According to a recent report by the Pension Benefit Guarantee Corporation (PBGC), the multi-employer program of the PBGC “is more likely than not to run out of money within the next eight years.”
The PBGC is a government agency that insures private pension plans for single employers and multi-employer groups (i.e., unions). On the multi-employer side, when a pension plan becomes insolvent and cannot pay its promised benefits, the PBGC provides workers with a portion of their promised benefit up to a maximum of $12,870 per year. While the PBGC protects workers from a complete loss of their promised benefits, it also creates a moral hazard by making it easier for pension plans to renege on their promised benefits.
Once the multi-employer program is exhausted, the only money available to PBGC benefits will be the premiums of remaining, solvent pension plans. As more plans are projected to become insolvent, there will be fewer left contributing, creating a problem of adverse selection in which the financially solvent plans have the incentive to exit the multi-employer program.
The insolvency of multi-employer pensions is not a new phenomenon, but the PBGC’s method of reporting deficits has masked awareness of the problem. The PBGC reports only 10-year projected deficits, so if a plan is projected to become insolvent in 11 years, it is not included in the deficit projections. It is the insolvency of plans that leads to deficits in the PBGC, because once a plan becomes insolvent, it shifts from an asset (contributing premiums) to a liability (drawing benefits). According to the 2013 report, the multi-employer program deficit will be $49.6 billion in 2023.
Policymakers have called for action to help address the growing insolvency of multi-employer pension plans. As the PBGC report makes clear, it will be impossible for some plans to raise contributions or reduce benefits enough to avoid insolvency. Consequentially, the multi-employer PBGC program is at “significant risk of running out of money in as little as five years” and is “highly likely” to become insolvent within the next ten years.
It is a tragedy that many of these multi-employer pension plans have not acted prudently to protect the benefits they have guaranteed to workers, but policymakers need to make it clear that taxpayers will not support a bailout of private pensions. There was no bailout for millions of retirees and near-retirees who lost huge portions of their personal retirement accounts in the recent recession, and there should be no bailout for irresponsible union pension plans.
