The financial crisis facing the private-sector multiemployer pension system calls for comprehensive reform. The crisis is severe and growing worse every day.
Around 125 multiemployer plans are in so-called “critical and declining” financial status, and they report that they will become insolvent over the next two decades. Several large plans – including the United Mine Workers Pension Fund and the large Central States Pension Fund – predict that they will become insolvent in the next few years.
This will leave more than 1.3 million participants without the pension benefits they have been promised.
In Iowa, the benefits of close to 10,000 participants of multiemployer plans are at risk if the system fails. That represents over $70 million in benefits paid out annually that these individuals rely on in retirement.
More broadly, another large group of multiemployer plans are in “critical status.” They report that no realistic combination of contribution increases or allowable benefit reductions – options available under current law to address their financial condition – will enable them to emerge from their currently poorly funded financial condition. These plans cover millions more workers and retirees across the nation, and those workers and retirees face significant benefit cuts under existing laws.
We should also be concerned about the financial health of the federal insurance system that is intended to back these retirement benefits. The Pension Benefit Guaranty Corporation’s multiemployer pension program may itself become insolvent if only one, or possibly two, large multiemployer plans become insolvent. And, one of these plans – the United Mine Workers – just lost its last large contributing employer to bankruptcy.
Without reforms, the PBGC reports it will be insolvent no later than 2026. When that happens, PBGC will not be able to pay either current or future retirees more than a very small fraction of the benefits they have been promised. Consequently, substantial reductions in retirement income are a real possibility for the millions of workers and retirees who depend on benefits from these plans.
We need to act soon to protect the hard-earned pension benefits of the workers who participate in these plans.
As Chairman of the Finance Committee, I join today with Chairman Alexander of the HELP Committee to release a responsible reform plan to address the immediate financial challenges of a number of plans in critical financial condition and also secure the multiemployer pension system over the long term.
As we looked at options for reforming the current system, we have relied on several important reform principles.
First, a reform plan should provide balanced assistance to the most poorly funded plans.
Second, federal assistance to the failing plans should rely on as little taxpayer dollars as possible.
Third, reforms must promote long-term stability of the multiemployer pension system and the long-term solvency of PBGC.
Finally – and most importantly – reform options must focus on workers and retirees. That is, the reforms must ensure as much as possible that when workers retire, the benefits they have been promised by their employers and unions are there for them.
The relief and reform proposal we are releasing today adheres to those principles and gives us a realistic path for securing multiemployer plans and the benefits they have promised to workers in each of our states.
To help the sickest plans recover their financial footing, our proposal creates a special “partition” option for multiemployer plans. This is not a new concept. In fact, it simply expands on the PBGC’s existing authority. It’s based on banking industry reforms Congress enacted after the Great Depression and other times.
Partitioning permits employers to maintain a financially healthy multiemployer plan by carving out pension benefit liabilities owed to participants who have been “orphaned” by employers who have exited the plan without paying their full share of those liabilities. Removing orphan liabilities allows the original plan to continue to provide benefits in a self-sustaining manner by funding benefits with contributions from current participating employers. In effect, partitioning creates a “healthy pension” that continues to meet all of its obligations to retirees, and a separate “sick pension” that requires attention and assistance from the PBGC.
For this partition program to operate effectively and address the plans that are in immediate danger, a limited amount of federal taxpayer funds will be needed to support the PBGC. We expect the necessary federal resources to comprise only a small portion of the financial assistance provided to the faltering multiemployer plans, and we intend to offset the cost. We should all acknowledge the reality that action now means lower taxpayer involvement than if we wait for the PBGC to become insolvent, which would lead to a far larger commitment of taxpayer funds in the not-too-distant future.
Over the long run, the reforms we are proposing will be sustained primarily by shared-sacrifice funding reforms and a new premium structure for all stakeholders of the multiemployer plans.
Because taxpayer dollars would be at risk if the sickest plans fail to move to fully funded status, the proposal also includes a number of plan-governance reforms to strengthen multiemployer plans, protect the taxpayers’ contributions to the overall reforms, and shield taxpayers from future risks.
While partitioning addresses one element needed for reform, Senator Alexander and I propose to go a step further to make significant changes to the management and operation of all multiemployer pension plans. That way, moving forward, the entire multiemployer pension system will be better funded and more transparent to participants, sponsoring employers, and government regulators.
Providing relief to critical and declining plans is contingent on making changes to the legal framework of the multiemployer pension system to ensure that all plans operate on a sound financial basis in the future.
To help finance the partition relief and provide a stronger PBGC insurance guarantee to participants in the system, our reform proposal creates a new premium structure.
That includes raising the flat-rate premium to $80 per participant in a multiemployer plan, putting the multiemployer program on par with the single-employer guarantee program.
The new premium structure also broadens the base on which premiums are assessed to more equitably spread the costs of insuring benefits and to ensure PBGC solvency.
The new structure applies a co-payment to active workers and retirees. However, because of the broader contribution base, the co-payments are significantly less than the amount of the typical benefit cuts retirees face under current law if their plan should fail. Older retirees and disabled participants also will be protected.
In addition, our reform package establishes a variable-rate premium. This premium, which parallels the variable-rate premium that has long applied to single-employer plans, is tied to a plan’s funding status to manage risks stemming from more poorly funded plans.
The new premium structure not only helps to secure finances of the PBGC, but also funds an increase in the guaranteed benefit level for the vast majority of participants in the system. Raising the guaranteed benefit will greatly reduce the risk to retirees of significant reductions in retirement income, which would occur if their multiemployer plan becomes insolvent.
While the changes to the premium structure will fundamentally strengthen the financial status of the multiemployer pension system and the PBGC, our reform proposal makes other important structural changes to the multiemployer system to help ensure that the entire system moves to a well-funded status over the long term.
We achieve this by addressing key flaws in the current legal framework governing multiemployer plans.
Current multiemployer-plan rules do not serve the best interests of workers and retirees. They have not been sufficient to keep plans in good financial health, and they tend to underestimate liabilities and result in insufficient contributions to the plans.
To ensure that benefit promises offered in a multiemployer plan ultimately are met, our proposal strengthens the rules for measuring the value of promised pension benefits and the amount of employer contributions necessary to pay them when the worker retires.
These changes will require plan trustees and actuaries to measure and project plan assets and liabilities more prudently and accurately. They also are designed to help move plans toward full funding and to protect the interests of plan participants and taxpayers.
Our reform proposal also improves the so-called “zone” rules. Plans will be required to look farther into the future when estimating their financial status and institute a form of “stress testing” to check whether a plan can remain financially sustainable through potential economic and demographic stresses. Depending on its health, plans will have to bolster the steps they take when signs of financial hardship arise.
We also replace current withdrawal-liability rules with a simpler, more transparent, and consistent method for determining an employer’s liability if it withdraws from a multiemployer pension plan.
Looking to the future, the proposal includes a new option for sponsors of multiemployer plans to establish a new hybrid pension plan – called a “composite” plan.
We have heard a great deal of interest from smaller businesses and their workers about the benefits of a composite plan approach, including less costly operations, and more certainty in the financing of these plans.
To close, let me say that there are no perfect solutions to the multiemployer pension crisis. The longer we wait, the harder it gets. What’s more, our solution is far better than allowing the system to continue on its current path to collapse, and far better than merely throwing federal money into the plans without changing how they operate.
The House has essentially advanced a pure, no-strings-attached, bailout plan that would give taxpayer funds to plans in the hopes that they can somehow earn returns sufficient to keep them going. But the nonpartisan Congressional Budget Office tells us that the House’s proposal will not generate sustainability of pension plans or the PBGC. In contrast, the proposal we are releasing today addresses the immediate needs of the few multiemployer plans facing immediate crisis in a manner that protects participant benefits and ensures a sustainable multiemployer pension system for the long haul, all in a fiscally responsible way.
Our proposal is not a giveaway to corporations or to unions. And, it is a better deal for taxpayers than a future with even larger problems and PBGC funding needs that will almost surely be met with taxpayer backing.
All participants in the system would make a sacrifice – employers, unions, workers, and retirees – which is fair and responsible.
But with some shared pain will come significant shared gain. That will be to the benefit of over one and a half million participants in about 125 multiemployer plans that are in serious financial jeopardy. And it will be to the benefit of the rest of the multiemployer plans and their participants by providing a stronger system for the long haul and by promoting long-term solvency of the PBGC.
Senator Alexander and I offer this proposal as a path forward for a multiemployer pension system in crisis. I look forward to working with my colleagues in the United States Senate and in the House to advance this proposal, compromise where needed, and get it to the President’s desk before more pension holders face losses of the benefits that they earned and were promised.