Pension Benefit Guaranty Corporation, like Fannie Mae and Freddie Mac, is a case of "too big to fail." At least a number of members of Congress see it that way. And they are planning a push for legislation designed to shore up underfunded multiemployer private-sector pension funds whose result could put taxpayers on the hook for billions, if not tens of billions, of dollars. Sen. Bob Casey, D-Pa., and Reps. Earl Pomeroy, D-N.D., and Pat Tiberi, R-Ohio, the driving forces behind this measure, seek to shift the primary responsibility of keeping pensions adequately funded from unions and unionized employers onto the general public. It's another example of the bailout culture in action.
National Legal and Policy Center covered this issue at length last November. Late that October, Rep. Pomeroy had introduced his Preserve Benefits and Jobs Act (H.R. 3936). The measure would bail out the deficit-ridden Pension Benefit Guaranty Corporation (PBGC), itself a de facto ongoing bailout agency, and make it easier for trustees of failed private-sector pension plans to dump their liabilities onto the corporation.
Congress created PBGC in 1974 as part of the Employee Retirement Income Security Act (ERISA). The corporation acts as an insurance company for traditional, defined-benefit pension funds. In a manner similar to Federal Deposit Insurance Corporation, PBGC derives its operating revenues through insurance premiums rather than public expenditures. And just as FDIC is charged with the responsibility of taking over failing commercial banks, PBGC is charged with the responsibility of taking over private-sector defined-benefit plans (i.e., those with employer-determined asset allocation) whose sponsors are unwilling or unable to continue as fiduciary agents. In most cases, a sponsor voluntarily terminates a plan and requests a PBGC takeover, though in certain extreme situations, the corporation forcibly takes over a plan. Either way, the corporation pays promised annuities according to statutory per-worker limits.
There are now nearly 30,000 PBGC-insured defined-benefit private-sector pension plans in operation affecting a combined 44 million workers, retirees and family members. Back in the Eighties there were more than 100,000 plans in force. The decline is attributable mainly to the rise of the 401(k) and other defined-contribution (i.e., employee-driven) retirement instruments and to Pension Benefit Guaranty Corporation takeovers. The Washington, D.C.-based PBGC currently manages about 4,000 of these plans, providing monthly benefit checks to about 750,000 persons, not including money it owes to another nearly 750,000 future participants. Pensions sponsored by Bethlehem Steel, the Chicago Sun-Times, Delphi, LTV Steel, and United Airlines are among the agency's more dramatic recent acquisitions.
There are two kinds of defined-benefit pension plans: single-employer and multi-employer. The Casey-Pomeroy-Tiberi legislation deals with the latter. Here, employers within a specific industry pool their resources to minimize the impact of a plan meltdown by one of its participants. Typically, a plan involves joint employer-union management. Multi-employer plans account for only about one-fifth of all existing defined-benefit plans, covering about 10 million current and future beneficiaries. They also are less generous in the event of a government takeover. Under a single-employer plan, the annual maximum benefit varies by age of retirement and other factors, but can reach as high as $54,000. In multiemployer funds, however, the maximum is only $12,870. The Casey-Pomeroy-Tiberi legislation would raise the latter to $21,000.
So why is there a need for this bailout legislation? Put simply, it addresses a crisis largely of the government's own making. The very concept of social insurance, whether for pensions, savings accounts or cropland, undercuts self-discipline of the firm. Moreover, the institution of a bailout often may make for a bigger problem later on - and another bailout. The Senate bill, the Create Jobs and Save Benefits Act, unveiled this March, like its House companion measure, explicitly authorizes taxpayer support for terminated, or "orphan," multiemployer pension plans. Rather than raise employer premiums on sponsor participants, which Congress did four years ago as part of the Pension Protection Act, the new legislation would stick taxpayers with a bill in two ways.
First, it would create a "fifth fund" within PBGC. The language of the bill is clear: "(O)bligations of the corporation that are financed by the [fifth fund] shall be obligations of the United States." In other words, the bill would shift the burden of paying orphan fund claims from sponsor to the general public. And benefit levels would be guaranteed to be no lower than before. The proposed per-retiree ceiling hike from $12,870 to $21,000 would create an additional incentive for individual sponsors to terminate their pensions and hand the ball over to PBGC.
Second, the legislation would allow trustees of union-sponsored multiemployer pension funds to form alliances with trustees of plans in unrelated industries. Currently, multiemployer plans must be in the same industry group. The purpose behind allowing a broader pooling of resources is to enable unions to avoid more easily the last-man-standing' rule. This regulation, based on 1980 legislation, stipulates that if a sponsor pulls out of a multiemployer plan, all remaining firms must cover that employer's liabilities or pay a large exit fee. Unions and union-friendly employers like the arrangement because it gives workers an opportunity to keep their pensions if they change jobs within the same industry. Unfortunately, the rule unwittingly has encouraged plan terminations.
Multiemployer plans are in trouble, especially since the onset of the current recession. In 2006, when the stock market was rapidly rising, only 6 percent of all multiemployer plans were fully funded; i.e., assets matched or exceeded liabilities. This compared with 31 percent of all single-employer pensions. Reports in 2009 issued by the Hudson Institute and Moody's Investor's Service indicate that with the onset of recession, the problem has gotten worse. The number of multiemployer plans are in "critical" condition, as defined by the Pension Protection Act of 2006 as assets at less than 65 percent of liabilities, has risen. Whereas 230 plans were in this red zone at the end of 2008, fully 640 were there by the end of 2009.
But this crisis was in the making well before 2008. The lead author of the Hudson Institute report, Diana Furchtgott-Roth, several months ago explained the role of organized labor:
Why the persistent underfunding? Some union leaders like to achieve wage increases and new benefits when they renew collective contracts, in order to make their reelection more likely. Ensuring that pension plans are kept well-funded takes more work for little visible effect - and may well work against winning more benefits by underscoring their cost to the employer.