3 June 2020

A Strategy for Pensions at Risk of Extinction

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Companies could change, or even eliminate, pension plans, but workers were entitled to the benefits they had already earned. A government agency was set up to guarantee that pensions would be paid even if the sponsoring company went broke. This year may well be remembered as the one when the fundamental tenet of Erisa, as the law came to be known, was abandoned.

The Pension Benefit Guaranty Corporation, the agency set up 40 years ago to guarantee those pensions, made clear in its annual report released last month that one group of pension funds would most likely run out of money within a few years. Absent new legislation, the already modest pensions of some retired workers will be eliminated.

The endangered pensions are not in the P.B.G.C.’s largest program, which insures pensions backed by a single company. That program is said to have a multibillion-dollar deficit, but there is no immediate danger for pension recipients.

The problem is in the area known as multiemployer pension plans. Those plans, often involving unionized workers, were once common in industries like coal mining, trucking and construction. Those plans seemed so solid in 1974 that they were not even required to be covered under Erisa. When they were added, years later, they were put into their own separate insurance scheme. Now that scheme is in danger of failing.

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. But the P.B.G.C. says its multiemployer plan might run out of money in 2018 and is virtually certain to fail by 2025.

In another era, a consensus would have been reached that something should be done to prevent that from happening. But this is the 21st century. When a commission was set up to look for solutions to the multiemployer problem — one that included representatives of pension plans, unions and employers — it started from the assumption that no government money would be available. The proposal it came up with was to allow such plans to cut benefits quickly, on the theory that depriving current retirees of income would leave some for future retirees. Such cuts would require legislation.

There are those who are outraged by the proposal. AARP, the lobbyist for retired people, protested that “the anti-cutback rule,” barring the reduction of benefits already earned and vested, “is perhaps the most fundamental of Erisa’s participant protections.” But in the current century, spending taxpayer money to help the unfortunate is unpopular.

It may not help that the multiemployer plans generally benefit union members, a group whose political influence is waning. Nor does it help that the Central States Teamsters fund was legendarily corrupt a few generations ago, although that fact does not seem to be a cause of its current problems.

Erisa never covered public pensions, and there are plenty of troubles in that area now. While few companies still offer defined-benefit pensions, many local and state governments still do. But Detroit was able to reduce its obligations in bankruptcy, and some states are seeking ways to get around legal protections for pension benefits.

The baby boomers now retiring — a group that includes me — may be the last American generation to leave work assured of adequate income in old age. In place of defined-benefit pensions, future generations will be left with their own savings.

Employers, private or public, are no longer willing to accept the investment risks that come from managing plans that promise benefits, so that risk has been transferred to workers. Whatever one thinks of 401(k) defined-contribution plans, they offer no guarantees and no assurances that even retirees who build up substantial balances will not outlive their money. And the evidence is that most people are not saving much money. They say the typical household nearing retirement has only $110,000 in a 401(k), an amount that will not go far.

They want to raise payroll taxes to shore up Social Security and to make it automatic for workers to join 401(k) plans. Employees could still opt out, but research shows inertia leads people to stay in if they are in and to stay out if they are out. They think we should work longer and save more.

Now, with retired coal miners in danger of losing meager pensions, the political system seems unwilling to even consider a taxpayer-supported solution.

Click here to access the full article on The New York Times. 

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