Congress packed a lot of extraneous issues into the massive $1 trillion spending bill passed just before adjourning last week. Among them was a provision that allows pension benefits to be reduced for about 1.5 million retirees. That is bad news for those pensioners, but the alternative would be even worse.
The cuts are necessary because those retirees’ pension plans are seriously underfunded and projected to go broke within the next 10 years. If the payouts are not reduced to extend the life of these pension plans, some retirees could see their benefits slashed by as much as 95 percent.
This action by Congress to shore up pensions for retirees who worked in union industries, such as trucking and mining, exposes fundamental problems with defined-benefit retirement programs that promise workers lifetime benefits. These promises were based on expectations of full employment of workers who pay into the system and rosy projections of investment returns. Neither expectation has panned out.
These problems are not unique to these so-called multi-employer pension plans. It is a similar story for millions of federal, state and local government employees, and to an extent all Americans who look forward to receiving retirement benefits they have paid into for their working lives — including Social Security.
Massive numbers of baby boomers leaving the workforce will have to be supported by a smaller proportion of active workers. And people are living far longer into retirement than ever before. As a result, many private and public pension plans will have trouble meeting promises to retirees. This problem will only get worse the longer we put off dealing with it.
There are just three options: Reduce benefits; increase contributions; or do some of both.
Those options confront some of the 200 private pension plans negotiated by employee unions. They are among the more than 27,000 private pension plans for more than 44 million people insured by the federal Pension Benefit Guaranty Corp., which was created by Congress in 1974 as part of the Employee Retirement Income Security Act.
The corporation insures more than $1.7 trillion in pension benefits. In the past 20 years, however, liabilities have steadily swamped the assets of the Pension Benefit Guaranty Corp., which, in its 2014 annual report, showed a record deficit of $62 billion, in part because of losses suffered by the plan’s reserve funds during the recent recession. But these problems have been building for several years.
The largest piece of that deficit is for the multi-employer pension plans. Some of those plans are in serious risk of going broke within a decade, according to the Congressional Budget Office, because of declining assets, increasing liabilities and fewer union workers supporting large numbers of retirees. The Teamsters Union, for example, has one worker for every five retirees.
The action by Congress was proposed by a consortium of 40 organizations representing employers and labor groups to avoid catastrophic reductions in pension benefits. Giving pension fund managers the ability to reduce benefits for current and future retirees is a painful move, but not as painful for them as doing nothing.
The only other alternative is for Congress to bail out these pension funds, but there is no interest in Congress for asking taxpayers to bail out these failing private pension plans. It would be hard to make the case that taxpayers — the vast majority of whom do not have the benefit of a defined-benefit pension — to pay retirees who enjoy this benefit.
Critics say it is cruel to reduce pension benefits promised to workers who worked long careers to earn them, and that any reductions should be phased in over a longer time. But Congress, as usual, has kicked this can down the road too long, and it is too late for long-term fixes. The lesson here is that Congress should not put off correcting problems with Social Security and Medicare.