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Defying economic reality

Updated with correction

In embracing legislation to repeal the Multiemployer Pension Reform Act of 2014, the International Brotherhood of Teamsters and other union leaders have put themselves at odds with the retirement security of multiemployer plan participants.

The IBT and the International Association of Machinists and Aerospace Workers ignore the economic reality facing severely underfunded multiemployer funds. For example, the Teamsters Central States, Southeast and Southwest Areas Pension Plan is on track to deplete its assets in 11 years. Other severely underfunded multiemployer plans could become insolvent in similar timeframes of 10 to 15 years.

These plans face desperate financial straits with no safe shore on either side of these financially dangerous waters.

For that reason, President Barack Obama signed into law Dec. 16 the multiemployer reform act. It enables severely underfunded multiemployer plans, such as Central States, to cut benefits for current and future retirees, provided the reductions meet certain conditions.

The act was designed to help stabilize the plans in the short term and at least extend their time horizons for paying promised benefits if they could not become financially sustainable once again. The union plans should support it.

But the Teamsters and Machinists unions have come out against the stabilization measure. Instead the unions endorsed legislation introduced June 18 in the Senate by Sen. Bernie Sanders, Ind.-Vt., and in the House by Rep. Marcy Kaptur, D-Ohio.

Through the proposed Keep our Pension Promises Act, the unions want to make sure multiemployer plans don't reduce benefit payments, or if they do reduce them have them restored in the future. To fund the shortfalls, the legislation would set up a legacy fund within the Pension Benefit Guaranty Corp. to provide support for multiemployer pension plans to continue to pay pensions.

The bill would finance the fund by taxing the wealthy “by eliminating a loophole in the estate tax and a tax break on sales of expensive art and other collectibles,” a June 18 news release from Mr. Sanders said. But that tax is unfair to anyone not involved in the vulnerable plans.

Through the Sanders/Kaptur bill, the IBT and IAM might be hoping for a change in the sentiment in Congress. But that likely would require the Democrats to gain control in the 2016 elections. The unions' opposition to reform is shortsighted. They should offer constructive recommendations to help shore up severely underfunded plans.

The IBT and IAM create a conflict between generations. The contributions of the younger generation are being used to fund the pension payments of the older generation, leaving little if any assets for those retiring much later.

Current economics are working against the model of many multiemployer plans, like the Central States Teamsters plan.

Central States executives project the plan could become insolvent in 2026, leaving it without any assets and unable to pay benefits to current and future retirees.

The Central States plan cannot rely on the PBGC's multiemployer insurance fund to backstop its pension benefits or those of other multiemployer plans because the agency lacks sufficient assets. The PBGC multiemployer fund is itself projected to become insolvent in 2025.

Under the reform act, fiduciaries of the fund will have to approve any reductions and submit them to the Department of the Treasury, in consultation with the Department of Labor and the PBGC, for approval and then, if accepted, submit the cuts to a vote by the plan participants.

It is important that regulatory oversight provide safeguards to ensure the cuts are necessary and fair. The cuts must balance generational risk-sharing.

Central States has taken the appropriate path. The unions, rather than postponing the cuts in the probably vain hope of a congressional rescue, should face the reality of benefit reductions now instead of allowing the financial condition of the funds to worsen, necessitating deeper benefit cuts in the future.

This article originally appeared in the June 29, 2015 print issue as, "Defying economic reality".