MoneyPalooza Monstrosity -- The Return: Multiemployer Bailout
Will this encourage a public pension bailout?
Okay, the Dems have got all the power! (Well, barely. But still….)
So time for BAILOUT CITY! PARTY TIME!
We will see exactly how this shakes out, but one of the parts has got my attention: the Butch Lewis Emergency Pension Plan Relief Act of 2021, which shares (partly) the name of a previous multiemployer pension (MEP) bailout bill, but goes beyond that bill by not being a half-assed bailout.
It’s a whole-assed-and-borrowing-the-asses-of-future-taxpayers provision.
Provisions of the new MEP bailout
Elizabeth Bauer at Forbes has done the most detailed look I’ve seen so far: The Covid Spend-O-Rama’s Multiemployer Pension Bailouts: Some Disappointed First Impressions
But there’s another change that’s substantial. In the prior, HEROES Act version, the drafters maintained the concept of the “partition,” shifting liabilities for a portion of an at-risk pension to the PBGC and funneling extra funds there to be able to make those payments; to be sure, that version had planned to increase the maximum benefit substantially in order to protect retirees from benefit cuts, but the structure remained somewhat similar. The new proposal simply sends cash to eligible ailing multiemployer plans directly.
Which plans are eligible?
Any plan which has been labelled “critical and declining,” or which had previously had a “suspension of benefits” (benefit cut to preserve solvency), had a funded status of less than 40% and a disproportionate number of retirees, or which had actually become insolvent after 2014.
How much cash? Enough, according to the bill’s text,
“to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment under this section and ending on the last day of the plan year ending in 2051, with no reduction in a participant’s or beneficiary’s accrued benefit as of such date of enactment, except to the extent of a reduction in accordance with section 305(e)(8) adopted prior to the plan’s application for special financial assistance under this section, and taking into account the reinstatement of benefits required under subsection (k).”
A straightforward read of this, then, is that every penny of pension benefits due to be paid to present or future retirees, for the next 30 years, would be paid by the federal government.
Well, at least bailouts for the next 30 years.
Nutshell explanation: full bailout, including going into the past
My understanding of the MEP bailout provision is the following:
- the distressed plans get full bailouts (to 30 years, and not merely by actuarial measurement but 30 years of payments)
- the plans that did benefit cuts to try to improve sustainability would have to bring the benefits back to the original promised amounts (I think the cut benefits for retirees would be given back in a lump for the cut benefits and then back to the full amounts going forward), and yeah that back-payment would be covered as well as the going-forward payments
- there are no requirements for any kind of “adjust for sustainability” in terms of contributions and benefits
- why no, there are no strings attached, why do you ask?
They didn’t bail out MEPs in 2020, but I guess they’re going to try again. We’ll see.
Teamsters are happy
Press release from the Teamsters: Teamsters Laud House Committee For Including Pension Reform In Stimulus Bill
In unveiling language included in the Butch Lewis Emergency Pension Plan Relief Act of 2021, the House panel took the first step towards ensuring that millions of retirees and active workers who have played by the rules will receive the pension benefits they earned through years of hard work.
“The financial distress many of these plans are facing is beyond the control of retirees and workers,” Teamsters General President Jim Hoffa said. “While multiemployer pension plans have been buffeted by economic turbulence over the decades, the situation has been seriously exacerbated by the current pandemic.”
Through no fault of their own, the earned pension benefits of millions of retirees and active workers are being threatened due to the deteriorating financial status or the impending insolvency of hundreds of multiemployer pension plans – including the Teamsters’ own Central States Pension Fund – representing more than 1 million participants.
I agree with them — it’s not the retirees’ or even the active workers’ fault that their pensions are threatened.
But, sorry guys, pretty much all the MEPs requiring bailouts were the exact same plans requiring bailouts for years before COVID hit.
And, again, sorry, it may not be your fault, but the rest of us did not promise you those pension payments.
Who made the promise?
The MEPs are union-backed pension plans, where the provisions are part of the specific unions’ demands re: pay and benefits for the various employers who hire members of that union.
Who, exactly, made the pension promises?
The union set the terms for pay and benefits.
The employers agree to those terms.
The PBGC is paid some minimal risk premiums to back their currently minimal guarantees for MEPs. When MEPs totally fail by running out of assets, the retirees get the very low guaranteed benefits.
So, who exactly made those pension promises? Who is responsible for making retirees and active workers whole?
I’m pretty sure I never told the Central States Teamsters that it was okay to take retirement benefits as early as age 57.
MEP distress history
Here is a post I made in December 2014: Multiemployer pensions, Social Security, and Public Pensions: Choices Have Consequences
But multiemployer plans are an especially sticky subject, because of all sorts of bad incentives baked into how these plans are regulated.
Here is one bit of info: when pensions (whether single employer or multiemployer) are put onto the PBGC because they’ve gone bankrupt, the pensions are guaranteed only up to a certain amount. Those with small pensions may get their full amount, but those with higher amounts get whacked down. A lot.
“When those funds run out of money to pay benefits, it will be up to the P.B.G.C. to step in. It now pays a maximum of $12,870 a year for workers who spent 30 years digging coal or driving trucks, even if the plan called for larger payouts. A worker with only 15 years of service gets half of that.”
The reason the boomers are going to find out that they’re going to get a lot less than they thought is because of choices they made:
1. They didn’t save up enough and
2. They didn’t have enough children
That second one is a manner of saving for the future, btw.
The reason taxpayers will not boost them up is because there’s not going to be enough of us. And bringing in a bunch of low income once-illegal aliens is not going to do much for them, either, except perhaps provide some low cost workers for their assisted living centers.
Yes, I was feeling particularly salty when I wrote that. I will come back to that at the end of this post.
Central States Teamsters were already failing as a pension plan back in 2014.
The reason they need a bailout was that, well before the pandemic, when the plan was going to fail, they were going to take the PBGC with them. That a bailout for the PBGC multiemployer pension program would happen was always expected, because people don’t want all the union plans to go without protection because one big plan failed.
However, we never expected that the failed plans would be made 100% whole.
Central States: I Guess the Plan is To Run Out of Money – that was from 2016, and that still seems to be the plan. Well, the real “plan” is to get a bailout. We’ll see.
Yeah, that last one is the HEROES act from last year.
So let’s think through that last bit — I can see Joe Manchin, the Senator from West Virginia, getting his arm twisted over needing to bail out Central States and other MEPs. Heck, not only are Democrats vulnerable, but midwest Republicans in specific.
So I can see this complete bailout of MEPs sailing through the Senate, while other parts of the bill running into friction. I definitely can see another aspect of the new MoneyPalooza Monstrosity, bailing out state/local governments, may run into more interference.
Andrew Biggs thinks this MEP bailout is a bad sign: Prelude to a State Pension Bailout
Ordinarily, insolvency means pension freezes and benefit reductions, but multiemployer pensions are run by labor unions, a key Democratic constituency. And so the House Covid bill plans to dole out an estimated $86 billion from 2022 to 2024 to 186 pensions, enabling these plans to pay full benefits through 2051. With no incentive to cut costs, there’s little reason to think the pensions will be solvent after 2051. Look forward to more spending down the road.
The larger worry is that Congressional Democrats’ willingness to bail out private-sector multiemployer pensions signals they would do the same for state and local employee plans. Public-employee pensions operate under the same loose funding rules as multiemployer pensions, and public plans in Illinois, Kentucky, New Jersey, Texas and other states are no better funded than the worst multiemployer plans.
May I call you Andy? (you may call me meep, it’s okay)
Here’s the biggest problem in this thought.
There isn’t enough money to fill that hole.
From Elizabeth Bauer’s follow-up piece: Multiemployer Pension Plan Bailout Update: The Good News, Bad News, And The Pricetag
Based on simulations of the data available through the PBGC, CBO projected that, in the average simulation, 185 plans would receive funds, and those funds would total $86 billion, the bulk of which, $82 billion, would be spent in 2022, with smaller amounts spent in 2023 ($2 billion) and 2024 ($0.6 billion). At the same time, the PBGC’s spending for insolvent plans would be reduced by $2 billion, and tax revenues would increase by $1.7 billion as retiree-taxpayers pay tax on benefits they would have otherwise not received.
So, that’s only $86 billion total (yes, obviously, it could be more… but the order of magnitude is unlikely to be a lot higher. Maybe the total could be twice?)
What’s the public pension shortfall, do you think?
Pew Trusts last year went with a number of $1.2 trillion. Based on fiscal year 2018 results.
I did a quick extract from the Public Plans Database, which uses the actuarial measurements of unfunded liabilities, at $1.4 trillion for 2019. And that’s just for the plans in the database.
I’m all about data visualization, and orders of magnitude. Here is a comparison of the MEP bailout value to a public pension bailout value.
Now, you can say that they are just about to add $2 trillion to the federal debt, so what’s $2 trillion more? (and yes, people will be saying that – we shall see how much that money printer can go BRRRRRR)
In my own opinion, the standard measures for DB pension shortfalls greatly underestimate the cash flows needed, given this time of extremely low interest rates. But still, let’s pretend.
The public pension bailout would be at least 20 times the amount of a MEP bailout. Just because you bailout a set of pensions that would have pulled down a federal guarantee fund (the PBGC) does not mean you’re going to bailout other pensions that are much bigger and that you never guaranteed in the first place.
Maybe the MEPs get bailed out on paper.
And then the public pensions get bailed out on paper.
And then there’s the hyperinflation that makes it all moot. (oh, we want to keep our COLAs! Our precious COLAs! So hyperinflation doesn’t bite into us! Oh wait, you won’t bail us out for that?!?)
As it is, let us see if this even bigger bailout of multiemployer pensions occurs with no strings attached, and then we can worry if the 20x bigger bailout will go through.
There seems to be some question as to whether the Democrats, in charge of White House, House of Reps, and Senate (barely), can even get some of the milder aspects of this latest bailout bill enacted.
I find that very interesting, don’t you?