Pension crisis sparks reform debate

DON’T MESS WITH OUR PENSIONS: At a May 2 special meeting in Portland, Teamsters lined up to sign petitions opposing the GROW Act, a bill in Congress that its critics say would shift the risk of pension investments to workers.

By Don McIntosh

PORTLAND, Oregon — By 6:15 p.m., pickup trucks and cars snaked along NE 162nd Avenue waiting to turn into a complex of Teamsters union buildings. Near the union hall entrance, co-workers socialized in small groups or lined up to sign a petition. By 6:30, May 2, about 150 Teamsters were in their seats, and the meeting got under way with the pledge of allegiance. Chuck Mack, the man they came to hear, took the microphone.

Mack is co-chair of America’s largest multi-employer pension fund. The Western Conference of Teamsters Pension Trust, with 591,619 participants concentrated in 13 Western states, has paid guaranteed monthly benefits to retired Teamsters since its founding in 1955. Its investments lost 20 percent of their value in the 2008-2009 financial crash, but bounced back by the end of 2017. But today, its fate is linked to the failing Central States Teamster pension plan, America’s fourth largest multi-employer pension. The Central States pension is projected to run out of money in six years. Its collapse won’t just be a disaster for its 397,492 participants — including 165,000 now-retired truck drivers and factory workers who worked their whole lives expecting a pension. It would also push the government’s pension insurance program into insolvency — the Pension Benefit Guaranty Corporation (PBGC) multi-employer program provides funds to pensions that run out of money so they can pay benefits to retired workers.

And that’s not all. A Central States collapse could also push several national trucking companies into bankruptcy, and even threaten the viability of UPS, America’s biggest commercial package delivery company. Combined, UPS and those trucking companies account for a sizable fraction of contributions to the Western Conference pension. If they fail, the now-healthy Western Conference pension could be at risk.

Mack, the Western Conference pension co-chair, has been traveling all over the Western United States to talk about coming crisis of pensions, and options in Congress to fix it. The Portland presentation was his seventh so far this year.

Central States is only the biggest of an estimated 102 multi-employer pension trusts that are projected to run out of money within 20 years, leaving 1.2 million active and retired union workers with just a fraction of the pension benefit they were promised.

At least three of those declining plans have members in the Portland area: Operative Plasterers Local No 82 Pension Trust Fund; Western States Office And Professional Employees Pension Fund, which includes union office employees and workers at Northwest Natural who are members of OPEIU Local 11; and Bakery & Confectionery (B&C) Union & Industry International Pension Fund, which includes workers at the Portland Nabisco plant. In B&C’s case, the pension’s troubles are at the heart of a dramatic two year contract standoff with Nabisco [See related article here.]

What went wrong with the union pensions

Union-sponsored multi-employer pension plans have long been an extraordinarily stable, efficient and flexible way for unionized employers to provide secure retirement benefits. The way they work, the employers typically contribute a certain dollar amount for each hour an employee works, the amount spelled out under the terms of collective bargaining agreements they negotiated with the union. The funds are collected and invested long-term by the pension trusts. The trusts are overseen by equal numbers of union and employer trustees, who are advised by actuaries, accountants, administrators, attorneys and investment managers. Based on how well they expect investments to perform, trustees promise a retirement benefit that grows or “accrues” for every dollar the employer contributes. By the time workers retire, the pension trusts will have invested decades of contributions on their behalf.

FIVE FAILING FUNDS

Central States Teamsters

  • 397,492 participants, 83.8 % inactive
  • 33% funded
  • 7 years until insolvency

United Mine Workers 1974 Plan

  • 104,258 participants, 92.1% inactive
  • 39.8% funded
  • 5 years until insolvency

Western States OPEIU

  • 7,830 participants, 88.3% inactive
  • 65% funded
  • 15 years until insolvency — except that the trust has asked the Treasury Department for permission to cut benefits 30 percent and thereby prevent insolvency

Bakery & Confectionery Pension

  • 113,040 participants, 79.9% inactive
  • 42.6% funded
  • 12 years until insolvency

Operative Plasterers Local 82 Pension

  • 274 participants, 74.4 percent inactive
  • 62% funded
  • 16 years to insolvency — except that the trust has asked the Treasury Department for permission to cut benefits 22 percent (31 percent for inactives) and thereby prevent insolvency

Multi-employer pensions are most common in manufacturing, trucking, and industries like construction that have lots of small employers and workers that move from one employer to another.

All told there are about 1,300 multi-employer pension trusts. All were battered by the 2000 and 2008 financial crashes, but more than nine tenths of them have either recovered or are on track to recover. But the remaining tenth are in a death spiral, and not because of anything the trustees did or didn’t do. Looking back, it’s clear that policies set by Congress created the crisis. [See How Congress created the Pension Crisis]

The failing pension plans all have an important feature in common: Retired and inactive participants came to greatly outnumber “active” working participants whose employers are still contributing. [Inactive participants are former employees who worked long enough to be vested, i.e., entitled to future benefits.]

There were many causes for those upside-down demographics. U.S. trade policies smoothed the way for offshoring, downsizing and plant closures. Deregulation of trucking and other industries led to volatility and business failures. Decades of union-busting reduced the number of unionized firms. Advances in automation and computer technology meant fewer workers were needed.

In 1975, active participants made up 83 percent of participants across all multi-employer pension trusts. By 2014, the share of active participants in multi-employer pension trusts had fallen to 39 percent. Among the pension trusts that are headed for insolvency, actives make up just 16.2 percent.

It’s actually normal and healthy for long-established pension trusts to pay out more in benefits to retirees each year than they take in from employer contributions — because the investment returns from all those past contributions are supposed to make up the difference. Chuck Mack’s Western Conference of Teamsters pension is a good example: In 2017, it took in $1.8 billion in employer contributions, and paid $2.7 billion in benefits, while earning over $5 billion on its investments.

But the more lopsided the inactive-to-active ratio is, the more vulnerable a pension trust is to severe financial shock.

The key thing to know about the failing pension trusts is that they have too few employer contributions coming in for it to be possible to recover from severe financial market losses. Their remaining assets continue to earn returns, but they’re now paying out more in benefits than the combination of employer contributions and investment returns. They don’t have enough assets to meet their future liabilities, and their total assets are shrinking year by year.

What makes all this particularly painful is that most of the 100 or so funds that today are headed for insolvency were fully funded or close to fully funded as late as the year 2000.  To be fully funded means they had enough assets on hand to pay all of their future pension promises. Many multi-employer pension trustees might have liked to let boom-market investment returns pile up as a cushion against future downturns, but the rules set by Congress wouldn’t let them. Instead, when the plans became fully funded, the rules required that they increase benefits, or decrease employer contributions, or both. If they failed to do that and became overfunded, their employer contributions would no longer be a tax-deductible business expense — under the Tax Reform Act of 1986. Since the employer contributions were spelled out in three- to five-year union contracts, reducing employer contributions during the financial market boom wasn’t feasible in most cases. So pension trusts started giving retirees bonus “13th” checks. They reduced penalties for early retirement and in effect offered subsidies to workers to take earlier (and more expensive for the trust) retirement.

Then the 2000 tech stock bubble burst, proving that some of that asset value had been temporary or illusory. But now, a rule against “cutbacks”— contained in a 1973 law known as ERISA — prevented the pension trusts from scaling back benefits. Congress slightly relaxed that rule with the Pension Protection Act of 2006, allowing trusts to scale back those “extra” benefits they’d promised during the boom years, but it was too late for some, because a downward spiral had begun.

When multi-employer pensions are healthy, they produce a generous benefit at an affordable cost to employers, and are often the pride and joy of their sponsoring unions. But when they get into trouble, the dynamics caused by pension regulation can create a vicious cycle, in which new employers are reluctant to come in, and participating employers are eager to get out. That vicious cycle results in still fewer active employees, which makes it that much harder to recover from sudden funding shortfalls.

The features of pension law that create that effect are withdrawal liability and rehabilitation surcharges.

  • Withdrawal liability for multi-employer pensions was created by Multi-employer Pension Plan Amendments Act of 1980. The idea is that all employers in a multi-employer pension are collectively responsible for paying the promised benefits. If the assets shrink and there’s unfunded liability, employers can’t leave the pension trust unless they pay the amount it would take to keep the promises for their own employees. That amount is known as withdrawal liability. The rule is designed to prevent employers from leaving the pensions, but it has often had the effect of preventing new employers from entering.
  • Rehabilitation surcharges, meanwhile, come from the Pension Protection Act of 2006. That law requires pension trustees to take action to reduce unfunded liability, including the imposition of employer “rehabilitation” surcharges which ramp up over time. For example, Daimler Trucks North America had been paying $4.45 an hour into the multi-employer Automotive Machinists Pension Plan. But to catch up after the financial market meltdown decimated its investments, trustees imposed mandatory rehabilitation surcharges that eventually reached $6.15 an hour — and none of those extra dollars were attached to additional benefit for employees. Such extraordinary sums risk bankrupting employers, or send them running for the exits. [Last fall, Daimler negotiated a withdrawal from the Machinists pension.]

Congress tries to halt the crisis — and comes up short

By 2011, it was clear that the 2008 crash was going to result in the collapse of many multi-employer pensions, including Central States, which would bankrupt the multi-employer program of the PBGC (the government pension insurer). Something needed to be done.

The National Coordinating Committee for Multiemployer Plans (NCCMP) — a group representing multi-employer plans and their sponsoring unions and employer groups — put together a task force to come up with proposals for Congress to consider. One of them became law in 2014 —the Multiemployer Pension Reform Act (MPRA), also known as the Kline-Miller Act after its sponsors, U.S. representatives John Kline (R-Minn.) and George Miller (D-Martinez).

The Kline-Miller Act allows pension trusts to cut benefits to current and future retirees to a certain extent — if doing so can save the trusts from insolvency. But they can only cut benefits down to 110 percent of what retirees would receive if the trust were to become insolvent and have benefits paid by the PBGC. PBGC’s insurance for multi-employer pensions doesn’t guarantee everything retirees were promised — only 47 percent, on average. So Kline-Miller gave pension trusts a lot of room to cut benefits.

But pension fund trustees — half of whom are union appointees — haven’t been eager to use the new authority to cut retiree benefits, and the Treasury Department hasn’t made it a slam-dunk for those who tried. In the three years since Kline-Miller became law, just 19 trusts have applied for permission to make the cuts, and just two applications have been approved by Treasury — trusts connected to Ironworkers in Cleveland, Ohio, and Alaska. [See the list of trusts that have applied here.]

Kline-Miller was written above all in order to prevent the Central States collapse, in order to save the PBGC itself from insolvency. But in 2016, the U.S. Treasury department rejected Central States’ application to make benefit cuts. Treasury said the proposal’s investment assumptions were too rosy, and its cuts weren’t fairly apportioned. The rejection spelled doom for Central States: It can’t apply again, because its assets continued to shrink and now trustees would have to cut benefits beyond 110 percent of the PBGC benefit in order to restore solvency.

What to do now

With Central States and the PBGC headed for collapse, Congress in February created a special task force to come up with a solution. The Joint Select Committee on Solvency of Multiemployer Pension Plans, made up of 16 members of the House and Senate, eight from each party, is supposed to hold hearings and deliver a report by November, with the expectation that Congress would take action by the end of the year. But unions are at odds over what proposal to push the Joint Committee to recommend.

Chuck Mack, co-chair of the Western Conference of Teamsters pension — America’s largest multi-employer pension — is sounding the alarm about the need for Congress to do something about pensions that are headed for insolvency.

NCCMP, backed by many building trades unions, is proposing a bill called the GROW Act that would create a new kind of pension without withdrawal liability or rehab surcharges, or even the need for PBGC insurance.

Western Conference Pension co-chair Chuck Mack, along with the Machinists, Boilermakers, and Steelworkers unions, is critical of that, saying it fails to address the problems of the failing pensions. Instead, they back a bill called the Butch Lewis Act that would provide renewable low-interest government loans that might enable the trusts to invest their way out of their hole. Western region Teamsters have gathered 35,000 signatures opposing the GROW Act to present to Congress.

NCCMP Executive Director Michael Scott says Mack is right that GROW does nothing to help distressed plans, but says the antagonism is misplaced: “Just because a hammer is different from a screwdriver doesn’t mean you have to be mad at the screwdriver,” Scott told the Labor Press.

Meanwhile, Scott calls Butch Lewis a bailout, and says it’s unlikely that Congress would approve a plan that requires no retiree sacrifice. NCCMP is floating its own proposal, which similarly uses long-term government loans but also requires some level of benefit cuts.

Scott says the belief that benefits are currently guaranteed is misplaced, because the PBGC is only replacing 47 percent of promised benefits, and — because the PBGC is not backed by the full faith and credit of the U.S. government — when it runs out of money, retirees will get 2 to 6 percent of what they were promised.

“Benefit reductions are coming to retirees in insolvent plans,” Scott said. “It’s just a question of how deep.”


How Congress created the pension crisis

1 The Employee Retirement Income Security Act (ERISA) – 1974 ERISA regulated pensions heavily, and created the Pension Benefit Guaranty Corporation (PBGC) as a federally sponsored insurance program to pay benefits if pension trusts fail. But unlike with bank depositor insurance (FDIC) and home loan guarantees (FHA), Congress didn’t back the PBGC with the full faith and credit of the U.S. government. ERISA’s “anti-cutback” rule also said pension trustees could increase benefit promises, but could not later scale them back.

2 The Motor Carrier Regulatory Reform and Modernization Act – 1980 deregulated the trucking industry. It ended shipping cost controls, which led to ruinous price competition, decimation of union trucking, and the closure of as many as 10,000 trucking firms that were contributing to multi-employer pensions.

3 The Tax Reform Act of 1986 said that if multi-employer pensions became fully funded, employer contributions would no longer be tax-deductible. This led plans to increase promised benefits during financial booms, instead of saving gains as a cushion against financial busts.

4 North American Free Trade Agreement (NAFTA) – 1993 U.S. companies were already shifting manufacturing assembly to Mexico’s tariff-free maquiladora zone. But by making Mexico safe for investors, NAFTA greased the skids for even more offshoring. It was followed by PNTR, DR-CAFTA, KORUS, and many more. Over a million American manufacturing jobs were lost, many of them union, and the threat of offshoring became the most effective threat in employer campaigns to keep workers from unionizing.

5 The Financial Services Modernization Act – 1999 repealed the Glass-Steagall Act, which had kept commercial and investment banking separate for 70 years. That paved the way for banks to make riskier investments.

6 The Commodity Futures Modernization Act – 2000 prevented regulation of new classes of complicated financial products known as “over-the-counter” derivatives, such as the credit default swap. Combined with the repeal of Glass Steagall, it laid the groundwork for a housing bubble to inflate amid systemic fraud. Banks and Wall Street firms securitized and traded sub-prime mortgages, so-called “liar loans,”  which bond rating agencies lied and labeled as AAA-rated investment grade securities. These were then hedged with exotic derivatives like “debt-equity” swaps.

7 The Pension Protection Act (PPA) – 2006  Many pension trusts were rocked by the 2000 collapse of the dot-com stock bubble. To stop pensions from going off a cliff and taking the PBGC with them, PPA required severely underfunded pension trusts to come up with rehabilitation plans to recover from the asset losses by cutting expenses and increasing contributions. For the first time since ERISA, pensions would be allowed to cut back “extra” benefits they’d been forced to give out during the stock run-up. PPA also required trusts to impose surcharges on participating employers, extra charges not tied to any new benefits, which would ramp up over time. That ensured no new employers would want to enter, and put enormous financial pressure on those that remained, leading some to negotiate an exit. Recognizing that PBGC was at risk of failure, PPA increased PBGC premiums. But it was too little, too late.

8 Troubled Asset Relief Program – 2008 With the collapse of the giant financial firms Bear Stearns and Lehman Brothers, a financial panic ensued, wiping out more than a quarter of the value of pension fund assets. Instead of confiscating Wall Street’s  ill-gotten gains, Congress authorized up to $700 billion to bail out the banks that were holding the tarnished securities.

9 The Multi-employer Pension Reform Act (MPRA) – 2014 In a lame-duck session of Congress, MPRA was inserted into the omnibus spending bill. It allows multi-employer pension funds to prevent the slide to insolvency by cutting benefits to current and future retirees (but not for those over 80, and less for those 75 to 80).


How Congress could fix the pension crisis

  • Butch Lewis

    Butch Lewis Act of 2017 (S.2147) sponsored by Senator Sherrod Brown (D-Ohio), would create a federal loan program to bail out failing multi-employer pension funds,  funded by the sale of Treasury-issued bonds. It’s named after Butch Lewis, who was president of Teamsters Local 100 in Cincinnati and a fierce opponent of pension cuts; he died in 2015. It has 22 cosponsors including Jeff Merkley (D-Ore.) H.R. 4444, a similar bill in the House sponsored by Rep. Richard Neal (D-Mass.), has 162 cosponsors, including Oregon Democrats Earl Blumenauer, Suzanne Bonamici, and Peter DeFazio.

  • Give Retirement Options to Workers (GROW) Act (H.R. 4997) sponsored by Reps. Donald Norcross (D-NJ) and Phil Roe, M.D. (R-TN) would prevent future pension collapses by giving healthy multi-employer pension plans the ability to create a new hybrid or “composite” option combining features of defined benefit and defined contribution pensions.  Trustees would freeze legacy defined benefit plans, and all their accrued benefits would be fully paid out. They’d then create a new plan going forward to provide guaranteed monthly benefits within a range, with the actual amount determined upon retirement. Trustees would aim for a 120 percent funding level as cushion against financial shocks. Employers would face no withdrawal liability in the new plan. The bill has four co-sponsors.
  • Keep Our Pension Promises Act (S.1076/H.R.2412) sponsored by Bernie Sanders (I-Vt.) would repeal the MPRA provision that allows pensions to cut benefits. It would also ensure that employer pension obligations are prioritized during bankruptcies, and it would provide additional funds to the PBGC to pay retiree benefits at insolvent pensions – paid for by closing two tax breaks that benefit the wealthiest Americans. It has nine cosponsors, all Democrats (none from Oregon or Washington). An identical measure in the House, sponsored by Rep. Marcy Kaptur (D-Ohio) has 33 cosponsors, all Democrats, including Rep. Jayapal, Pramila (D-Wash.)

1 Comment on Pension crisis sparks reform debate

  1. “But the remaining tenth are in a death spiral, and not because of anything the trustees did or didn’t do” This is a complete lie. Want proof??

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