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Retirees’ worst nightmare: Federal backing of pension funds at risk

Looming insolvency of Central States pension plan has stakeholders calling for bipartisan solution

Teamsters listen to Massachusetts Rep. Richard E. Neal speak about efforts to save pensions in South Boston on Jan. 24, 2018. The promise of a monthly pension check, once considered ironclad, is now in doubt for more than a million retirees and older workers nationwide, including tens of thousands in Massachusetts and neighboring states. Their underfunded pension plans are creeping toward insolvency, putting benefits they earned over the course of a career at risk of being cut or even eliminated.
Teamsters listen to Massachusetts Rep. Richard E. Neal speak about efforts to save pensions in South Boston on Jan. 24, 2018. The promise of a monthly pension check, once considered ironclad, is now in doubt for more than a million retirees and older workers nationwide, including tens of thousands in Massachusetts and neighboring states. Their underfunded pension plans are creeping toward insolvency, putting benefits they earned over the course of a career at risk of being cut or even eliminated. (Lane Turner/The Boston Globe via Getty Images file photo)

The colorful history of the Teamsters union’s largest pension fund as a piggy bank for the mob was a driving element in the Oscar-nominated film “The Irishman.” But it will take a lot more than great acting and directing to solve the fund’s current problems.

It’s projected to run out of money in 2025. Already its annual benefits payments are $2.1 billion more than it’s taking in. And the Central States, Southeast and Southwest Areas Pension Plan is committed to paying $40 billion more in benefits to 364,000 members than its dwindling assets can support.

Not coincidentally, the federal backstop to protect such plans, the Pension Benefit Guaranty Corporation, is projected to go under the same year. Its multiemployer insurance fund covers 1,400 union plans with more than 10 million members and has a balance of about $2.5 billion. A growing number of insolvencies by small pension plans will shrink that to about $1.7 billion in 2024. The Teamsters plan will wipe out the rest.

“We’ll take the PBGC down for sure, there’s no doubt about it,” said Thomas Nyhan, executive director of the Central States pension plan.

When that happens, Central States pensioners, currently receiving an average benefit of about $1,400 a month, will get an immediate 20 percent cut since the PBGC’s insurance fund pays a maximum benefit of $1,072.50 a month. Those with 30 years in as a Teamster who receive a $3,000 monthly check can expect a 60 percent cut. Once the PBGC fund balance hits zero things get even worse, as its sole source of revenue will be the $380 million in premiums coming in annually.

Divided among several hundred thousand stranded pensioners, that will amount to “mere pennies on the dollar,” PBGC Director Gordon Hartogensis told the Senate Finance Committee in a closed-door briefing in December, according to prepared remarks provided by the agency.

[Trump taps McConnell brother-in-law, big GOP donor, for Labor post]

Whatever the figure is, it will come out to something less than $100 a month, as that small income stream is divided among Central States retirees, the 66,900 retirees in failed plans that the PBGC was already paying in fiscal 2019 and the thousands in plans that will fail in the next few years. 

Pain in the Heartland

Union issues are usually the province of Democrats, but the approaching insolvency of Central States has Republicans and businesses calling for a bipartisan solution.

In this case, “bipartisan” means a fix that will include taxpayer dollars. The PBGC estimates its deficit is $65.2 billion, and there is general agreement that there isn’t enough to be had from retirees and contributing companies to fill that massive hole.

Republicans have a strong political motive to find a solution: About two-thirds of the $2.8 billion in annual Teamsters benefits goes to members residing in congressional districts held by Republicans.

Complicating matters in a presidential election year, battleground states are among the hardest hit. Ohio has the most participants affected, with 42,643 Central States members as of the end of last year. Wisconsin is fourth with 23,074, which is slightly more than President Donald Trump’s margin of victory in that state in 2016. In his 2020 State of the Union address, Trump said rising wages for lower income groups had prompted a “blue-collar boom” in America, but that boast might seem suspect to the tens of thousands of worried retirees in these key states.

Rep. Ron Kind, a Democrat on the House Ways and Means Committee, said his southwestern Wisconsin district with more than 3,000 Central States members will be “a key battleground area in the state” in the race for the White House. “I think it’s going to be an issue, certainly,” Kind said.

In all, 235,000 Central States participants, or 65 percent, live in GOP districts, which helps explain why 29 Republicans joined unanimous House Democrats last June in passing a $68 billion rescue plan that some other Republicans criticized as a bailout.

Rep. David Joyce, a Republican with nearly 2,000 Central States members in his northeast Ohio district, said he is also worried about business owners stuck in the failing plan, facing high costs and concerns about the future.

“It’s not just rank-and-file folks, but it’s the owners of businesses who cannot sell their businesses,” said Joyce, explaining his vote for the bill. Three other Ohio Republicans joined him.

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Besides cutting benefits to retirees, another common method of bolstering a plan’s finances is to levy special assessments on participating companies, although that would cut their profits and make the companies less appealing to investors.

For instance, the Alaska Ironworkers fund, which never recovered from the 2008 financial crisis, won approval from the Treasury Department last year for a reorganization plan involving an average 26.5 percent cut in benefits. The fund already required contributing companies to pay not only the normal $4.75 contribution to the plan for each hour a covered employee works but also an added $13.75 an hour in special catch-up assessments. In a filing, plan sponsors claimed increasing assessments further could drive participating companies into bankruptcy.

Wheel of Misfortune

“There’s only three places the money can come from,” said Jean-Pierre Aubry, director of state and local government research at the Center for Retirement Research at Boston College. It can come from benefit cuts, employer contributions or taxpayers. Insurance premiums charged by the PBGC more than doubled in 2015, but that eventually comes out of the pockets of beneficiaries or companies.

Active participants “have been getting the brunt of it recently,” Aubry noted. A 2014 law not only boosted premiums paid to PBGC but also allowed pension plans to temporarily suspend and then permanently reduce benefits as part of plans to restore their finances to solvency.

But only 15 plans have been approved, only one prior to the 2016 elections, and the proposal by Central States, the plan the law was designed to rescue, was rejected. Central States suggested an average benefit cut of 22 percent, but large demonstrations in Missouri, Michigan and elsewhere were followed by a ruling that the cuts weren’t enough to put the plan on a track to solvency.

While most of the 1,400 union plans covered by the PBGC are in good shape, 125 of them with 1.3 million members are projected to run out of money in the next 20 years. Most of those, though, are smaller plans.

Only three of the 25 largest plans were in regulators’ “worst” category — plans that not only are underfunded by a large margin but also are projected to get worse. That calculation is based on 2017 data, the latest year for which all plans have filed with the Labor Department.

Among the big plans, Central States would be the first to go. Aubry predicts that the “800-pound gorilla” will force Congress to deal with the problem before 2025. House members whom CQ Roll Call interviewed suggest Congress probably won’t act during an election year, although this could well be the year when candidates on the campaign trail promise to fix the problem.

Two years ago, Congress created the Joint Select Committee on Solvency of Multiemployer Pension Plans, which expired at the end of 2018 without fulfilling its mandate to recommend legislation to fix the program’s financing problems. The committee reportedly was close to a bipartisan approach that would have included funding from all three available sources:  retirees, contributing companies and the federal government.

“We kind of had some hope there was going to be something that was workable, that was fair, that treated taxpayers appropriately but also the retirees,” said Rep. Jim Jordan, a conservative Ohio Republican who voted against the House bill but hopes the consensus almost reached in 2018 by the select committee can be duplicated. Jordan’s district is home to 3,200 Central States participants who received $28 million in benefits last year, 13th among all congressional districts.

Another Republican, Rep. Tim Walberg, has a southeast Michigan district that ranks seventh in receiving Central States benefits. Walberg, a senior member of the House Education and Labor Committee, which has jurisdiction over pensions, didn’t like the House bill with its expensive government guarantees, but he voted for it anyway.

“I’ve been trying to get our leadership to take legitimate action on it for years, and I finally decided if this can get their attention, I’m going to vote for the thing,” Walberg said.

After Central States, the second biggest plan in regulators’ bleakest category is the 110,000-member Bakery and Confectionery Pension Plan, which estimates it will be out of money in 2029. The plan’s deficit topped $7 billion at the end of 2017.

The United Mine Workers of America with 93,000 participants had been expected to be the first of the big plans to run out of money. The UMWA’s projected insolvency date was 2022, but the plan’s largest remaining contributor, Murray Energy, declared bankruptcy in October, pushing the estimate to September.

It became a priority of Senate Majority Leader Mitch McConnell to avoid that catastrophe two months before an election, and the plan, with a deficit of more than $6 billion, was effectively taken over by the federal government in a final fiscal 2020 spending law.

House vs. Senate

In hindsight, this crisis seems due to a miscalculation. The theory was that by having all these businesses in the same industry contributing to a single, central pension, the risk would be spread out. If one company went out of business, the rest would pick up the slack.

Instead, the system concentrated risk in industries and sectors that de-unionized, like trucking, or simply shrunk precipitously, like coal and manufacturing. 

But Congress was slow to catch on to the change. Insurance premiums collected by the PBGC remained phenomenally low at less than $3 per member per year until 2006, when the projected shortfall of the agency’s insurance fund doubled to $700 million and premiums jumped to $8 per worker.

Premiums edged up to $12 by 2014, then more than doubled to $26 after the 2014 bill became law. But by that time the shortfall in the fund had exploded to $42 billion and the higher premiums merely slowed down the rate of increase.

The House bill counts on big government-guaranteed loans and targeted grants rather than big premium hikes. Despite the $68 billion cost, the House bill, which would provide an immediate $3 billion loan to Central States, would only delay the collapse of the system, not prevent it, according to the CBO.

In an analysis released last September, the CBO found that about 25 percent of the pension plans that would receive 30-year loans under the bill would not be able to pay them back and would still run out of money. And most of the plans that did repay their loans would become insolvent at a later date.

The law that created the system, the 1974 pension act known as ERISA, does not provide a federal guaranty if the PBGC’s fund fails. It also bars the PBGC from tapping money in its other fund, which insures pension plans at individual companies and has a surplus of nearly $9 billion.

At its core, though, the PBGC is a federal program that collected insurance premiums from pension plans in exchange for a promise that benefits would be paid if the plans failed, said House Education and Labor Chairman Robert C. Scott, a Virginia Democrat.

“I believe, it essentially having sold insurance, that the PBGC is morally obligated to pay the bills” when a plan fails, Scott said. “Whether they have the money or not, the federal government has a moral obligation to make good on the promise.”

“That they didn’t charge enough premiums, that’s not the fault of the people paying the premiums,” he added.

But there’s a limit as to how much in premiums can be raised to address the problem, the  U.S. Chamber of Commerce said in comments it filed in January on a Senate proposal that has little taxpayer funding and instead relies on big hikes in insurance premiums and more powers for the PBGC. The Senate proposal was unveiled late last year by Finance Chairman Charles E. Grassley, an Iowa Republican, and Health, Education, Labor and Pensions Chairman Lamar Alexander, a Tennessee Republican.

In its comments, the chamber points out that the Grassley-Alexander proposal would boost the current $29 premiums to $80 per participant, plus as much as $250 more per participant for troubled plans. That’s more than a tenfold increase, which the chamber said would result in the cost being passed along to contributing companies or in cutting benefits and would be “economically unsustainable” for the many union plans that pay modest benefits.

“There needs to be a recognition that government policies (no matter how well-intended) contributed to the current crisis, and the government must contribute to the cost of shoring up the PBGC,” the chamber said.

In its fiscal 2021 budget released Feb. 10, the Trump administration also proposed a large boost in premiums, which it said would raise $26 billion over the next 10 years and at least lower the odds of the multiemployer fund’s insolvency.

Most union plans pay comparatively modest benefits, a fact reflected by the widely different PBGC guarantees. The PBGC pays a maximum of $12,870 in benefits to members of insolvent plans, while it guarantees up to $67,295 for the private single-employer plans. The single-employer fund, though, charges much higher premiums.

Not surprisingly, it is Sens. Rob Portman and Sherrod Brown — both from Ohio, where the Central States insolvency will land the hardest — who have been at the forefront of efforts to find a solution. Both served in 2018 on the joint committee, which Brown co-chaired.

After a vote in mid-January, Portman, a Republican, said he still believes a bipartisan, bicameral bill can be written. “There’s a number of Republicans who care about this issue,” he said.

“I spoke to the Teamsters this morning, in fact, trying to figure out a way to get some Democratic support for a compromise between where we were in the House and the [proposal] … by Sens. Alexander and Grassley.”

The death in January of 58-year-old Chris Allen, who spearheaded Senate Finance’s efforts on multiemployer legislation, complicated the situation. Allen’s passing has slowed efforts on the Senate side, where a replacement is being sought who can engender the high level of trust that both business and labor officials say Allen brought to the task.

Before his committee job, Allen had worked seven years for Kansas Republican Sen. Pat Roberts, a senior Finance member. “It’s no surprise that Chris was such a crucial part of pension legislation,” Roberts said. “During his time in my office, Chris was one of my most trusted advisers. He always had a wealth of knowledge with some of the most complicated financial issues.”

‘Devastating Stories’

Despite its colorful past, the Central States fund largely rebounded after its mob-connected managers were run out and a 1982 federal consent decree put an independent manager in charge of the fund’s investments. In 1982, the pension plan was only 40 percent funded, but it recovered to what would now be considered a “non-critical” 75 percent before getting pummeled by the market downturn in 2000, UPS’ withdrawal from the fund in 2007 and the 2008 financial crisis.

But Central States’ problems are similar to those of other troubled plans: There are too few current workers paying into plans dominated by retirees and “orphaned” workers whose employers no longer contribute. More than half of Central States’ members worked for companies no longer contributing to the plan, and only 1 in 6 members is currently working for a contributing employer.

A June 2018 report by the Government Accountability Office found that the fund’s investment results were actually better than the median result for other big pension plans in most years. However, the plan overinvested in equities prior to the 2008-09 downturn, which knocked funding to below 60 percent, and it never recovered.

By the end of 2019, its assets amounted to only 24.8 percent of what it will need in the coming years to pay benefits.

“We were better off when the mob was running things,” Mike Walden, president of the National United Committee to Protect Pensions, said only half-jokingly. The committee is a Teamsters-created group whose members in their black T-shirts with yellow lettering frequent the halls of House and Senate office buildings.

Walden pointed to a study commissioned by the National Coordinating Committee for Multiemployer Plans, a group representing plans, members and employers, that estimates an economic impact of more than $300 billion over 10 years if the PBGC insurance fund fails. Much of that would come from destitute pensioners applying for help from the social safety nets, including Medicaid and food stamps. A U.S. Chamber official, who asked for anonymity in order to speak freely, quoted from the same study, arguing that as costly as a legislative solution will be, doing nothing will cost more.

“They could have settled this in 2006 for $5 billion to $10 billion,” said Walden, now willing “to bet my house” that the cost will escalate to more than $100 billion before Congress acts.

Along with myriad health problems, these aging retirees have financial responsibilities to children and grandchildren and won’t give up their pensions without a fight, Walden said. He promises a fight showcasing “the 20,000 devastating stories” that Teamsters will tell about their struggles to members of Congress as part of the lobbying effort.

However long it takes to get Congress to act, Ken Stribling, a retired truck driver from Milwaukee, said he’ll keep lobbying for a solution. He has financial obligations to some of his five children and to a grandchild.

Stribling, 68, who was in Washington telling his story in January, spoke haltingly about the promise he made to his wife, Beverly, who died last April of pancreatic cancer: “One of the commitments I made to her was I would stay involved until this was fixed.”

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