Sen. Robert P. Casey Jr.'s proposed multiemployer plan bailout legislation confirms that the model is broken for many such pension plans, irreparably in some cases.
His Create Jobs and Save Benefits Act (S. 3157), pending in the Health, Education, Labor, and Pensions Committee, only postpones a reckoning and creates moral hazard.
It avoids tackling the funding deficits of multiemployer plans, distorts the costs of such plans, removes incentives for fixing the model, and jeopardizes an already underfunded Pension Benefit Guaranty Corp. It will likely encourage further underfunding as unions and employers expect further bailouts.
Besides, why favor only multiemployer plans when single-employer plans also are distressed?
For some multiemployer plans, a defined benefit plan is no longer viable.
A key feature of the legislation, introduced March 23, would allow multiemployer plans that satisfy certain requirements — and are deemed irretrievable unless they are helped — to dump onto the PBGC legacy pension liabilities attributed to employers that withdrew from the plans without paying withdrawal liabilities.
At the same time, these plans would have to transfer to the PBGC an amount of assets that would cover a maximum of five years of projected benefit payments. Then the PBGC would guarantee fully the benefits of retired participants from such plans.
The legislation tries to salvage the remaining part of a troubled multiemployer plan, at least in the short run, by relieving existing participating employers of the burden of making up the costs of these benefits. It would strengthen the remaining plan and improve its funding level by enabling it to use its remaining assets and future employer contributions to fund the liabilities remaining.
But there is no certainty the plan would be viable in the long term. The same economic and internal forces that put a plan into a critical underfunded position — especially union willingness to trade employer pension contributions for higher wages now — would remain at work.
The problem with multiemployer plans isn't always lack of withdrawal liability payments. United Parcel Service Inc. withdrew from the Teamsters Central States, Southeast & Southwest Areas Pension Fund, fully paying its required $6.1 billion in withdrawal liability. But the proceeds quickly shrank because they were invested just before the market meltdown. Unfortunately, the benefits they were meant to pay didn't likewise fall.
The Senate bill reduces the incentive for trustees — employer and union representatives — to restructure their plans, and for unions and employers to negotiate affordable pension benefits to meet changing economic reality.
Another feature of the bill would enable multiemployer plans to combine resources — but not assets and liabilities — to strengthen investment management and to reduce investing and other administrative costs.
The idea is that a stronger plan would help a weak plan gain from better management oversight. This part of the bill is a good idea and should be advanced, although it is no sure remedy. The immense scale of Central States, the second-largest multiemployer plan in terms of assets, hasn't averted its underfunding problem.
Proponents of the legislation argue that it allows plans to keep paying defined benefit payments longer. But it provides no incentive to come up with creative alternatives, which could include some new structure for defined benefit plans. When UPS withdrew, it teamed up with the Teamsters to create a jointly administered single-employer defined benefit plan for future accruals of participants who would have been under the Central States plan.
Sen. Casey, D-Pa., should take the bailout feature out of his bill. It removes any incentive for creativity in plan design, or for compromise. It is another example of moral hazard resulting from good intentions.