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.
PBGC Multiemployer Deficit Almost Doubles Under “Fair-Value” Accounting
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.
What Happens to PBGC Beneficiaries When It Runs Out of Money?
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.
Protecting Taxpayers from PBGC Liabilities
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.
Reducing the PBGC’s Multiemployer Shortfall
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.
- Allow the PBGC to reduce guaranteed benefits. If premium increases alone will not be able to solve the PBGC multiemployer program shortfalls, then some level of benefit reductions will also be necessary. The PBGC should have the authority to enact reductions in order to maintain its solvency. These reductions could occur within plans prior to their insolvency, or could take the form of a reduced PBGC benefit. The CBO estimates that reducing the PBGC’s multiemployer guarantee to 75 percent of its current level would decrease the program’s deficit by $11 billion (31 percent) using cash-based estimates, and by $25 billion (25 percent) using fair-value estimates from 2017 to 2026. However, since it would only push back the program’s projected date of insolvency by one year, from 2025 to 2026, other reforms would be necessary in order for the program to provide even lower levels of insured benefits.
- Make it easier for multiemployer plans to reduce benefits. In addition to, or separate from, reducing the guaranteed PBGC benefit level, plans could pre-emptively cut benefits before becoming insolvent and transitioning to PBGC benefits. This would help to spread out the pain of benefit cuts among workers so that older workers in underfunded plans do not continue to receive full benefits while future workers receive little to nothing in promised benefits. Under the Multiemployer Pension Reform Act of 2014, plans are allowed to reduce their benefits to no less than 110 percent of the PBGC guarantee (excluding certain vulnerable populations) if the plan meets certain criteria. Congress should consider removing some of these criteria, such as the requirement that the reductions lead to long-term solvency.
- Create special rules for inevitably insolvent plans. Plans in “critical and declining” status, which have no hope of becoming solvent, should not be allowed to continue adding new liabilities or to keep paying full benefits. Plans that are beyond repair and are digging themselves deeper into a fiscal hole each day should be required to freeze new benefits and to reduce existing benefits along the lines specified in the Multiemployer Pension Reform Act of 2014. Critical and declining plans are effectively exempt from funding requirements, so there is little reason to allow them to continue operating outside the rules meant to protect pensioners. The new rules could be imposed on the existing plans and carried out by the plans’ trustees—or the PBGC could take over the plans and carry out the changes.
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:
- Instruct the PBGC to implement a variable-rate premium. The PBGC’s multiemployer program should transition to a variable-rate premium structure, commensurate with each plan’s level of risk. Adding a variable rate component to the PBGC’s multiemployer premium would help to prevent plans from becoming underfunded—since they would have to pay higher rates if they did. This would, in turn, reduce the PBGC’s liabilities. This reduction in liabilities would require a transition because immediate implementation of variable-rate premiums would cause further deterioration in already troubled plans.
- Require that the PBGC take over failed multiemployer plans. Currently, when multiemployer plans fail, they are allowed to continue operating, and the PBGC’s multiemployer program provides them loans (which are never repaid) to cover the cost of providing PBGC-guaranteed benefits, as well as the plans’ administrative costs. There is no reason why officials who oversee plan failures should be allowed to keep their jobs. The PBGC should take over failed multiemployer pension plans, as it does for failed single-employer plans. Not only would this reduce the PBGC’s costs through lower administrative expenses, it would encourage plan trustees to ensure adequate funding by putting their jobs on the line.
- Require multiemployer plans to use specified discount rates. While single-employer plans must use a specified discount rate that takes into account the inherent risk in providing guaranteed benefits through uncertain asset returns, multiemployer plans are allowed to use whatever discount rate they deem appropriate. As a result, they consistently use a rate almost twice that required by single employers, which allows them to contribute significantly less to “fully fund” their plans. Multiemployer programs should, over time, be required to use the same discount rate as single employers. This would require significantly higher plan contributions and lead to better-funded plans. Although not all employers have the ability to increase contributions to the extent required by a more appropriate discount rate, employers could negotiate with unions to reduce benefit accruals. While lower benefit accruals may seem like a cut in compensation, they could lead to higher lifetime pension benefits by preventing plan insolvencies.
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.