Decrying the Union Pension Bailout Bill
April 8, 2010
by Diana Furchtgott-Roth
Some members of Congress seem to like putting taxpayers on the hook for practically unlimited liabilities. The latest Congressional Budget Office forecasts 2020 public debt climbing to 90% of GDP under President Obama's 2011 Budget. This is not enough for Senator Robert Casey, a Pennsylvania Democrat and habitual ally of labor, who now wants Americans to bail out union pension plans underfunded by hundreds of billions of dollars.
Following on the healthcare model, it's all part of a political calculus in which Washington politicians try to buy votes today for the next election with money that Uncle Sam won't have to spend until afterwards. It is Pennsylvania's other Senate seat that is to be filled this November, but Mr. Casey, a first-term senator elected in 2006, appears to be looking ahead to 2012.
Mr. Casey's bill, the Create Jobs and Save Benefits Act of 2010, is similar to that of Representatives Earl Pomeroy, a North Dakota Democrat, and Patrick Tiberi, an Ohio Republican, who seek to bail out pension plans with their proposed Preserve Benefits and Jobs Act of 2009, introduced last fall.
Under these bills, the Pension Benefit Guaranty Corporation would, at the request of the plans, have the authority to take over the pension obligations of employers who have withdrawn from the plans, and pay the benefits out of taxpayer dollars. Once the PBGC shoulders that obligation, it would keep making payments until the last retiree or designated survivor dies.
Since many multiemployer plans are in financial difficulty, this legislation, if enacted, could dramatically increase the federal deficit, putting even more pressure on the American taxpayer and the economy. Depending on events, it might add billions to government spending-current underfunding levels are estimated at $165 billion-bumping up future deficits.
Unions prefer multiemployer defined-benefit plans to allow workers to keep pensions if they change jobs to another participating company in the same industry. Such plans have the effect of keeping workers in unionized jobs in the same industry for most of their working lives, contributing both to defined benefit funds and to unions' security.
Multiemployer plans are more commonly underfunded than non-union plans. In 2006, even before the market crash, 6% of multiemployer pensions were fully funded, compared with 31% of single employer pensions.
Why the persistent underfunding? Some union leaders like to achieve wage increases and new benefits when they renew collective contracts, in order to make their reelection more likely. Ensuring that pension plans are kept well-funded takes more work for little visible effect-and may well work against winning more benefits by underscoring their cost to the employer.
Congress (through the Pension Protection Act of 2006) considers funds with less than 80% of needed assets to be in "endangered" status, and those with less than 65% to be in "critical" status. Every year more failing plans, as well as plans who applied to delay their remedial strategies, are listed on the Labor Department's Web site. The list has grown from 230 pension plans in 2008 to 640 at the end of 2009.
Under the Casey and Pomeroy-Tiberi bills, some underfunded plans would be shifted to taxpayers. But it's a vicious circle: once PBGC took over some plans, other employers would want to declare bankruptcy, unload plans on the PBGC, and reorganize under another name. The incentives to do this would be enormous, because companies bailed out by the PBGC would be free of onerous pension obligations and hence would acquire a competitive advantage.
Both House and Senate bills would allow failing multiemployer pension funds to form alliances and merge where such mergers would reduce PBGC's losses. Plans that have been financially prudent could lose, because they could be merged by PBGC with failing plans, with PBGC funding failed plans.
By bailing out the plans, Congress would be compromising the remedial provisions of the Pension Protection Act of 2006. The Act requires underfunded pension plans to put their houses in order by raising retirement ages; increasing contributions by employers, workers, or both; and lowering benefits. A bailout would remove any incentive for multiemployer pension plans to reorganize their plans responsibly.
Neither bill has been voted out of committee and reached the floor of the House or the Senate, nor have hearings been held. However, the bills have generated support from unions and employers. Unions want to be free of pension obligations so that they can focus on higher wages in future contracts. Employers seek to avoid continuing and possibly higher contributions.
Last fall Moody's estimated that multiemployer plans were underfunded by at least $165 billion, and concluded that "The ballooning of the under funded status of these funds has substantially increased the implied liability for contributing companies in the industries affected." Some companies risk having their ratings downgraded, especially if weaker companies become bankrupt and leave the pension plans.
Hence, a coalition of liberals and conservatives might pass the bills and send one to President Obama's desk for a likely signature, given his frequent support for unions, one of his most important constituencies.
With deficits stifling the economy, making the taxpayers, already in trouble themselves, pay for underfunded pensions is manifestly unfair. Multiemployer pension plans were in trouble well before the latest recession, even at stock market heights of 2006-2007. As employers and unions had reason to know from the beginning, many firms have too few young workers, too many old workers, life spans are lengthening-and contributions by both sides were predictably inadequate.
Yes, Mr. Casey's Create Jobs and Save Benefits Act would save benefits for workers and retirees. But spending billions of taxpayer funds on failed pensions would swell the deficit still further, harming the economy and destroying jobs rather than creating them. Exactly how much mismanagement by employers and union leaders must the taxpayers underwrite?
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, was a Senior Fellow at Hudson Institute from 2005 to 2011.
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