According to the Pension Benefit Guarantee Corporation’s (PBGC’s) own 2015 annual report, the government entity tasked with insuring private-sector pensions faces a $76.3 billion shortfall.[1] In other words, the backstop that Congress created to prevent workers from losing their promised pensions could be worthless. Without further, significant reforms, the PBGC’s multiemployer program will become insolvent in 2025, and millions of beneficiaries of insolvent pensions will be left with mere pennies on the dollar in promised benefits.

Although Congress enacted some well-meaning reforms in the 2014 Multiemployer Pension Reform Act (MPRA), these reforms will not prevent the insolvency of many large multiemployer pension plans or the PBGC’s multiemployer program. Despite passage of the MPRA, the PBGC’s multiemployer program deficit rose by $9.9 billion in 2015 to $52.3 billion, and it is still projected to be insolvent within 10 years. The MPRA was a step in the right direction, but more significant reforms are needed to protect private pension beneficiaries from a complete loss of pension benefits and to protect taxpayers from a bailout of private pensions.

What Is the PBGC?

The PBGC is a government entity that was established to prevent situations such as the 1963 closing of the Studebaker plant in Indiana, when more than 4,000 workers lost some or all of their promised pension benefits. All private employers who provide defined-benefit pension plans must pay PBGC premiums so that their workers are eligible for PBGC-insured benefits if their pension plans fail.

The PBGC has two separate programs—one for single (individual) employers and one for multiemployers, or unions. Multiemployer plans represent a certain industry union, and any employer with employees who are part of that union must pay into the multiemployer pension and pay PBGC premiums.

The PBGC’s multiemployer program is very different from its single-employer program. The multiemployer program benefit amount is capped at $12,870, and the annual premium is $26 per participant (rising to $27 in 2016).[2] The benefit cap for single-employer plans is much higher—at $60,136—and it has a $57 fixed-rate premium (rising to $64 in 2016) as well as a variable-rate premium that takes into account plans’ risk of becoming insolvent and requiring PBGC payments.[3] Moreover, when a multiemployer plan fails, the plan trustees continue to administer the plan, and the PBGC provides so-called loans to multiemployer plans so that they can pay PBGC-guaranteed benefits. Since the plans are insolvent, however, the “loans” are never repaid.

Changes in Finances Since 2014

The PBGC’s combined deficit—including both its single-employer and multiemployer programs—increased by $15 billion to $76 billion in 2015. The single-employer deficit increased by $4.7 billion to $24.1 billion, and the multiemployer deficit increased by $9.9 billion to $53.3 billion.

Prior to 2015, the PBGC’s single-employer program finances improved two years in a row (its deficit declined by $8.0 billion in 2014). Were it not for a reduction in interest factors that added $5.9 billion to its deficit, the single-employer program’s finances would have improved again in 2015. In general, premium income for the single-employer program has been increasing and covering a growing share of the program’s benefits, which have averaged about $5.5 billion per year since 2010.[4]

The PBGC’s multiemployer deficits have exploded over the past two years, increasing by $34.2 billion in 2014 and another $9.9 billion in 2015, despite passage of the MPRA. The way that the PBGC measures its deficits—which includes only the future liabilities of plans that are expected to become insolvent within the next 10 years—leads to large swings in deficits.

The massive increase in the PBGC’s multiemployer deficit over the past two years is primarily the result of some very large, financially troubled multiemployer plans. In particular, the addition of the Central States Teamsters and United Mineworkers plans into the probable insolvency category in 2014 added $26.3 billion to the PBGC’s multiemployer liability.[5] This amounts to an average liability of more than $13 billion compared to an average liability of $270 million for the 17 multiemployer plans that the PBGC added to the probable insolvency category in 2015.

The financial impact of these two plans is so large that the Government Accountability Office reported that the insolvency of either plan would drain the PBGC’s multiemployer program within two to three years, at which point benefits would be reduced to only 10 percent of their current guaranteed level. In other words, a worker who was promised a $24,000 pension would receive only $12,870 if his pension plan becomes insolvent, and then, $1,500 or less per year if the PBGC becomes insolvent.

Multiemployer Pension Reform Act of 2014

The MPRA was enacted in December 2014, as part of the so-called CRomnibus.[6] The MPRA attempts to reduce the unfunded liabilities of multiemployer pensions as well as the PBGC’s multiemployer program. Among the MPRA’s reforms were:

• A doubling of multiemployer PBGC premiums from $13 to $26.
• Authority for trustees of multiemployer plans in critical and declining status to suspend benefits,[7] but only if it will result in the plan becoming solvent and all other reasonable measures have first been taken. Additionally, benefits cannot be reduced below 110 percent of the PBGC guarantee or what is needed to achieve solvency, retirees over age 80 must be exempt from reductions, and the members of most plans can vote down a benefit suspension. (The Treasury Secretary can override a no vote if the plan is considered “systemically important”—meaning that its insolvency would add $1 billion or more to the PBGC’s projected liabilities.)
• Authority for the PBGC to facilitate plan mergers and to grant partitions if such actions will strengthen the PBGC’s financial position.
• Repeal of some scheduled expirations of multiemployer funding rules established under the Pension Protection Act of 2006.
• Changes in withdrawal liability rules that generally make it easier for employers to withdraw from a plan.

Although the MPRA doubled the PBGC’s multiemployer premiums to $26 per participant, the premiums are still so low that the increase generated only $90 million more in net premium income in 2015. This does not make so much as a dent in the program’s $53.3 billion deficit. Positive impacts are expected, however, from the MPRA’s new options for benefit suspension and partitions. Although the actual impact will depend on how plans respond to these new options (which are not mandatory), the PBGC estimates that the MPRA provisions will delay the multiemployer program’s expected date of insolvency by three years, from 2022 to 2025, and will almost cut in half the program’s future deficit, from a previously estimated $49.6 billion in 2023 to $28 billion in 2024.[8]

Nevertheless, the PBGC’s multiemployer deficit is so large that there is no way it can provide the insurance it has promised. To put the program’s current finances in perspective: It is equivalent to an individual making $50,000 a year having $12.8 million in debt. There is simply no way under current circumstances that the PBGC’s multiemployer program will be able to pay benefits to all the recipients of insolvent plans.

Ensuring the PBGC’s Solvency by Preventing Private Pension Failures

The solvency of the PBGC’s multiemployer program depends on the solvency of the plans it insures. The fewer plans that fail, the fewer benefits the PBGC pays out.

One factor that has allowed multiemployer plans to drastically understate their future liabilities and short-change their contributions is the freedom to use whatever interest rates and life expectancy assumptions they desire. As a result, multiemployer plans typically assume a significantly higher interest rate: A 7.5 percent interest rate requires about 25 percent less in contributions compared to a 4.5 percent rate. Add on a shorter-life expectancy assumption, and multiemployer plans can reduce contributions even further.

Assumptions do not translate into reality, however. Multiemployer plans cannot assume higher interest rates into existence, and when the higher rates they assume do not occur, plans will not have enough assets to pay promised benefits.

Congress should eliminate preferential treatment for multiemployer pensions and instead subject them to the same rules and regulations as single-employer plans.

Additionally, Congress should give multiemployer plan trustees additional authority to change plan features, such as contributions and benefit accruals, to ensure that plans are adequately funded. In addition to needing more authority, plan trustees also need to be held to greater accountability to prevent plans from using current workers’ contributions to pay overpromised benefits until the plan runs dry.

Within the PBGC itself, Congress should grant the PBGC the authority to set its own premiums, and require it to operate more like a private insurer, charging premiums commensurate with risk. Insurance companies would never set the same premium on flood insurance for a house on the coast of North Carolina as for a house in Kansas, but this is what the PBGC’s multiemployer program does. It charges plans that are expected to become insolvent tomorrow the same $26 per participant that it charges plans that are 100 percent funded.

Instead of requiring all private pension plans to purchase insurance from the PBGC, Congress should allow plans to purchase comparable pension insurance from private insurance companies that have proven more effective at managing risks and protecting insured benefits. Charging premiums commensurate with financial risks would encourage plans to make adequate contributions because failing to do so would drive up their insurance costs. Additionally, private pension insurance would protect taxpayers from a potential bailout due to Congress’s failure to properly manage the PBGC.

Protecting Pensioners and Taxpayers

Tragically, what was sold to many workers as a secure retirement will be anything but secure. For a variety of reasons—some economic, and some the result of reckless and shortsighted management—many private and public pension plans across the country simply cannot pay anything close to the benefits they promised. What is more, the PBGC—which is supposed to step in when private pensions fail—cannot keep its promises, either.

A steep or total loss of promised pension benefits would be devastating to current and future beneficiaries. These individuals accepted lower wages in return for promised pensions, so it seems unfair to retroactively take away some or all of those benefits. But forcing federal taxpayers to insure private pensions by bailing out the PBGC also seems unfair. After all, taxpayers have their own retirements for which to save, and the federal government is not going to bail out individuals’ 401k accounts if they suffer from an economic downturn or poor management.

The MPRA was a positive step, but it was not enough. Congress must enact even bolder reforms that will boost the solvency of private multiemployer pensions and maximize the PBGC’s ability to make good on its promises. This ultimately requires holding pension plan trustees accountable for plan management and giving them the tools to adjust benefits when needed, as well as eventually turning the role of the PBGC over to the private sector where risk-based premiums can ensure adequate funding.