NORTHWEST LABOR PRESS | May 18, 2018 | PAGE 3
...Pension crisis sparks reform debate
From Page 2
have either recovered or are on track
to recover. But the remaining tenth
are in a death spiral, and not because
of anything the trustees did or didn’t
do. Looking back, it’s clear that poli-
cies set by Congress created the cri-
sis.
The failing pension plans all have
an important feature in common: Re-
tired and inactive (formerly em-
ployed but vested, i.e., entitled to fu-
ture benefits) participants came to
greatly outnumber “active” working
participants whose employers are
still contributing. There were many
contributing causes to those upside-
down demographics. U.S. trade poli-
cies smoothed the way for off-
shoring, downsizing and plant
closures. Deregulation of trucking
and other industries led to volatility
and business failures. Decades of
union-busting reduced the number of
unionized firms. Advances in au-
tomation and computer technology
meant fewer workers were needed.
In 1975, active participants made
up 83 percent of participants across
all multi-employer pension trusts. By
2014, the share of active participants
in multi-employer pension trusts had
fallen to 39 percent overall. Among
the pension trusts that are headed for
insolvency, actives make up just 16.2
percent.
It’s actually normal and healthy
for long-established pension trusts to
pay out more in benefits to retirees
each year than they take in from em-
ployer contributions — because the
investment returns from all those
past contributions are supposed to
make up the difference. Chuck
Mack’s Western Conference of
Teamsters pension is a good exam-
ple: In 2017, it took in $1.8 billion in
employer contributions, and paid
$2.7 billion in benefits, while earning
over $5 billion on its investments.
But the more lopsided the inac-
tive-to-active ratio is, the more vul-
nerable a pension trust is to severe fi-
nancial shock.
The key thing to know about the
failing pension trusts is that they
have too few employer contributions
coming in for it to be possible to re-
cover from severe financial market
losses. Their remaining assets con-
tinue to earn returns, but they’re now
paying out more in benefits than the
combination of employer contribu-
tions and investment returns. They
don’t have enough assets to meet
their future liabilities, and their total
assets are shrinking year by year.
What makes all this particularly
painful is that most of the 100 or so
funds that today are headed for insol-
vency were fully funded or close to
How Congress created
the pension crisis
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The Employee Retirement Income Security Act –
1974 ERISA regulated pensions heavily, and created the
Pension Benefit Guaranty Corporation (PBGC) as a federally
sponsored insurance program to pay benefits if pension trusts fail.
But unlike with bank depositor insurance (FDIC) and home loan
guarantees (FHA), Congress didn’t back the PBGC with the full faith
and credit of the U.S. government. ERISA’s “anti-cutback” rule also
said pension trustees could increase benefit promises, but could not
later scale them back.
The Motor Carrier Regulatory Reform and
Modernization Act – 1980 deregulated the trucking
industry. It ended shipping cost controls, which led to
ruinous price competition, decimation of union trucking, and the
closure of as many as 10,000 trucking firms that were contributing
to multi-employer pensions.
The Tax Reform Act of 1986 said that if multi-employer
pensions became fully funded, employer contributions
would no longer be tax-deductible.
North American Free Trade Agreement – 1993 U.S.
companies were already shifting manufacturing assembly to
Mexico’s tariff-free maquiladora zone. But by making Mexico
safe for investors, NAFTA greased the skids for even more
offshoring. It was followed by PNTR, DR-CAFTA, KORUS, and many
more. Over a million American manufacturing jobs were lost, many
of them union, and the threat of offshoring became the most
effective threat in employer campaigns to keep workers from
unionizing.
The Financial Services Modernization Act – 1999
repealed the Glass-Steagall Act, which had kept commercial
and investment banking separate for 70 years. That paved
the way for banks to make riskier investments.
The Commodity Futures Modernization Act – 2000
prevented regulation of new classes of complicated financial
products known as “over-the-counter” derivatives, such as
the credit default swap. Combined with the repeal of Glass Steagall,
it laid the groundwork for a housing bubble to inflate amid
systemic fraud. Banks and Wall Street firms securitized and traded
sub-prime mortgages, so-called “liar loans,” which bond rating
agencies lied and labeled as AAA-rated investment grade
securities. These were then hedged with exotic derivatives like
“debt-equity” swaps.
The Pension Protection Act – 2006 Many pension
trusts were rocked by the 2000 collapse of the dot-com stock
bubble. To stop pensions from going off a cliff and taking the
PBGC with them, PPA required severely underfunded pension trusts
to come up with rehabilitation plans to recover from the asset
losses by cutting expenses and increasing contributions. For the first
time since ERISA, pensions would be allowed to cut back “extra”
benefits they’d been forced to give out during the stock run-up. PPA
also required trusts to impose surcharges on participating
employers, extra charges not tied to any new benefits, which
would ramp up over time. And recognizing that PBGC was at risk of
failure, it increased PBGC premiums. But it was too little, too late.
Troubled Asset Relief Program – 2008 With the
collapse of the giant financial firms Bear Stearns and Lehman
Brothers, a financial panic ensued, wiping out more than a
quarter of the value of pension fund assets. Instead of confiscating
Wall Street’s ill-gotten gains, Congress authorized up to $700
billion to bail out the banks that were holding the tarnished
securities.
The Multi-employer Pension Reform Act – 2014 In a
lame-duck session of Congress, MPRA was inserted into the
omnibus spending bill. It allows multi-employer pension
funds to prevent the slide to insolvency by cutting benefits to
current and future retirees (but not for those over 80, and less for
those 75 to 80).
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Chuck Mack, co-chair of the Western Conference of Teamsters pension — America’s
largest multi-employer pension — is sounding the alarm about the need for Congress
to do something about pensions that are headed for insolvency.
fully funded as late as the year 2000.
To be fully funded means they had
enough assets on hand to pay all of
their future pension promises. Many
multi-employer pension trustees
might have liked to let boom-market
investment returns pile up as a cush-
ion against future downturns, but the
rules set by Congress wouldn’t let
them. Instead, when the plans be-
came fully funded, the rules required
that they increase benefits, or de-
crease employer contributions, or
both. If they failed to do that and be-
came overfunded, their employer
contributions would no longer be a
tax-deductible business expense —
under the Tax Reform Act of 1986.
Since the employer contributions
were spelled out in three- to five-year
union contracts, reducing employer
contributions during the financial
market boom wasn’t feasible in most
cases. So pension trusts started giv-
ing retirees bonus “13th” checks.
They reduced penalties for early re-
tirement and in effect offered subsi-
dies to workers to take earlier (and
more expensive for the trust) retire-
ment.
Then the 2000 tech stock bubble
burst, proving that some of that asset
value had been temporary or illusory.
But now, a rule against “cutbacks”
contained in the 1973 law known as
ERISA prevented the pension trusts
from scaling back benefits. Congress
changed that rule with the Pension
Protection Act of 2006, which al-
lowed trusts to scale back those “ex-
tra” benefits they’d given, but it was
too late for some, because a vicious
cycle had begun.
When multi-employer pensions
are healthy, they produce a generous
benefit at an affordable cost to em-
ployers, and are often the pride and
joy of their sponsoring unions. But
when they get into trouble, the dy-
namics caused by pension regulation
can create a vicious cycle, in which
new employers are reluctant to come
in, and participating employers are
eager to get out. That vicious cycle
results in still fewer active employ-
ees, which makes it that much harder
to recover from sudden funding
shortfalls.
The features of pension law that
create that effect are withdrawal lia-
bility and rehabilitation surcharges.
Withdrawal liability for multi-em-
ployer pensions was created by
Multi-employer Pension Plan
Amendments Act of 1980. The idea
is that all employers in a multi-em-
ployer pension are collectively re-
sponsible for paying the promised
benefits. If the assets shrink and
there’s unfunded liability, employers
can’t leave the pension trust unless
they pay the amount it would take to
keep the promises for their own em-
ployees. That amount is known as
withdrawal liability. The rule is de-
signed to prevent employers from
leaving the pensions, but it has often
had the effect of preventing new em-
ployers from entering.
Rehabilitation surcharges, mean-
while, come from the Pension Pro-
tection Act of 2006. That law re-
quires pension trustees to take action
to reduce unfunded liability, includ-
ing the imposition of employer “re-
habilitation” surcharges which ramp
up over time. For example, Daimler
Trucks North America had been pay-
ing $4.45 an hour into the multi-em-
ployer Automotive Machinists Pen-
sion Plan. But to catch up after the
financial market meltdown deci-
mated its investments, trustees im-
posed mandatory rehabilitation sur-
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