I'm Dreaming of a...Well Funded Pension

(With apologies to Irving Berlin, Bing Crosby, and Billy Mack¹.)

Ten years before the Studebaker bankruptcy, Irving Berlin wrote and Bing Crosby sang the title song in the movie White Christmas. As we approach this holiday season, I’m almost thinking we need a Billy Mack version to marry new lyrics to that famous tune – dreaming of a well-funded pension. But, this is too serious an issue for such frivolities.  

On November 30, 2018, the 16-member Joint Select Committee on Solvency of Multiemployer Pension Plans, a bipartisan, bicameral congressional committee, delivered its recommendation regarding resolution of the multi-employer pension plan underfunding fiasco.² The Wall Street Journal confirmed that the select committee was going to miss that deadline.³ But, you should not be surprised about Congress missing deadlines.  Multiemployer pension plan funding challenges have been well known and mostly unchanged since White Christmas was first performed.⁴    

Why? Why hasn’t Congress increased Pension Benefit Guaranty Corporation’s (PBGC) multiemployer pension plan insurance premiums to match the risks? Why haven’t employers and unions agreed on higher contributions to ensure pension solvency? Why are members of Congress, certain employers, and unions still promising workers and retirees more than they were/are willing to fund, and why do they want to send you and other Americans the bill … you who will never receive such benefits?   

Would you be surprised to hear that inadequate PBGC insurance premiums and inadequate funding for multiemployer pension plans were deliberate choices?⁵    

Most Americans never heard of Studebaker.  Only a few benefit weenies like myself would know that President Gerald Ford’s signing of ERISA into law on Labor Day, 1974, could be directly linked to Studebaker’s plant closing more than ten years earlier in 1963 as well as Studebaker’s termination of dramatically underfunded pension plans (in 1958 for Packard hourly employees and in 1964 for Studebaker employees).  

Some liken the adoption of ERISA and the creation of the PBGC’s insurance program as comparable to a surfer who was prepared and on a surf board waiting to catch just the right wave.⁶ Myself, I’m reminded of the famous quote by Rahm Emanuel, once White House chief of staff to President Obama, who, in the middle of the 2008-2009 Great Recession, said, “You never want a serious crisis to go to waste. … and what I mean by that is that it is an opportunity to do things that you think you could not do before.”⁷

As Professor Wooten notes in his history of ERISA⁸:

• “… To hold down the short-term cost of retirement plans, (unions) agreed to provisions that placed younger employees at risk of not receiving a pension. One source of risk was underfunding. … (union) retirement plans almost never had enough assets to pay all of their pension obligations.”
• “The Packard termination convinced (union leadership)… that the union had to protect members from default risk. One option was for union negotiators to bargain for higher levels of funding. The union rejected this approach because it would require slower growth of pension benefits - which would lead older employees to be less willing to retire - or larger employer contributions - which would result in lower wages for active employees. Instead of addressing default risk through collective bargaining, union pension experts developed a proposal for a government-run insurance program that would guarantee the obligations of defined-benefit pension plans.”

Professor Wooten goes on to say, “Moral hazard refers to the possibility that the existence of insurance coverage will cause changes in conduct that increase the losses that must be paid by the insurer. Adverse selection refers to the fact that insurance buyers are likely to be a non-random selection from the population - more particularly, to be those who expect to have the highest expected claims.  If an insurer cannot or does not charge premiums that accurately reflect the risks posed by the entities in the insurance pool, then adverse selection may destabilize the pool because high-risk entities will stay in while low-risk entities will opt out.”

Not surprisingly, today’s multiemployer pension schemes face similar, predictable moral hazard and adverse selection challenges⁹: 

• Underfunding can be made up only with prospective funding actions affecting active workers and/or higher insurance premiums for healthy plans.
• The larger the needed charge, the more difficult it is to attract new employers and employees into the plan, and the more likely employers are to withdraw.
• Employers and active employees will be very reluctant to implement such added charges, especially if the bulk of the benefit goes to retirees. 
• Employers and employees are even less likely to support such a charge where retirees are “orphan participants” (i.e., they formerly worked for companies that no longer contribute to the plan). 
• The situation is made worse by withdrawing employers that often do not pay their full obligations. 

Note that the 2018 PBGC financial report confirmed stark differences in the defined benefit pension trust funds¹⁰:

• Multi-employer: A deficit of $53.9 billion, covering approximately 1,400 plans with 10.6 million participants, and 
• Single-employer: A surplus of $2.4 billion, covering approximately 24,000 plans with 27.5 million participants. 

Here’s the comparison to the 2008 PBGC financial report, a decade ago¹¹: 

• Multi-employer: A deficit of $473 million, covering approximately 1,500 plans with 10.1 million participants, and 
• Single-employer: A deficit of $10.7 billion, covering 28,000 plans with 33.8 million participants. 

Why the difference?  Why are the two trust funds headed in opposite directions?  It is simple.  One trust fund includes a number of plans hoping to catch the next big wave – the potential taxpayer bailout.  The other trust fund had many more plans that paddled to shore (freezing accruals and/or terminating the plan).    

So, no wonder the Joint Select Committee is looking at solutions that would shift some or all of the underfunding burden to … you guessed it … taxpayers …  most of whom will never receive similar pension benefits.¹²  

¹ Inspired by Billy Mack, Christmas Is All Around (first scene in the movie Love Actually), Youtube video accessed 11/30/18 at: https://www.youtube.com/watch?v=5Fmf3D9oNn4 
² J. Towarnicky, Pension Promises Without Funding Are Mere Dreams, 11/12/18, Accessed 11/30/18 at:  https://www.psca.org/blog_jack_2018_52 
³ J. Jamerson, H. Gillers, Panel Won’t Meet Deadline on Fix for Multiemployer Pension Plans, Answers aren’t clear for set of plans on track to hit shortfall of $80 billion by 2026, Wall Street Journal 11/29/18, Accessed 11/30/18 at:  https://www.wsj.com/articles/panel-wont-meet-deadline-on-fix-for-multiem...
⁴Note ii, supra.  
⁵ J. Wooten, "The Most Glorious Story of Failure in the Business": The Studebaker-Packard Corporation and the Origins of ERISA, 49 Buff. L. Rev. 683 (2001).  Accessed 11/30/18 at: https://digitalcommons.law.buffalo.edu/cgi/viewcontent.cgi?article=1147&... See also:  R. Jefferson, Defined Benefit Plan Funding:  How Much is Too Much, Case Western Reserve Law Review, Volume 44, Issue 1, 1993.  “… While sufficient funding was recognized as one of the primary goals of ERISA, Congress continued the maximum funding limitations which capped the (tax) deduction for (contributions - IRC §404(a)(1)(A)).  Moreover, in an effort to further discourage "overfunding," a ten percent excise tax was imposed … on all nondeductible contributions.  … emphasis on overfunding creates a risk that plans will be insufficiently funded … (these and other changes on asset reversions) have succeeded in essentially bringing accelerated funding … to a halt.”  Accessed 11/30/18 at: https://scholarlycommons.law.case.edu/cgi/viewcontent.cgi?article=1961&c...
⁶ Note v, supra, quoting J. Kingdon, Agendas, Alternatives and Public Policies 94-95 (2d ed. 1995) page 736.   Professor Wooten states:  “…  Not every calamitous event becomes a catalyst for legislative reform.  A calamity is more likely to draw attention to a social problem when people interested in the problem are prepared to take advantage of the opportunity the calamity presents.  This is what happened in the Studebaker case.  … the United Auto Workers union (UAW) was well aware that "default risk"- the risk that a pension plan will terminate without enough funds to meet its obligations – threatened union members. In the early 1960s, UAW pension specialists devised a remedy - a proposal for "pension reinsurance" that is a precursor of the termination insurance program created by Title IV of ERISA.” Page 684. 
⁷ R. Emanuel, Wall Street Journal, 11/19/08, Accessed 11/30/18 at: https://www.youtube.com/watch?v=_mzcbXi1Tkk  
⁸ Note v, supra, pages 684 – 686. 
⁹ Note ii, supra. 
¹⁰ PBGC 2018 Annual Report, Accessed 11/30/18 at: https://www.pbgc.gov/sites/default/files/pbgc-annual-report-2018.pdf 
¹¹ PBGC 2008 Annual Report, Accessed 11/30/18 at:  https://www.pbgc.gov/documents/2008_annual_report.pdf 
¹² See for example the Butch Lewis Act, S. 2147, Introduced 11/16/17, Accessed 11/30/18 at:  https://www.congress.gov/bill/115th-congress/senate-bill/2147/text?forma... See also the Congressional Budget Office cost estimate for S. 2147 of $100+ Billion, 10/11/18, Accessed 11/30/18 at: https://www.cbo.gov/publication/54563 See also: Pension Analytics Group, The Multiemployer Solvency Crisis: Estimates of the Cost and Impact of the Butch Lewis Act, November 2018, and Can the Multiemployer Pension System Be Rescued by Subsidized Loans?, November 2018.  “…  (We project) that, absent significant remedial action, about 200 multiemployer pension plans covering over three million participants will become insolvent over the next 30 years. We have also projected that the Pension Benefit Guaranty Corporation’s (PBGC) multiemployer guarantee fund … will itself be exhausted by 2027. … We concluded that while the (proposed loan from taxpayers) would have some beneficial effects … it would not be a broadly effective remedy for mitigating the solvency crisis. Unless troubled plans implement significant benefit cuts, our analysis indicates that loans would not prevent plan insolvencies, but merely delay them.” Accessed 11/30/18 at: http://pensionanalytics.org/our_papers.html