How to Fix Broken Union Pensions

Most multiemployer, or union pension plans remain deeply troubled despite a selective taxpayer bailout of roughly 18 percent of plans.¹ After factoring in an estimated $97 billion in taxpayer dollars directly deposited into plans facing the most imminent failure, the remaining roughly 1,100 multiemployer pension plans covering about 8 million workers and retirees are short at least $745 billion in promised pension benefits.²

Without reforms, these plans will begin running out of money over the coming decades, with most multiemployer pension insolvencies coming after Social Security’s trust fund runs dry around 2033.³ Preventing automatic and across-the-board 21 percent Social

Security benefit cuts would cost an additional $400 billion annually, and it will be increasingly difficult to simply prevent those cuts by issuing new debt because interest payments on the debt will already be consuming more than 22 percent of federal tax revenues in 2033. ⁴ Thus, while a select group of roughly 250 plans received unconditional taxpayer bailouts to preserve 100 percent of their generous unfunded pension promises, it is unlikely that there will be the political will or fiscal means to provide a similar bailout to the remaining 1,100 struggling multiemployer pension plans.

To protect multiemployer pension beneficiaries and taxpayers, policymakers must fix fundamental flaws in the multiemployer pension system, safeguard promised benefits, minimize pension losses, ensure viable pension insurance, and impose accountability on plans receiving taxpayer bailouts.

The crux of multiemployer pension reforms is to treat multiemployer or union plans the same as non-union single-employer plans, which are well-funded and well-insured. However, because multiemployer pensions’ underfunding accrued over decades, policymakers cannot simply switch a flip to create fiscal sustainability. Rather, a pathway to long-term viability will require gradually transitioning towards a secure system while spreading the costs of reform across stakeholders and minimizing pension losses for workers and retirees.

Fix the Multiemployer Pension Rules

Union and non-union workers deserve equal protection of their promised pension benefits, but because of different funding rules, non-union single-employer pensions are collectively 87 percent funded while union multiemployer pensions are collectively only 44 percent funded.⁵

Require multiemployer pension plans to use a reasonable discount rate assumption. Over the course of 10-20 years, multiemployer pension plans should have to shift towards using the same discount rate required of single-employer plans.

Require employers to recognize pension liabilities on their balance sheets. Like single-employers, multiemployers should have to recognize their share of their plan’s unfunded pension liabilities on their balance sheets. Such recognition should be phased in over approximately 10 years.

Prohibit collective bargaining from setting both contribution and accrual rates. If pensions are to be adequately funded, contributions must be the formulaic output of negotiated pension accruals. Negotiating contributions separately from pension accruals will always result in imbalance.

Safeguard Promised Benefits

A first step to protecting pensioners is to stop the bleeding within insolvent plans, and the second step is to start building them back up.

Freeze dangerously insolvent pension plans. Any plan that is less than 60-70 percent funded should have to freeze new benefit accruals until the plan is at least 90 percent funded. Employers of frozen pension plans should be required to offer workers a 401(k) plan to save for their retirement.

Re-enact an excise tax on multiemployer funding shortfalls, similar to that which applies to single-employer pensions. This could take the form of an immediate 10 percent tax on annual funding shortfalls, or it could be phased in over 10-20 years and applied to cumulative funding shortfalls.

Minimize Pension Losses

With the entire multiemployer system’s assets equal to only 41 cents on the dollar of promised benefits, many workers and retirees will not get 100 percent of their promised benefits. Plans need the ability to minimize losses across generations and protect the most vulnerable retirees, while workers should have options.

Reinstate enhanced Multiemployer Pension Reform Act (MPRA) provisions. The 2014 MPRA allowed some plans to reduce benefits if doing so would prevent them from becoming insolvent, but fewer than half the plans that attempted to do so were approved for reductions. Congress should reinstate MPRA and ease the eligibility requirement, making the provisions available to any plan that can improve their long-term solvency. To give pension beneficiaries options, plans should be allowed to offer workers delayed pension eligibility as an alternative to benefit reductions.

Allow workers a buy-out option. A significant portion of many union-workers’ compensation currently goes into pension plans that will be bankrupt before they retire. Workers in plans that are less than 60 percent funded should have the opportunity to buy-out of their pension fund and instead receive a partial lump-sum payment into a 401(k) and have a portion of their current pension contributions deposited into that 401(k).

Provide a Viable Insurance Backstop for Plans that Become Insolvent

The federal government mandates private pension plans to purchase pension insurance from the Pension Benefit Guaranty Corporation (PBGC), but the PBGC’s multiemployer plan is financially inviable and unable to provide insured benefits over the long-term.⁶

Incorporate risk-based insurance premiums. No private insurance company could stay in business if it charged the same car insurance rates for 16-year old males as for 46-year old females, or the same flood insurance rates for homes on the coast and in Kansas. The PBGC’s multiemployer program should gradually, over 10 years, implement the same variable rate premium as applies to its single-employer program.

Triple the flat-rate multiemployer premium. The current PBGC multiemployer premium of $39 per year per participant should be increased to at least $120 per year. This would bring the multiemployer flat-rate premium in line with the single-employer premium (slightly above) and add about $8 billion in new multiemployer PBGC revenues over the next 10 years.

Implement a stakeholder fee. PBGC premiums are paid by employers, and there is a limit as to how much the PBGC can charge without risking employers’ viability. Instead of tripling the flat-rate premium, the costs of providing viable pension insurance could be shared more broadly with less risk of employer and plan failures if shared equally across employers, unions, and participants. An annual stakeholder fee of around $100 per participant per year paid by unions, participants, and employers would, along with risk-based premiums, roughly make the PBGC’s multiemployer program solvent for the long-run.

Incorporate retirement age into PBGC premiums. The PBGC’s multiemployer insurance benefits should be first available to participants at age 62. Plans that want individuals to have access to benefits at an earlier age should have to pay a sufficiently higher premium.

Have the PBGC take over failed multiemployer plans. If a plan runs out of money to pay promised benefits, failed plan management should not remain in place and the PBGC should take over the plan as it does for failed single-employer pensions.

Incorporate Accountability Into Existing Union Pension Bailouts

Bailouts set a bad precedent, and the unconditional private union pension bailout actively incentivized even more reckless actions. Plans that receive millions or billions of dollars in taxpayer money should be held accountable for proper stewardship of those funds.

Prohibit new pension accruals if plans do not meet required contributions. Bailouts covered plans pre-existing broken promises, but not current and future shortfalls. If plans that received bailouts do not receive 100 percent of required contributions based on funding rules that apply to non-union plans, they should not be allowed to promise new benefits.

Require funds that received taxpayer bailouts pursue a return-maximizing investment strategy. Taxpayer funds should be free from subjective and politically motivated environmental, social, and governance investment objectives.

Summary

Selective taxpayer bailouts injected unfairness and amplified uncertainty and risks for workers and retirees with multiemployer pensions. With $745 billion in unfunded pension promises remaining even after select plans received unconditional taxpayer bailouts, fixing the broken multiemployer pension system will be neither easy nor painless. The timing of multiemployer pension insolvencies occurring after Social Security’s insolvency and after the federal government runs out of fiscal space reduces the political and financial feasibility of a future taxpayer bailout. Thus, if policymakers want to protect union workers and retirees, they must act now to set in motion secure union pension rules, safeguard promised benefits, minimize pension losses, build up a viable pension insurance backstop, and ensure accountability within existing taxpayer bailouts.