Federal officials are going back and forth over Americans’ retirement plans again, but this time it’s not about Social Security. The future leadership of the Pension Benefit Guaranty Corporation (PBGC) is currently in a state of flux due to partisan infighting. But while politicians squabble in a Washington-insider drama, the PBGC is heading for a fiscal crisis that will be a disaster for workers and likely leave taxpayers on the hook for a bailout that will cost tens of billions of dollars — or more.
When a private sector employer-funded pension program fails, it is supposed to be rescued by a federal backstop called the Pension Benefit Guaranty Corporation, a system that insures partial benefits for retirees who, along with companies, have previously paid for the protection. But who protects the protectors?
That question could soon become disturbingly relevant for the part of PBGC’s portfolio called multi-employer pension plans. In fact, at a congressional hearing in November of last year, PBGC’s current director, Thomas Reeder, warned Congress that “projections show that the (multi-employer) program is likely to become insolvent by the end of 2025.” Allowing this to happen is irresponsible to workers, retirees and especially taxpayers.
Chartered to be “financially self-supporting,” PBGC’s inventory of single-employer plans (i.e., those covering one corporation’s workers) always bears close scrutiny, but it’s the Multiemployer Pension Plans — mainly union plans with workers from many businesses — whose troubles are more urgent.
MPP liabilities total $67 billion against assets of $2.2 billion. This huge deficit is double what it was in fiscal year 2013. At the same time, PBGC estimates that its exposure to future losses from underfunded plans of all types is more than $250 billion.
There may be worse news on the far horizon: across all categories, the plans insured under PBGC carry a total of $850 billion in unfunded liabilities, according to the most recent available data. Without corrective action, those liabilities could raise PBGC’s already considerable loss exposure even higher.
It is clear that this entity can’t fulfill its mission as currently structured. Because the PBGC insures the pension benefits of nearly 40 million American workers and retirees, they would all be at risk if this corporation goes under. While the PBGC’s liabilities are not official obligations and therefore not backed by the federal government, does anyone really believe that taxpayers will not be asked to bail out the system in a meltdown situation? After all, a decade has passed since the financial meltdown of 2008, but taxpayers bitterly recall being put on the hook for Fannie Mae and Freddie Mac’s liabilities, which public officials often claimed were not explicitly guaranteed by Washington.
With Social Security and Medicare facing their own shortfalls, adding a blank check for PBGC should be as unthinkable as it is unsustainable. But just because a bailout of any dollar amount should be off the table doesn’t mean Congress has no role in putting the system on sound actuarial footing.
The “Butch Lewis Act,” proposed by Sen. Sherrod Brown, D-Ohio, and Rep. Richard Neal, D-Massachusetts, would effectively snare taxpayers in a trap that will take a minimum $34 billion bite from their wallets. This should be off the table.
Rather than have taxpayers foot the whole bill, as some congressional Democrats have proposed, there are more sensible solutions at hand. In a policy paper from 2003, National Taxpayers Union was already warning that PBGC was endangered by “falling income, rising liabilities, and expected losses that are greater than its assets,” and recommended reforms such as greater reliance on risk-based pension insurance premiums and more development of private reinsurance products.
The Government Accountability Office, which has put parts of PBGC on its High Risk List for over a decade, has noted that despite increases in overall premiums, the use of risk-pricing and other risk-management tools remains highly limited.
In the nearer term, MPPs need to be stabilized, and one way might be to issue carefully calibrated Treasury loans at preferential interest rates to the PBGC. To be completely clear: these loans would be dispersed only if there is enough collateral to ensure the loans will be entirely repaid. An overriding concern must be to assure risks to taxpayers are minimized.
To further mitigate the prospect of default on these loans, an additional safeguard should be constructed through a risk-reserve pool. The pool could be funded through modest premium increases and higher membership fees.
During this period there will need to be tough concessions by beneficiaries to shore up longer-term financial viability as well. A uniform benefit reduction (20 percent or more) would be a show of good faith in building this bridge to a more certain financial future — one that would bring the most comfort to retirees, who would know their pensions are stable for the long haul.
Government-backed loan arrangements are far from ideal, and should not be contemplated lightly. Equally important are the details of such arrangements.
Witnesses before a Joint Select Committee empaneled by Congress earlier this year to study MPPs have floated a variety of solutions ranging from blatant handouts that require no restructuring to more limited approaches. Unfortunately, the cost of no intervention and reform will be much worse — measured in tens or even hundreds of billions of dollars.
For now, the steps outlined above comprise the measuring stick for progress, and from the taxpayers’ perspective, they stand far taller than any of the bailout schemes that have been offered thus far.
