September 13, 2016 | Issue Brief on Retirement Security
The Pension Benefit Guaranty Corporation (PBGC) is a government entity that provides mandatory insurance to private pension plans. If a private pension plan fails, the PBGC pays out insured benefits so that pensioners are not left penniless. The problem is, however, that the PBGC’s multiemployer program is itself insolvent and will likely run out of money to pay insured benefits beginning in 2025. That date could be much sooner, and the total size of the PBGC’s multiemployer deficit could be much larger, however, if investment returns are lower than projected or if more pension plans fail, or fail sooner, than anticipated.
Congress should not wait until it is too late to enact meaningful reforms. The PBGC’s multiemployer program deficit has already increased more than 150-fold over just the past 10 years. Congress can protect beneficiaries of the PBGC’s multiemployer program and private union pensioners through a combination of premium increases, limited benefit reductions, stricter funding rules, and restructuring of the PBGC’s multiemployer program to more closely resemble its single-employer program and private insurance companies.
According to the PBGC’s most recent “Projections Report,” its multiemployer program—which insures union-run pension plans that span multiple employers—has a deficit of about $53 billion. A recent report from the Congressional Budget Office (CBO) shows the PBGC’s deficit to be nearly twice that high, at $101 billion, using “fair-value” estimates. This fair-value estimate is essentially what a private insurance company would charge to cover shortfalls in the PBGC’s multiemployer program (including plans that become insolvent between 2017 and 2036).
The PBGC does not include a risk adjustment in its estimates, meaning that it essentially assumes there is no risk that expected returns will be anything other than exactly what the PBGC estimates. Risk adjustments are extremely important, however, when using uncertain assets to provide guaranteed benefits. Adjusting for risk has a tremendous impact on the PBGC’s future liabilities. The CBO estimated that, without a market risk adjustment, the PBGC’s multiemployer program deficit will be $58 billion for plans that become insolvent between 2017 and 2026. With a market risk adjustment, the CBO estimated a $101 billion deficit.
When the PBGC’s multiemployer program runs out of funds around 2025, the program will only be able to pay out as much in benefits as it receives in premiums. The CBO estimates that the PBGC’s multiemployer program will have $35 billion in claims between 2027 and 2036, but will take in only $5 billion in premiums, meaning it can only pay 14 cents on the dollar of insured benefits. This would reduce the PBGC’s maximum annual payout from its current level of $12,870 per year for a worker with 30 years of service, to only $1,839 per year (on a monthly basis, benefits would fall from $1,073 to $153). For many workers, this would amount to a near-elimination of what began as a promise from their employers for tens of thousands of dollars per year in pension benefits.
The PBGC’s looming insolvency has caused some policymakers to seek taxpayer assistance for the PBGC, but the PBGC is never supposed to have access to taxpayer dollars. The PBGC was established as a self-financed entity, meaning that it can only pay out as much in benefits as it takes in from premium payments. Some proposals, however, would provide taxpayer funds to cover the PBGC’s deficits. This could cost taxpayers between $50 billion and $100 billion—or more—just for the PBGC multiemployer program. The PBGC’s separate single-employer program has an estimated deficit of $24 billion.
Taxpayers were never supposed to finance private-sector pensions. Any system that allows taxpayers to be on the hook for the unfunded promises of private pensions will inevitably encourage excessive promises. This is especially true for union-run plans, which effectively shelter contributing employers from having to declare bankruptcy before the plan fails and the PBGC begins paying benefits. Taxpayers need to save for their own retirements. They should not be asked to cover the shortfalls in the pensions of their friends, families, or neighbors through a PBGC bailout.
The PBGC’s multiemployer deficit has grown so large that substantial reforms are necessary to protect beneficiaries of failed pensions. While there will be pain, Congress can help ensure that such pain is minimized and shared fairly among covered workers. Private pensioners were promised pension insurance, and while the PBGC cannot cover all the shortfalls, it should provide more than pennies on the dollar in insured benefits. Congress should:
Give the PBGC authority, and direct it to increase premiums. The PBGC’s multiemployer program needs larger premium revenues, but the PBGC itself has no control over premiums and has to wait for Congress to change them. Congress should allow the PBGC to increase premiums as necessary to fund its insurance programs. According to the CBO, premiums would have to increase 4.7-fold to have a 50 percent probability of covering the multiemployer program’s projected deficit over the 2017–2036 period, and by 8.6-fold to achieve a 90 percent probability of covering its deficit. A 4.7-fold increase would bring the current $27 per participant premium to $127 per year, and an 8.6-fold increase would take it to $232 per year.
Those are cash-based estimates. Using a fair-value estimate, which projects a $101 billion deficit for 2017 to 2036, a 4.7-fold increase would cover only 19 percent of the PBGC’s multiemployer program deficit, and an 8.6-fold increase would cover only 36 percent of the deficit. These findings suggest that it could be impossible to use premium increases alone to cover the multiemployer program’s shortfalls, as the increases would be so large that they could induce mass withdrawals from pension plans or cause plans to declare that they had exhausted all reasonable measures to avoid insolvency.
The changes above would help to address existing shortfalls in the PBGC’s multiemployer program, and going forward, additional changes could help reduce the risk of future deficits. The PBGC’s multiemployer program should be structured more like its single-employer program and private-insurer programs. Congress should:
The PBGC’s multiemployer program has massive and growing deficits, and is projected to become insolvent and unable to pay insured benefits beginning in 2025. Using fair-value estimates that take into account inherent market risks, the PBGC’s multiemployer program deficit exceeds $100 billion. The PBGC is not authorized to use taxpayer dollars to cover its shortfalls, and taxpayers should not be required to cover broken pension promises. However, insured pensioners deserve protections, too. Congress should reform the PBGC’s multiemployer program and rules governing multiemployer pension plans to minimize and fairly allocate the pain among covered employees, and to help ensure that unions, employers, and the PBGC can, to the maximum extent possible, keep their pension promises.—Rachel Greszler is Senior Policy Analyst in Economics and Entitlements in the Center for Data Analysis, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.
 The level of insured benefits provided by the PBGC is significantly lower for union-run or multiemployer plans than for single-employer pension plans. The PBGC’s multiemployer program covers approximately 60 percent of the total benefits payable by insured plans, while its single-employer program covers closer to 100 percent of total benefits payable.
 According to the PBGC’s annual reports, its multiemployer program deficit was $335 million in 2005 and $52.284 billion in 2015.
 Pension Benefit Guaranty Corporation, “FY 2015 Projections Report,” June 17, 2016, http://www.pbgc.gov/documents/Projections-Report-2015.pdf (accessed August 31, 2016).
 Congressional Budget Office, “Options to Improve the Financial Condition of the Pension Benefit Guaranty Corporation’s Multiemployer Program,” August 2, 2016, https://www.cbo.gov/publication/51536 (accessed August 30, 2016).
 The reported $53 billion deficit from the PBGC’s latest “Projections Report” is the mean 2025 deficit, which covers the liabilities of all plans expected to become insolvent through 2035. The corresponding figure of $58 billion from the CBO covers plans expected to become insolvent through 2036. This is likely the primary source of difference between the two figures, which are both cash-based estimates.
 Congressional Budget Office, “Options to Improve the Financial Condition of the Pension Benefit Guaranty Corporation’s Multiemployer Program.”