In The News

WSJ Editorial Board: Washington’s Pension Non-Bailout

A fix for multi-employer plans that doesn’t hit taxpayers. Really.

Editorial Board

December 11, 2014

It’s the season for miracles. And behold, Congress seems poised to pass a bipartisan compromise as part of its omnibus budget that would mitigate a pension crisis before it requires a taxpayer bailout.

Yes, we were skeptical too. But after reading the fine print, this looks like a rare case of Congress trying to solve a problem before it’s a crisis—to wit, the looming failure of multi-employer pensions.

These plans were set up decades ago to let workers change employers without losing union benefits. They’re common in industries with heavily union workforces such as mining, transportation and construction. The plans are also an anachronism in a rapidly changing economy in which companies go broke or drop certain lines of business.

In a typical multi-employer plan, there are about two pensioners for every worker, and in the Teamsters’ Central States it’s nearly five to one. Even one-to-one isn’t sustainable. Many employers have been willing to pay a penalty to withdraw from plans, as UPS did from Central States in 2007.

The Teamsters and other unions tried to push through a taxpayer bailout in 2010, but they can now see that won’t happen. That means that if the plans do fail, the pensions would fall into the lap of the federal Pension Benefit Guaranty Corporation. Yet the PBGC’s annual maximum pension is $12,870 (after working 30 years) with no cost-of living escalator. Many union members would lose more than half their pension.

But wait, the PBGC is also in trouble, with a projected long-term deficit of $42.4 billion. The PBGC puts its odds of going bust by 2025 at 90%, which could mean slashing pension payments to less than $1,500. More than a million Americans could be hurt.

All of which has concentrated the minds of the smarter union leaders, who joined a coalition with employers to draft a proposal that is the framework for the compromise. Credit also goes to Republican John Kline (Minnesota) and liberal baron George Miller for brokering the deal in Congress.

The big reform breakthrough is that pension plans deemed “critical” or “declining”—i.e., those projected to go broke within 15 years or are less than 80% funded—could petition the Treasury to cut benefits to up to 110% of the PBGC guarantee. Reductions would be based on actuarial analysis, and disabled and elderly (80 years and older) pensioners would be shielded. The reform would also make permanent the 2006 Pension Protection Act’s rules that allow insolvent plans to reduce “adjustable” benefits (e.g., early and disability payouts).

Insurance premiums would immediately double to $26 per participant, and the PBGC would have to propose a plan for paying benefits through 2035. This may be a bow to the reality that the multi-employer pension model can’t be sustained in the long-term and should be phased out. We’re told that next year the House Ways and Means Committee will consider how to facilitate the transition to hybrid plans involving 401(k)s.

Failing plans could also petition to be partitioned—in effect throwing some members onto the PBGC—to avert a larger failure. The PBGC would also be authorized to “facilitate” plan mergers, which could require employers in stronger plans to prop up unsound pensions. This isn’t ideal, but it’s better that the unions bail themselves out than hit taxpayers.

In a better Congress, this reform would pass separately through regular order. But unions are desperate for a fix, and Republicans can rightly take credit for preventing a bailout while getting Democratic cover for benefit cuts. Sometimes the good is good enough.

To read the full piece online, click here.

Posted 10:24AM on December 12 2014 by Jessica
Categories: SNB in the News