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Industry Voices

Commentary: Getting retirement solutions rights is a matter of national security

All Americans should be concerned about three separate, but interrelated, retirement crises: the impending meltdown in multiemployer pension plans; the roughly 50% of private-sector workers not in a workplace retirement plan; and the enormous unfunded liabilities associated with public pension plans.

Fortunately, the country can solve these problems and simultaneously create large pools of capital needed for certain infrastructure projects. Once created, this capital can address infrastructure needs in this country and, as a matter of national security, compete with China, which has aggressively moved to acquire long-term leases of vital Mediterranean seaports, such as Piraeus in Greece.

Unfortunately, congressional responses so far appear headed toward continued stalemate.

In response to the first crisis, Congress created a Joint Select Committee on Solvency of Multiemployer Pension Plans, co-chaired by Sens. Orrin Hatch, R-Utah, and Sherrod Brown, D-Ohio, and with 16 members equally divided between the two parties and the two legislative bodies. The rules creating the joint committee specify that if at least five members of each party support a piece of legislation, then it will automatically receive a vote in both Houses. The committee has done an admirable job soliciting input from stakeholders and the public, holding multiple open hearings. However, the only plan emerging so far is a massive loan program embodied in HR 4444 and SB 2147, both sponsored only by Democrats. This legislation, known as the Butch Lewis Act, would create an entity to issue bonds and use the proceeds to make low-interest loans to troubled multiemployer plans to pay retiree benefits. The loan program envisions interest-only payments for 29 years, followed by a balloon repayment. Needless to say, the loans won't solve many, if any, of the existing problems with each existing plan. Given the existing trouble, how many employers and plans will be able to repay the loans?

As to the second crisis, recent news stories have reported on discussions in Congress, but mainly among Republicans, to tinker with the 401(k) model by making it easier for small companies to offer such plans and for workers to create an annuity upon retirement with whatever each worker has managed to save. Because there is no risk-pooling, these ideas still require each worker to save as if he or she will live to be 100. Few Americans are able to save such sums.

In the meantime, no one seems to know what to do about public pension liability, which produces shrill, daily news coverage in states such as Illinois, New Jersey, California, Kentucky and Connecticut. Likewise, the civil engineers keep reminding us that our D-plus infrastructure needs trillions of dollars.

Here's one way to address all of these problems. First, we need to recognize that pension funds, not a 401(k) or an individual retirement account, can pool large amounts of capital and then invest it. Second, pension plans provide enormous advantages over atomized savings plans because they pool risks, cut costs and provide lifetime retirement income. Third, in contrast to complaints from some quarters that defined benefit plans are not sustainable, we should ask whether there are successful defined benefit plans and what lessons can be learned from them.

Answers to the last two questions can be found in two church plans, the Wisconsin Retirement System, the Ontario Teachers' Pension Plan and the Province of New Brunswick Public Service Pension Plan. Each of these plans uses a discount rate ranging from the cost of an annuity (3.17% in 2017 for the Presbyterian Church U.S.A.) to a blended rate of 5.5% for Wisconsin. Even with such discount rates, they maintain a funded status ranging from 100% to 120% (or higher). They have reached compromises between those who insist that public plans can use their expected rates of return to compute liabilities and the financial economists who insist just as fervently that only a risk-adjusted rate is appropriate (meaning something close to risk-free).

The plans achieve these results by underpromising and overdelivering on the benefits side and with discipline on the investing side. The two churches — the Presbyterian and the Christian Church (Disciples of Christ) — contribute 11% of ministers' compensation to their pension plans, with members accruing annual pension credits of 1.25% and 1.5% of compensation, respectively. If the plans maintain a funded status above at least 115%, the trustees can grant special apportionments to members and retirees. Over time, those additions have far outpaced Social Security cost-of-living allowances, as illustrated:

How can we transfer these lessons of successful, modest cost and well-funded defined benefit plans to the multiemployer world? We know that within a decade, more than 100 of these multiemployer plans are likely to default, putting the retirements of nearly 1 million people at risk and pushing the multiemployer fund of the Pension Benefit Guaranty Corp. into negative territory. No amount of additional employer contributions or insurance premiums will stop this inexorable march to insolvency.

Here's what we could do. We could require the actuary for each multiemployer plan to calculate new pension liabilities based solely on the actual record of cash contributions to the plan. For example, pension credits could be calculated based on a 10-to-1 ratio, with each 10% of salary contributed generating a pension credit of 1% of salary annually. Total pension liabilities could then be calculated using a discount rate of something like 4.75% (as New Brunswick uses). If the funded ratio (assets/liabilities) exceeds 120%, then "special apportionments" could be allocated to all members and retirees. If the funded ratio is less than 120%, then Congress could "top off" the fund with a single cash contribution to bring it to that ratio. However, before that happens, the fund members would have to vote to approve the new benefit plan and to turn over the assets and management to a new sustainable, government-managed plan.

But before protesting about the bailout nature of this plan, consider that the real cost of the Butch Lewis Act loan proposal might be even larger than this direct cash infusion proposal. In contrast, this plan is based upon actual contributions to the multiemployer plans, likely requires some initial sacrifice (if promised benefits were unrealistic for some reason), and provides a long-term employee with the distinct likelihood of about 75% wage replacement when Social Security benefits are combined with the pension benefit. If the assets of the merged, new, sustainable plan do well and if new contributions are sufficient, then the trustees should find themselves able to grant special apportionments, just as the church plans have done.

What about all those taxpayers who have no workplace retirement plan and would be asked to subsidize these multiemployer plans? Congress could create a template for states to adopt, providing for employer contributions ranging from, say, 3% to 9% and employee contributions ranging from 2% to 6%. Liabilities could be calculated like our five examples, and again, special apportionments could be granted if funded status is above 120%. By delaying any payouts for a few years, these plans would grow rapidly. Long-term infrastructure investments are then feasible, just like Ontario Teachers' has done with airports, bulk liquid storage facilities and water systems.

What about those public pension plans, which some estimate are underfunded by as much as $4 trillion? Once states sponsor these low discount, well-funded, underpromising and overdelivering plans for private-sector workers, significant pressure to bring their public plans into line likely will follow.

W. Gordon Hamlin Jr. is a retired attorney and president of Pro Bono Public Pensions, Tuscumbia, Ala. He was a 2016 Fellow in Harvard's Advanced Leadership Initiative. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.