One of the bailout provisions of the ARP was a multiemployer pension bailout, with a total price tag of $86 billion quoted at the time. (I will return to this in a moment.) Money from this bailout was going to be doled out in stages. That’s the context for what I’m about to link.
Here is the latest news on that particular bailout:
Pensions & Investments: Biden announces $36 billion in federal aid for struggling Central States Teamsters plan:
President Joe Biden on Thursday announced that the Pension Benefit Guaranty Corp. has approved $36 billion in federal assistance to shore up a massive union multiemployer pension plan facing steep cuts.
Teamsters Central States, Southeast & Southwest Areas Pension Fund, Chicago, will receive the funds under the Special Financial Assistance Program. The program, created by the American Rescue Plan Act that Democrats passed in March 2021, was designed to shore up struggling multiemployer pension plans through 2051. The PBGC estimates the total cost of the program will range from $74 billion to $91 billion.
The Central States Pension Fund covers more than 350,000 union workers and retirees who were facing estimated benefit reductions of roughly 60% in the next few years, according to a White House news release.
The pension plan had a funding ratio of 18% with $57.2 billion in projected benefit obligations as of Jan. 1, 2021, according to the plan’s most recent Form 5500 filing. As of Dec. 31, the plan had $10.1 billion in assets, the filing showed.
The PBGC approved the first SFA application in December 2021 and since then has awarded funds to 36 other struggling multiemployer plans. But Thursday’s announcement is by far the largest. As of Dec. 1, the PBGC had approved just over $8.9 billion in SFA funds to cover roughly 193,000 workers, retirees and beneficiaries.
If you want to look at current stats, and some of the historical stats, go to John Bury’s post here.
I will pull a few crucial numbers from the post/from the most recent valuation.
Let’s look at Bury’s post — his numbers come from the most recent valuation filed with the government, and the key form is hosted by John Bury — it’s a Form 5500.
The last measurement of the MEP was as of January 1, 2021, which is almost two years ago. That’s the problem with these pension problems – but as it really is long-term, we won’t worry about two years. Until, later in this post, we’ll think about what has happened over these two years.
But here is the breakout:
Assets: $10.4 billion
Liabilities (valued at 2.43%): $58.6 billion
Expected payouts in 2021 (after the above): $2.9 billion
Expected contributions in 2021: $0.6 billion
Yes, the plan was in an asset death spiral, and it was projected to run out of assets by 2025, and was going to wipe out the PBGC multiemployer pension guaranty plan. I’ve written about this before, such as this 2016 post titled: Central States: I Guess the Plan is To Run Out of Money.
So, let’s just ignore 2 years’ worth of cash flows, though we could just subtract $4 billion from the assets without much harm, and just hold the liabilities relatively level.
But let’s just pretend we’re adding $36 billion to $10 billion and ta da, $46 billion in assets for $59 billion in liabilities, and it’s just gone from 18% funded to 78% funded, and I’m about ready to revive my 80% funded hall of shame!
Let me go back to my 2016 post, which was so quaint.
May 2016: Central States: I Guess the Plan is To Run Out of Money
THE PLAN: FAILURE
So, there’s no current cut to the plan, which means everybody keeps getting their full benefit til the money runs out. At which point the benefits get drastically reduced. Much worse than what was proposed by Nyhan.
….
I think if one did an investigation, one will find most of what causes pensions to fail is not enough money put in early enough. While sometimes there’s malfeasance in the asset management, in general one finds that plans had been shortchanged on contributions for decades by the time they fail….and that this shortchanging was completely legal.Imprudent, but legal.
….
THERE WILL BE NO BAILOUTSThis all goes to say: there will be no bailouts. Mish agrees.
Also, this should be a signal to public employees and retirees in some places (like Illinois and New Jersey), which Mish and Mark Glennon point out.
Yes, it’s sad that retirees will get heavily slashed in retirement when they have little flexibility to increase their income. But that being sad didn’t stop Detroit pensions from being cut. That should have been a signal as well.
Detroit got no bailout. Central States will get no bailout. Neither Illinois nor New Jersey (nor California nor Connecticut nor…) will get bailouts.
There’s simply not enough money to fulfill all these promises.
So they will be defaulted on.
So, that’s not what’s happening with Central States. They got bailed out.
I was wrong.
(as were many others, so I will take comfort in the crowd.)Note, their bailout is a very large percentage of the multiemployer bailout package of the American Rescue Plan of 2021.
Pretty much none of the MEP failures had anything to do with the pandemic. I wrote the above in 2016. We knew for years that Central States was going to fail without a bailout. The UPS withdrawing from the Central States plan is a big part for the failure, but part of the reason for their withdrawal was the failing nature of the plan. I don’t feel like recapitulating their problems right now, and no, it’s not all the Mafia’s fault — not now.
But the issue was that when the Moneypalooza Monstrosity was on, everybody came traipsing to DC with their demands, and this was as good a time as any to try, try again at the bailout. And with the Democrat sweep in the 2020 elections, time was on to turn that money printer on!
I know many people have forgotten about all the cash printed out (figuratively), but we’ve got the hangover now in the form of inflation.
So yay, the Central States Teamsters folks didn’t get their pensions cut… but those dollars aren’t worth as much anymore. But if they hadn’t gotten that bailout, they would have gotten some explicit cut and… still have weakened dollars because those “stimulus” bills went through anyway. I mean, what’s the difference of $86 billion in a $1.9 trillion bill?
(4.5%, that’s what)
But that’s the point — when the federal government was throwing around dollars at everybody, without regards to actual impact, why not go grab the dollars? Where’s mine?
And now… what about other grossly underfunded pensions — especially those that have no PBGC backstop?
The WSJ editorial board makes that point: Biden Bails Out the Teamsters
Central States’ overseers proposed modest pension cuts that would have spared nearly half of participants. But progressives howled, and the Obama Administration rejected the reforms. At their first opportunity, Democrats rushed through a bailout. Last year’s union, er, Covid relief bill lets the PBGC make lump sum payments to keep some sick 200 multi-employer plans solvent through 2051 and fully restore benefits in the 18 plans that had cuts.
Notably, the law prohibits the PBGC from conditioning aid on governance reforms or funding rules. But it doesn’t forbid benefit increases. So the failings that got these plans in trouble will continue and may lead to future bailouts. Government unions with under-funded pensions in New Jersey and Illinois will surely demand one too.
So there are two parts to this.
One is the “getting into the weeds” aspect, which is to talk about the oversight of MEPs under ERISA, and no, I do not feel like doing that. Not today, at least.
But I do want to talk about the potential of bailing out New Jersey or Illinois pensions.
I’m not surprised that the WSJ and others are trying to make hay of Central States getting their money, which was a foregone conclusion when the bill was passed. It was just a matter of how much they would get. back when the Moneypalooza Monstrosity passed I wrote about the possibility of this crap being extended to bailing out public pensions:
We can’t bail ourselves out
Let me make a comparison of four numbers:
- the MEP bailout size in the current bill ($86 billion)
- total MEP underfundedness ($673 billion)
- a theoretical public pension bailout ($1.9 trillion)
- a Social Security “bailout” amount ($16.8 trillion)
Here ya go:
Here are the whole-number ratios if you can’t eyeball the relationships above.
- The total MEP unfunded liability is 8 times that of the bailout bill amount
- The total public pension unfunded liability is 22 times that of the bailout bill amount (this happens to be the same as the total American Rescue Plan Act of 2021)
- The total Social Security shortfall is almost 200 times that of the MEP bailout bill
Now, there are loads of things that can be done with Social Security, and it wouldn’t even have to involve cutting benefits, but it definitely would involve taxing a bunch of people (and well beyond “the rich”) more. You can try out a bunch of different proposals yourself, many of which don’t involve benefit cuts at all.
We can’t bail out ourselves (look, don’t start with MMT on me or the magic money printer. I know about these. I’m talking reality.)
The future cannot bail us out. We tried that before, with the Boomers. The Boomers’ parents did fine – they produced enough people to make that sort of system work. But the Boomers produced far too little, in terms of the future.
We saw what the magic money printer has gotten us.
The future is here. And nobody is interested in bailing out Illinois.
and certainly not New Jersey.
To be sure, it could happen. Loads of things could happen.
Maybe they can manage to get rid of the SALT cap in the next Congress, and tell Illinois and NJ that’s their “bailout”. See if they go for it.
]]>John Bury reports that Central States Teamsters has filed for their bailout from the Special Financial Assistance program:
The first 34 plans that filed requested a total $8.4 billion in bailout money from the PBGC Special Financial Assistance program for troubled multiemployer plans. No press release but the PBGC weekend update showed one new plan – the Central States, Southeast & Southwest Areas Pension Plan with 364,908 participants which is asking for $35 billion dollars.
By the way, if you’re interested in multiemployer plans, you absolutely should be following John Bury’s site burypensions.
He has been keeping close tabs on the filings for the multiemployer plan bailouts as they come, withdrawals if they occur, approvals, and most importantly, Bury has a spreadsheet with key metrics such as participant count, last unfunded liability reported, and how much is being requested from the SFA program.
I will be doing a few graphs of these amounts from his spreadsheets below.
Indeed, it looks like the last post I had on the situation was from over a year ago.
I want to pull out a particular point from that post, as it explains why I’m posting now:
April 2021: Multiemployer Pensions: Will the Recent Bailout Destroy Pensions (in the Long Run)?
The main reason the bailout had to happen, if not now but before 2024, was that the Central States Teamsters fund in particular was going to wipe out the PBGC. If they hadn’t bailed out the plans now, they’d have bailed out the PBGC in a few years.
Here is the nutshell version.
The PBGC (Pension Benefit Guaranty Corporation) is one of those government creations that is implicitly backed by the government but we’re pretending is self-supporting. Its revenues come from charges imposed on defined benefit private pension plans. It does not cover public pensions (government pension plans), church plans, or things like Social Security. It does not cover defined contribution plans, like 401(k)s.
In the event that private defined benefit pensions go belly-up, it takes the pensions over and guarantees certain minimum amounts to the retirees and participants. That’s its function. You will sometimes hear about the PBGC in a company bankruptcy, in which the PBGC takes over the pension, and then a new entity, sans pension, goes forward without the old liability.
There are two main types of private pensions: single employer and multiemployer, also known as union pensions. The guarantees for single-employer plans are much higher than for multiemployer plans, and their contribution and valuation requirements are much stricter than multiemployer plans.
Even with relatively low guarantees for multiemployer plans, one particular multiemployer plan was going to wipe out the PBGC reserves for multiemployer plans by 2024 or 2025: Central States Teamsters. There’s a sordid history there, involving the Mafia and Hoffa first, but then involving a grossly undervalued withdrawal liability when UPS left next. In any case, Central States Teamster was going to go under in the near future.
Selected STUMP posts on Central States Teamsters and MEPs:
So that’s a list if you want to travel the recent history.
Let’s see where things stand, because this is a half-assed bailout, in my opinion.
The comparison I made back in 2021:
And you can see how much other items were at the time to consider the likelihood of other bailouts.
Now, a lot of MEPs have unfunded liabilities that will not file for “help” at all. And we’ll see below that the plans aren’t filing for their full unfunded liabilities as they stand now.
Given that the “loans” can’t be clawed back, I’m not sure why they’re not trying for it all, but maybe there’s some sort of limit of how much they can ask for, as a percentage of their liability.
I thought this might be a useful comparison.
All the data comes from John Bury’s most recent posts: the Central States update from Friday and the SFA update with 5 more approvals from Friday.
For right now, I do not want to analyze the distinction between approvals and waiting for review. There had been a prior program allowing MEPs to cut benefits, but stay above guarantee levels, and some applications had been denied. That was a different situation than we’re seeing here, and as I’ve not yet seen any application be denied, I will just look at all the plans together.
Central States is just larger than all the other plans that have applied so far, which is hardly surprising — it is far larger than most of the multiemployer pensions out there, period, whether or not they’re failing.
Here is a graph:
Central States Teamsters has asked for $35 billion. This is hardly surprising, since its hole is about $44 billion deep.
There are three plans the next size down that have asked for about $1 billion each.
These are not really fair comparisons as they have a very different number of participants. Central States has almost 365,000 participants, and the next largest plan has 51,000 participants — yes, there will be scale differences.
Why not compare with respect to the amount per participant being requested?
That said, wouldn’t you like a $100K boost to your own retirement savings? I will circle back to that thought at the end of the post.
Finally, how much of the current unfunded liability is actually being requested?
Now, due to market prices moving about, yadda yadda, perhaps the valuation they have in hand has these percentages a lot closer to 100% than the overall 75% average for the whole group.
We were given a price tag of $86 billion for this SFA bailout, and with the Central States application, the total is at $43.6 billion, or a little more than halfway there.
At the time this passed I was feeling sour and made this:
But since then, a lot of people have found that the “bailouts” we got over the last couple of years weren’t exactly “free”.
The Fed’s Preferred Measure of Inflation Jumps to 6.6%, a 40-Year High
The PCE price index for March increased 6.6 percent from one year ago, reflecting increases in both goods and services.
Energy prices increased 33.9 percent
Food prices increased 9.2 percent.
Excluding food and energy, the PCE price index for March increased 5.2 percent from one year ago.
Yes, some of the price movements are due to supply issues, but some price movements are due to a bunch of extra money flooding the markets the last year.
That may have distorted some stuff, doncha think?
And now we’re looking at student loans potentially getting written off (without taxing the people on the forgiveness, I assume… though it would be hilarious if they did hit people with that, too.)
So hey, maybe all this will get wiped out by inflation anyway.
When I was contemplating no bailouts, I did caveat that Central States and MEPs might get a bailout, but that Illinois would get stuck, etc.
When I was contemplating no bailouts… I didn’t think that just turning on the money printers and ignoring inflation was going to be considered just fine.
And when I was contemplating no bailouts, I certainly didn’t think that an unrelated pandemic was going to be used as an excuse for all of it.
So, I guess we’ll see if any of this will get reined in before anybody remembers why inflation and, more importantly, stagflation was so bad.
For those who don’t think taxation is theft, because they often get to dodge it, inflation is theft on a scale they cannot comprehend. That’s one you cannot escape.
There is a reason that one of the biggest crimes of a leader throughout history, no matter the economic or political system, was seen as the debasement of the currency. It comes as no surprise to me that the Fat Bastard (as I like to call him) not only messed about with the Church and his wives, but also debased the country’s currency. PTUI!
Anyway, shoveling a bunch of money out at people does seem very popular, but the problem with shoveling it out at everybody is that that money gets to be worth less, hmmm? Ain’t that a kick in the pants.
So yes, while I’d like more money for myself, what with inflation and all, this gets to be a bit of a bind with the money printers going BRRRRRRR. Could we shut down those printers for a while, hey? Maybe they’re getting overheated.
I’m happy to see the PBGC will not get wiped out in a couple of years by Central States Teamsters, but the poor retirees will find their money doesn’t go as far.
]]>You maniacs!!
I will be looking at the multiemployer pension bailout more in this post, and the state/local government bailout in a later post.
NYT: Rescue Package Includes $86 Billion Bailout for Failing Pensions
Tucked inside the $1.9 trillion stimulus bill that cleared the Senate on Saturday is an $86 billion aid package that has nothing to do with the pandemic.
Rather, the $86 billion is a taxpayer bailout for about 185 union pension plans that are so close to collapse that without the rescue, more than a million retired truck drivers, retail clerks, builders and others could be forced to forgo retirement income.
….
Both the House and Senate stimulus measures would give the weakest plans enough money to pay hundreds of thousands of retirees — a number that will grow in the future — their full pensions for the next 30 years. The provision does not require the plans to pay back the bailout, freeze accruals or to end the practices that led to their current distress, which means their troubles could recur. Nor does it explain what will happen when the taxpayer money runs out 30 years from now.
Oh, that should be fun.
For many of those getting the pension backpayments in the few plans that already had benefit cuts, they probably figure they’ll be dead in 30 years and won’t worry.
I do wonder about the MEPs that already completely failed, putting participants on the extremely low PBGC guaranteed payment amounts. Do they get their pension payments back? Or is it just the ones that managed to just barely hang on until they could get their full bailout?
On Friday, Senator Chuck Grassley, Republican of Iowa, introduced his own legislative proposal for the failing pension plans, which he said would bring structural reforms to make them solvent over the long term. He called the measure put forth by Democrats “a blank check” and tried to have it sent back to the Senate Finance Committee for retooling.
“Not only is their plan totally unrelated to the pandemic, but it also does nothing to address the root cause of the problem,” Mr. Grassley said in a statement. His motion failed in a vote of 49 to 50.
At 87 years old now, Chuck Grassley doesn’t have to worry about what will happen in 30 years, when the money is cut off. He has been trying to get various MEP reforms through Congress, but as one side wanted nothing less than a no-strings-attached bailout, he wasn’t very successful.
There are multiple root causes, especially for the one MEP that was threatening to pull the whole system down: Central States Teamsters plan. They would have pulled down the system by 2025/2026, and there would at least have been a bailout of the PBGC.
But the default case would have been the MEP participants getting the extremely low guaranteed amounts (which would have been enough to wipe out the PBGC multiemployer program). Not getting full payments.
Here, they get full payments, at least for 30 years…. or at least until the rules get changed again. But more on that below.
Using taxpayer dollars to bail out pension plans is almost unheard-of. Previous proposals to rescue the dying multiemployer plans called for the Treasury to make them 30-year loans, not send them no-strings-attached cash. Other efforts have called for the plans to cut some people’s benefits to conserve their dwindling money — such as widow’s pensions, early retirement subsidies and pensions promised by companies that subsequently left their pools.
This was already a law passed by Congress. I suppose I should grab the info from this page: The Multiemployer Pension Reform Act of 2014, which is the one allowing for benefit cuts. The record could disappear.
It looks like the Pension Rights Center captured the info in an August 2020 post, and I will calculate a few things below.
Back to the NYT piece:
The federal government does provide a backstop for certain failing pension plans through the Pension Benefit Guaranty Corporation, which acts like an insurer and makes companies pay premiums, but does not get taxpayer dollars. Currently, the pension agency has separate insurance programs for single-employer and multiemployer pensions. The single-employer program is in good shape, but the multiemployer program is fragile. As of 2017, the country’s 1,400 or so multiemployer pension plans had a total shortfall of $673 billion.
$673 billion… versus the supposed cost of this bill: $86 billion. The supposed cost of the bill is about 13% of the total shortfall (of 2017… which may be bigger or smaller now).
Is this really a full bailout?
To be sure, some of those funding shortfalls are very small compared to the full obligation for the specific pension plan. But that was because the unions sponsoring said not-egregiously-underfunded pensions were expecting their members to be greatly harmed if their pension funds ran out of money.
But this new bill is showing them that hey, they were suckers for trying to fully-fund their plans.
Back to the NYT:
One huge Teamster plan, in particular, is expected to go broke in 2025, and when the pension agency starts paying pensions to its nearly 200,000 retirees, its multiemployer insurance program will go broke, too, according to the agency itself. That would leave the roughly 80,000 other union retirees whose pensions the agency now pays without their payouts.
Interesting editorial choice not to actually name the plan. (Yes, it’s Central States Teamsters. Here is a piece from 2014 where they’re actually named, but I believe that’s an op-ed.)
The new legislation changes that. It calls for the Treasury to set up an $86 billion fund at the pension agency, using general revenues. The agency would be required to keep the money separate from the funds it uses for normal operations. It would use the new money to make grants to qualifying pension plans, allowing them to pay their retirees. The Congressional Budget Office estimated that 185 plans were likely to receive assistance, but as many as 336 might under certain circumstances.
And “unexpectedly” far more than 336 plans will ask for money! What’s to stop the 1,400 MEPs trying to put their pension obligation onto this program?
Of course, some of the plans are very small, so counting the number of plans applying isn’t terribly meaningful (but seriously, there will be a lot of plans deciding why be a sucker? Free money is free money!) — what I really want to know is what will happen when that $86 billion runs out.
Because I thought it was some sort of 30-year blank check, but no, it sounds like the check isn’t blank, but that specific amount.
The grants are intended to pay the retirees their full pensions, a much better deal than the pension agency’s regular multiemployer pension insurance, which is limited by statute to $12,870 per year. Many retirees in the soon-to-be rescued plans have earned pensions greater than that.
The taxpayer money will also be used to restore any pensions that were cut in a 2014 initiative that tried to revive troubled plans by trimming certain people’s pensions. The stimulus bills — there is a House version and a Senate version that have minor differences — call for the affected retirees to get whatever money was withheld over the past six years.
That is a complete clawback. As noted above, the bill that allowed for these benefit cuts was passed in 2014, the earliest applications for benefit cuts were in 2016, and the first benefit cuts approved was in 2017 (and there would be delay from approval to actually cutting).
So I took the record from the Pension Rights Center, and looked at only the plans with benefit cuts already fully approved. Next to them is the projected insolvency date (aka when all the cash runs out), and, if available, the number of plan participants.
So, just adding up the number of participants of the plans with benefit cuts already approved, that’s about 95,000 very happy people today.
Y’all should party — you guys are going to be first in line for this bailout.
Back to the NYT:
The legislation requires the troubled plans to keep their grant money in investment-grade bonds, and bars them from commingling it with their other resources. But beyond that, the bill would not change the funds’ investment strategies, which are widely seen as a cause of their trouble.
Um, sorry, no. I don’t think their investments caused the trouble. I believe their investment strategies are because of their trouble. I keep running into this cause-and-effect switcheroo in public pensions.
It’s not that the pensions are slavering to get into alternative asset classes, which then draws the funds into a burning ring of fire. It’s that they want the pensions to be relatively cheap compared to their real costs, so they go chasing waterfalls.
And then the ring of fire thing.
Here is my opinion:
- many of these plans funding (and valuation) assumption were built on the concept that more money would come in the future
- some of that is in their investment return assumptions and some of that is in their future contribution amount assumptions
Some of these ailing MEPs have seen the industries that their unions are in obliterated as the economy changes. It’s not merely that fewer companies in the U.S. want to use union labor and shift operations to places like South Carolina, which does not have much in the way of non-governmental unions. It’s also that all sorts of things are just not needed as much anymore, and other things are being produced.
As for the investment assumptions, I don’t fault their pension funds for not achieving a steady 7%/year. That’s just not realistic. Yes, many of these funds have gone into riskier asset classes to try to achieve these yields (which leads to higher volatility, and sometimes large losses), but that was because the contribution amounts have not been enough to attain solvency at more reasonable investment targets.
But let me not get ahead of the article:
For decades, multiemployer pensions were said to be safe because the participating companies all backstopped each other. If one company went under, the others had to cover the orphaned retirees. Because they were considered so safe, multiemployer pensions never got much oversight.
While companies that run their pension plans solo must follow strict federal funding rules, multiemployer plans do not have to. Instead, the companies and unions hammer out their own funding rules in collective bargaining. Both sides want to keep the contributions low — the employers to reduce labor costs, and the unions to free up more money for current wages. As a result, many of the plans have gone for years promising benefits without setting aside enough money to pay for them.
You keep contributions low by assuming you get more money later, whether through investment returns or growing contributions later. Neither of which necessarily came.
In hopes of making up for the low contributions, the plans often invest unduly aggressively for their workers’ advancing age. In bear markets they lose a lot of money, and they can’t ask the employers to chip in more because the employers are often struggling themselves.
In investment/finance terms, there is often a high correlation between the pension fund investment performance and the pension sponsor financial performance.
In less fancy terminology, many of these employer companies do poorly at the same time the market does poorly, so when the pension fund asset values go down, the employers are unable to contribute more to the pensions.
It does not make for a stable system.
The new legislation does nothing to change that dynamic.
“These plans are uniquely unable to raise their contributions,” said Mr. Naughton, whose clients included multiemployer plans when he was a practicing actuary. “When things go well, the participants get the benefits. If things go badly, they turn to the government to make it work.”
It’s interesting that Naughton is quoted.
I didn’t quote Naughton earlier. Here he is in his mention:
“Imagine that you have a college-aged kid who runs up $1,500 in credit card debt,” said James P. Naughton, an actuary now teaching at the University of Virginia’s Darden School of Business. “If you give him $1,500 and you don’t do anything else, the odds that the problem is going to get fixed are pretty low.”
Party time!
Naughton has testified to Congress in the past over MEPs. From March 2019: “The Cost of Inaction: Why Congress Must Address the Multiemployer Pension Crisis”.
Here is a key portion of his testimony:
The first decision relates to past underfunding, and entails figuring who will cover the shortfall
that has arisen because of the difference between what the unions promised their members and
what the unions collected from employers to cover these promises. This is not an easy decision,
as many union members who relied on the promises made to them by their union leaders are
facing severe financial consequences if their pensions are eliminated. In addition, employers vary
in their ability to absorb the increased contributions that are currently required or may be
required in the future to fund these plans. *The PBGC recently reported that the system is $638
billion underfunded for 2015.*
Recall from the NYT piece, that the underfundedness was $673 billion in 2017.
Anyway, this first question has been answered with the bailout bill: the American taxpayer (and bondholder) is bailing out a small portion of the past underfundedness for MEPs as a whole system, which will be a large portion of specific MEPs.
Back to Naughton:
The second decision entails figuring out how to ensure that the current level of underfunding
does not deteriorate further and how to put the system on a sustainable path going forward. The
urgency of this step is evident in the events that have occurred since legislative action was first
taken to address the multiemployer pension crisis in 2005—since that time, the level of
underfunding has increased by approximately $400 billion on a PBGC basis.
This, too, has been partly answered.
In short, the new bailout bill has incentives towards ever-deteriorating funded ratios for the plans not already being explicitly bailed out.
Why be a sucker and contribute more now to pensions that will get topped up later? Why not contribute the smallest amount you can get away with?
Of course, there is a question as to when these bailout funds will run out, and what will be left for all those plans that did not get to the trough rapidly enough.
Some are now taking this attitude:
Maybe high fantasy is not to your taste, and daytime TV is:
As we saw in my last post, Andrew Biggs brought forth the specter of a public pension bailout, which made me do a comparison — a public pension bailout would be about 20 times as big as this MEP bailout. [It’s actually 22 times, but who’s counting [me]]
Here’s an even more absurd suggestion: The hopeful news for Social Security buried in the $1.9 trillion bailout
Nobody’s noticed, but there may be a glimmer of hope for Social Security in the gigantic “rescue” package currently going through Congress.
Lawmakers have moved to include in the bill an unrelated $86 billion bailout for bankrupt union pension plans.
And once they’ve done that, it’s going to be even harder for them to argue that they shouldn’t bail out the stricken Social Security trust fund that is actually their responsibility. Social Security’s deficit: $16.8 trillion, or about $50,000 for every person in America.
[cough]
Dude.
Are you serious?
Now, reading the piece, maybe his editors cut out the parts where it made some sort of sense, because the bulk of the piece is how this bailout is an outrage. I totally agree.
You get bits like this:
Charles Blahous, an expert at George Mason University’s libertarian-leaning Mercatus Center, tells MarketWatch the bailout is not merely “irresponsible,” but “scandalous.” He accuses companies and unions of using accounting gimmicks to hide the problems for years, and warns that the new law won’t force them to stop, either.
This is absolutely true.
But this:
Given this, it’s going to be a much bigger scandal if Congress shafts Social Security beneficiaries harder than it does members of these union pensions. It would be ludicrous to hope that shame or embarrassment would constrain most politicians. But right now Social Security beneficiaries could be looking at a 25% benefit cut in just over a decade.
Joe Biden ran on a platform of protecting benefits, and actually raising them for many.
When the time comes for Congress to address the matter, they’d better give us the same terms as the unions, or we’re going to want to know the reason why.
Dude, the reason why will be very simple. IT’S IN YOUR FIRST THREE PARAGRAPHS.
Let me make a comparison of four numbers:
Here ya go:
Here are the whole-number ratios if you can’t eyeball the relationships above.
Now, there are loads of things that can be done with Social Security, and it wouldn’t even have to involve cutting benefits, but it definitely would involve taxing a bunch of people (and well beyond “the rich”) more. You can try out a bunch of different proposals yourself, many of which don’t involve benefit cuts at all.
We can’t bail out ourselves (look, don’t start with MMT on me or the magic money printer. I know about these. I’m talking reality.)
The future cannot bail us out. We tried that before, with the Boomers. The Boomers’ parents did fine – they produced enough people to make that sort of system work. But the Boomers produced far too little, in terms of the future.
It will be interesting to see how fast the bailout funds run out for the MEPs.
John Bury looked up the stats on the Central States fund back in October 2020, and the unfunded liability for their 2019 report was about $44 billion.
Well, if Central States itself takes up over half of the bailout funds, that will be an eye-opener, eh? If anybody actually pays attention to the cash going out the door.
It is not clear to me what controls, if any, lie on the disbursements of this fund.
It says the funds are not to be commingled with other pension funds, but if the point is to cover benefit payments, can’t they just liquidate and pay out the benefits? It doesn’t matter if you require investment grade bonds as the investments these funds are put into if the bonds are just sold in the market for the cash to pay the benefits. They can adjust the rest of whatever assets they have to get the asset-liability mix they want…. there are no real strings attached to this money as far as I can see.
So, to those whose pension funds will get to belly up to the bar first, congratulations! It seems that you will get fully bailed out, and you probably don’t have to worry for a few decades!
For those who will eventually pay for this, whether through higher tax, higher inflation, or both … well, that’s what we get with a White House and Congress like this.
]]>So time for BAILOUT CITY! PARTY TIME!
We will see exactly how this shakes out, but one of the parts has got my attention: the Butch Lewis Emergency Pension Plan Relief Act of 2021, which shares (partly) the name of a previous multiemployer pension (MEP) bailout bill, but goes beyond that bill by not being a half-assed bailout.
It’s a whole-assed-and-borrowing-the-asses-of-future-taxpayers provision.
Elizabeth Bauer at Forbes has done the most detailed look I’ve seen so far: The Covid Spend-O-Rama’s Multiemployer Pension Bailouts: Some Disappointed First Impressions
But there’s another change that’s substantial. In the prior, HEROES Act version, the drafters maintained the concept of the “partition,” shifting liabilities for a portion of an at-risk pension to the PBGC and funneling extra funds there to be able to make those payments; to be sure, that version had planned to increase the maximum benefit substantially in order to protect retirees from benefit cuts, but the structure remained somewhat similar. The new proposal simply sends cash to eligible ailing multiemployer plans directly.
Which plans are eligible?
Any plan which has been labelled “critical and declining,” or which had previously had a “suspension of benefits” (benefit cut to preserve solvency), had a funded status of less than 40% and a disproportionate number of retirees, or which had actually become insolvent after 2014.
How much cash? Enough, according to the bill’s text,
“to pay all benefits due during the period beginning on the date of payment of the special financial assistance payment under this section and ending on the last day of the plan year ending in 2051, with no reduction in a participant’s or beneficiary’s accrued benefit as of such date of enactment, except to the extent of a reduction in accordance with section 305(e)(8) adopted prior to the plan’s application for special financial assistance under this section, and taking into account the reinstatement of benefits required under subsection (k).”
A straightforward read of this, then, is that every penny of pension benefits due to be paid to present or future retirees, for the next 30 years, would be paid by the federal government.
Bailouts forever!
Well, at least bailouts for the next 30 years.
My understanding of the MEP bailout provision is the following:
- the distressed plans get full bailouts (to 30 years, and not merely by actuarial measurement but 30 years of payments)
- the plans that did benefit cuts to try to improve sustainability would have to bring the benefits back to the original promised amounts (I think the cut benefits for retirees would be given back in a lump for the cut benefits and then back to the full amounts going forward), and yeah that back-payment would be covered as well as the going-forward payments
- there are no requirements for any kind of “adjust for sustainability” in terms of contributions and benefits
- why no, there are no strings attached, why do you ask?
They didn’t bail out MEPs in 2020, but I guess they’re going to try again. We’ll see.
Press release from the Teamsters: Teamsters Laud House Committee For Including Pension Reform In Stimulus Bill
In unveiling language included in the Butch Lewis Emergency Pension Plan Relief Act of 2021, the House panel took the first step towards ensuring that millions of retirees and active workers who have played by the rules will receive the pension benefits they earned through years of hard work.
“The financial distress many of these plans are facing is beyond the control of retirees and workers,” Teamsters General President Jim Hoffa said. “While multiemployer pension plans have been buffeted by economic turbulence over the decades, the situation has been seriously exacerbated by the current pandemic.”
Through no fault of their own, the earned pension benefits of millions of retirees and active workers are being threatened due to the deteriorating financial status or the impending insolvency of hundreds of multiemployer pension plans – including the Teamsters’ own Central States Pension Fund – representing more than 1 million participants.
I agree with them — it’s not the retirees’ or even the active workers’ fault that their pensions are threatened.
But, sorry guys, pretty much all the MEPs requiring bailouts were the exact same plans requiring bailouts for years before COVID hit.
And, again, sorry, it may not be your fault, but the rest of us did not promise you those pension payments.
The MEPs are union-backed pension plans, where the provisions are part of the specific unions’ demands re: pay and benefits for the various employers who hire members of that union.
Who, exactly, made the pension promises?
The union set the terms for pay and benefits.
The employers agree to those terms.
The PBGC is paid some minimal risk premiums to back their currently minimal guarantees for MEPs. When MEPs totally fail by running out of assets, the retirees get the very low guaranteed benefits.
So, who exactly made those pension promises? Who is responsible for making retirees and active workers whole?
I’m pretty sure I never told the Central States Teamsters that it was okay to take retirement benefits as early as age 57.
Here is a post I made in December 2014: Multiemployer pensions, Social Security, and Public Pensions: Choices Have Consequences
But multiemployer plans are an especially sticky subject, because of all sorts of bad incentives baked into how these plans are regulated.
Here is one bit of info: when pensions (whether single employer or multiemployer) are put onto the PBGC because they’ve gone bankrupt, the pensions are guaranteed only up to a certain amount. Those with small pensions may get their full amount, but those with higher amounts get whacked down. A lot.
….
“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.”
….
The reason the boomers are going to find out that they’re going to get a lot less than they thought is because of choices they made:1. They didn’t save up enough and
2. They didn’t have enough childrenThat second one is a manner of saving for the future, btw.
The reason taxpayers will not boost them up is because there’s not going to be enough of us. And bringing in a bunch of low income once-illegal aliens is not going to do much for them, either, except perhaps provide some low cost workers for their assisted living centers.
Yes, I was feeling particularly salty when I wrote that. I will come back to that at the end of this post.
Central States Teamsters were already failing as a pension plan back in 2014.
The reason they need a bailout was that, well before the pandemic, when the plan was going to fail, they were going to take the PBGC with them. That a bailout for the PBGC multiemployer pension program would happen was always expected, because people don’t want all the union plans to go without protection because one big plan failed.
However, we never expected that the failed plans would be made 100% whole.
Prior posts:
Yeah, that last one is the HEROES act from last year.
So let’s think through that last bit — I can see Joe Manchin, the Senator from West Virginia, getting his arm twisted over needing to bail out Central States and other MEPs. Heck, not only are Democrats vulnerable, but midwest Republicans in specific.
So I can see this complete bailout of MEPs sailing through the Senate, while other parts of the bill running into friction. I definitely can see another aspect of the new MoneyPalooza Monstrosity, bailing out state/local governments, may run into more interference.
Andrew Biggs thinks this MEP bailout is a bad sign: Prelude to a State Pension Bailout
Ordinarily, insolvency means pension freezes and benefit reductions, but multiemployer pensions are run by labor unions, a key Democratic constituency. And so the House Covid bill plans to dole out an estimated $86 billion from 2022 to 2024 to 186 pensions, enabling these plans to pay full benefits through 2051. With no incentive to cut costs, there’s little reason to think the pensions will be solvent after 2051. Look forward to more spending down the road.
…..
The larger worry is that Congressional Democrats’ willingness to bail out private-sector multiemployer pensions signals they would do the same for state and local employee plans. Public-employee pensions operate under the same loose funding rules as multiemployer pensions, and public plans in Illinois, Kentucky, New Jersey, Texas and other states are no better funded than the worst multiemployer plans.
Ooooooh, Andy.
May I call you Andy? (you may call me meep, it’s okay)
Here’s the biggest problem in this thought.
There isn’t enough money to fill that hole.
From Elizabeth Bauer’s follow-up piece: Multiemployer Pension Plan Bailout Update: The Good News, Bad News, And The Pricetag
Based on simulations of the data available through the PBGC, CBO projected that, in the average simulation, 185 plans would receive funds, and those funds would total $86 billion, the bulk of which, $82 billion, would be spent in 2022, with smaller amounts spent in 2023 ($2 billion) and 2024 ($0.6 billion). At the same time, the PBGC’s spending for insolvent plans would be reduced by $2 billion, and tax revenues would increase by $1.7 billion as retiree-taxpayers pay tax on benefits they would have otherwise not received.
So, that’s only $86 billion total (yes, obviously, it could be more… but the order of magnitude is unlikely to be a lot higher. Maybe the total could be twice?)
What’s the public pension shortfall, do you think?
Pew Trusts last year went with a number of $1.2 trillion. Based on fiscal year 2018 results.
I did a quick extract from the Public Plans Database, which uses the actuarial measurements of unfunded liabilities, at $1.4 trillion for 2019. And that’s just for the plans in the database.
I’m all about data visualization, and orders of magnitude. Here is a comparison of the MEP bailout value to a public pension bailout value.
Now, you can say that they are just about to add $2 trillion to the federal debt, so what’s $2 trillion more? (and yes, people will be saying that – we shall see how much that money printer can go BRRRRRR)
In my own opinion, the standard measures for DB pension shortfalls greatly underestimate the cash flows needed, given this time of extremely low interest rates. But still, let’s pretend.
The public pension bailout would be at least 20 times the amount of a MEP bailout. Just because you bailout a set of pensions that would have pulled down a federal guarantee fund (the PBGC) does not mean you’re going to bailout other pensions that are much bigger and that you never guaranteed in the first place.
But hey.
Maybe the MEPs get bailed out on paper.
And then the public pensions get bailed out on paper.
And then there’s the hyperinflation that makes it all moot. (oh, we want to keep our COLAs! Our precious COLAs! So hyperinflation doesn’t bite into us! Oh wait, you won’t bail us out for that?!?)
As it is, let us see if this even bigger bailout of multiemployer pensions occurs with no strings attached, and then we can worry if the 20x bigger bailout will go through.
There seems to be some question as to whether the Democrats, in charge of White House, House of Reps, and Senate (barely), can even get some of the milder aspects of this latest bailout bill enacted.
I find that very interesting, don’t you?
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