Letter from the US: A model for future cuts?
The pension industry is concerned with the consequences of a bipartisan amendment to the $1.1trn (€924 bn) ominbus spending bill that Congress approved in December. This cuts benefits for multi-employer plan members and experts are now debating whether it is a model for further cuts across the industry.
The amendment is a historic turning point because it alters a fundamental provision of the Employee Retirement Income Security Act of 1974 (ERISA): the protection of pension benefits paid to retired workers. To ensure that promise, Congress created the Pension Benefit Guaranty Corporation (PBGC), a federal corporation that guarantees payment of basic pension benefits for 41m workers and retirees in more than 29,000 private sector DB plans.
If a company goes bankrupt, the plan is absorbed by the PBGC, a body financed by corporate premiums and inherited assets. It pays a maximum annual pension of $12,870, with no inflationary escalator, to employees who have 30 years of service.
But, the PBGC has warned that its deficit had nearly doubled, from $36bn to $62bn in the previous fiscal year. The reason was the financial situation of some multi-employer pension plans, which were created by union negotiation and managed by unions and employers. These pension plans number 1,400 and cover more than 10m participants in industries dominated by small businesses and a fluid workforce.
The PBGC says the deficit in its multi-employer insurance programme rose to $42.4bn from $8.3bn in 2013. By contrast, the deficit in the single-employer programme shrank to $19.3bn from $27.4bn. Around 200 multi-employer plans, with 1.5m workers, are in danger of becoming insolvent within 10 to 15 years, according to the agency. Two of the largest plans known to be in distress are the Teamsters’ Central States fund and the United Mine Workers of America fund. These cover truck drivers and coal miners.
The PBGC has also warned that it was “itself on course to become insolvent with a significant risk of running out of money in as little as five years”, with a 90% likelihood by 2025, taking into account current premium levels. That triggered a bipartisan response and the favoured solution was to allow plans to cut benefits quickly in order to avoid bankruptcy. Randy DeFrehn, executive director of the National Coordinating Committee for Multi-employer Plans, accepted that no government bailout was on the table.
This led to the amendment that allows trustees of financially troubled multi-employer plans to cut retiree benefits if the plan is considered big enough to pose a threat to the federal safety net. Only retirees aged over 80 or who receive a disability pension may not have their benefits reduced; for those 75 to 79, the cuts will be smaller than for those under 75.
For the American Association of Retired People the reduction of benefits already earned means overturning “perhaps the most fundamental of ERISA’s participant protections”. It is a terrible precedent, according to Karen Friedman, executive vice-president of the Pension Rights Center, who thinks that it could encourage cutbacks in state and local pension plans, and possibly Social Security and Medicare. However, Alex Pollock of the American Enterprise Institute welcomed it as a healthy response to insolvency.
One critic is James Hoffa, leader of the Teamsters union, whose Central States fund is at risk of insolvency. The fund has recently suffered the withdrawal of many companies, including UPS – which paid $6.1bn to exit in 2007 – establishing a new single-employer plan for about 45,000 employees and eliminating its contribution to the multi-employer plan.
Now the focus will shift onto public employees’ funds, which face long-term deficits of more than $1trn. These enjoy legal protections but the benefits cut for the City of Detroit’s retired employees shows nothing is sacred.