Biden’s Pension Bailout Is a Giveaway to Unions

Most plans were insolvent long before the pandemic.

Published in The Wall Street Journal.

By Howard B. Adler and Alex J. Pollock

President Biden boasted last week about his administration’s bailout of union multiemployer pension plans, enacted in the American Rescue Plan supposedly to address pandemic-related problems. “Millions of workers will have the dignified retirement they earned and they deserve,” he said July 6 in Cleveland. In fact, the American taxpayer will bear the cost of union plans that were insolvent long before the pandemic. The bailout all but guarantees future insolvency or another bailout and constitutes a massive giveaway to labor unions.

Multiemployer pension plans are a creation of unions. They are defined-benefit retirement plans, maintained under collective-bargaining agreements, in which more than one employer contributes to the plan. These plans are typically found in industries such as trucking, transportation and mining, in which union members do work for multiple companies.

As of 2019, there were 2,450 multiemployer plans with 15 million participants and beneficiaries. Many were insolvent well before the Covid pandemic. The Pension Benefit Guaranty Corp. estimated total unfunded liabilities of PBGC-guaranteed multiemployer plans at $757 billion for 2018. According to 2019 projections, 124 multiemployer pension plans declared that they would likely run out of money over the next 20 years.

Read the rest here.

Inflation Risk

Published in Barron’s.

To the Editor:

Regarding “Why—and How—Investors Should Gird for Inflation Risk” (The Economy, March 26), what the Federal Reserve says always reflects politics and its attempts to manipulate expectations. But being prepared for the risk of higher inflation, as Lisa Beilfuss suggests, is perfectly aligned with what the Fed is doing, namely printing money. As for the Fed’s forecasts, they are as unreliable as anybody else’s guesses about the future.

The Coming Bailout of State Pension Plans

Published in The Wall Street Journal.

In “Prelude to a State Pension Bailout” (op-ed, March 1), Andrew C. Biggs is doubtless right that the coming bailout of hopelessly insolvent multiemployer pension plans will lead to further bailouts of other broke pension plans. These will be justified with the argument that the pensions were “promised”—but by whom? They weren’t promised by the taxpayers, only by the defaulting plans and a government insurance program that is itself insolvent. How very clever it was to set up the Pension Benefit Guaranty Corporation and promise it would never call on the taxpayers: This very same illusion created Fannie Mae and Freddie Mac and their subsequent bailout. The multiemployer pension plans are deeply in need of structural reform, and so are many public-employee pension plans, and so is the PBGC. If indeed, as Mr. Biggs argues, the political urge to bail them out is irresistible, the opportunity for reform thereby created should not be missed. The unquestionable governing principle must be that bailouts require reform: No reform, no bailout.

Congress Moves to Put Pension Benefit Guaranty Corporation On Taxpayer Dole

Published by Real Clear Markets.

The Ways and Means Committee of the House just approved a bill for a big taxpayer bailout of private multi-employer/union-sponsored pension plans.  Many of these plans are hopelessly insolvent.  In other words, they have committed to pay employee pensions far greater than they have any hope of actually paying. In the aggregate, the assets of multi-employer plans are hundreds of billions of dollars less than what they have solemnly promised to pay.

There is an inescapable deficit resulting from past failures to fund the obligations of these plans. This means somebody is going to lose; somebody is going to pay the price of the deficit.  Who?  Those who created the deficits? Or instead: How about the taxpayers? The latter is the view of the Democratic majority which passed the bill out of committee in a 25-17 straight partyline vote on July 10.

“Wait a minute!” every taxpayer should demand, “aren’t all these pension plans already guaranteed by an arm of the U.S. government?”  Yes, they are–by the government’s Pension Benefit Guaranty Corporation (PBGC). But there is a slight problem:  the PBGC’s multi-employer guarantee program is itself broke.  It is financially unable to make good on its own guarantees. The proposed taxpayer bailout is also a bailout ofthis deeply insolvent government program.

This was not supposed to be able to happen.  In creating the PBGC, the Employee Retirement Income Security Act (ERISA) required, and has continued to require up to now, that the PBGC be self-financing.  But it isn’t–not by a long shot. Its multi-employer program shows a deficit net worth of $54 billion.  The PBGC was not supposed ever to need any funds from the U.S. Treasury.  But it is now proposed to give it tens of billions of dollars from the Treasury, and the bill does not have any limiting number.

“ERISA provides that the U.S. government is not liable for any obligation or liability incurred by the PBGC,” says the PBGC’s annual report every year.  But here we have another of the notorious “implicit guarantees,” which pretend they are not guarantees until it turns out that they really are.  Consider that if the PBGC’s multi-employer program were a private company, any insurance commissioner would have closed it down long ago.  No rational customer would pay any premiums to an insurer which is demonstrably unable to pay its committed benefits in return.  Only the guarantee of the Treasury, “implicit” but real, keeps the game going.

Bailing out guarantees which were claimed not to put the taxpayers on the hook, but in fact did, is the familiar pattern of “implicit” guarantees.  They are originally done to keep the liability for the guarantees off the government’s books, an egregious accounting pretense, because everybody knows that when pushing comes to shoving, the taxpayers will be on the hook, after all.

In such “self-financing,” off-balance sheet entities, the government generally does not charge the fees which their risk economically requires. This is true even if their chartering acts theoretically require it.  Undercharging for the risk, politically supported by the constituencies who benefit from the cheap guarantees, allows the risk to keep increasing.  So in time, the day of the taxpayer bailout comes.

Notable examples of this are the bailouts of the Farm Credit System, the Federal Savings and Loan Insurance Corporation (FSLIC), Fannie Mae, and Freddie Mac.  However, the bailout of Farm Credit included serious reforms to the System, and the bailout of FSLIC, serious reforms to the savings and loan industry.  The bailouts of Fannie and Freddie were combined with putting them in conservatorship under the complete control of the Federal Housing Finance Agency, where they remain today.

Now for the PBGC, when we read all the way to the very last paragraph on the last page of the bill, page 40, we find that the PBGC’s multi-employer program, which was supposed never to need any appropriated funds, is to get generous taxpayer funds forever.  “There is appropriated to the Director of the Pension Benefit Guarantee Corporation,” says this paragraph, “such sums as may be necessary for each fiscal year.”  The multi-employer pensions would thus become an entitlement, on the taxpayer dole.  There is no limiting number or time.  Nor in the previous 39 pages is there any reform of the governance, operations, or ability of these pension plans to finance themselves on a sustainable basis.

In short, the bill passed by the Ways and Means Committee is a bailout with no reform.  But the governing principle for all financial bailouts should be instead: If no reform, then no bailout.

Multi-Employer Pension Bailout Needs a Good Bank/Bad Bank Strategy

Published in Real Clear Markets.

The stock market is high, unemployment is low, but many multi-employer, union-sponsored pension plans are hopelessly insolvent and facing their own financial crisis. So is the government’s program that guarantees those pensions through the Pension Benefit Guaranty Corporation (PBGC). “Insolvent” means that while they have not yet spent their last nickel of cash (although that day is coming), their liabilities are vastly greater than their assets, and all the liabilities simply cannot be paid. In short, many multi-employer pension plans are broke and so is their government-sponsored guarantor. Unsurprisingly, the idea of a taxpayer bailout arises, although its proponents do not wish to call it a bailout.

The PBGC’s multi-employer program has a net worth of a negative $54 billion, according to its September 30, 2018 annual report. It has assets of only $2.3 billion, and liabilities of $56 billion—it has $24 in liabilities for each $1 of assets. And this striking deficit only counts the probable losses for the next ten years, not the unavoidable further losses after that. PBGC estimates the total unfunded pension liabilities of the multi-employer plans at $638 billion. Making financial promises is so much more enjoyable than keeping them.

One of the causes of these deficits is the government guarantee itself, which can induce these pension plans to make bigger pension commitments than they funded or can fund, reflecting the expectation of a taxpayer bailout. This displays the moral hazard of getting the government to guarantee pensions, an unintended but natural risk of creating the PBGC in the first place.

The deficits in the insolvent pension plans and in the PBGC are facts. We know for certain that losses which already exist will necessarily fall on somebody. On whom? That is the question. From where we are now, there is no possible outcome in which nobody loses.

The Employee Retirement Income Security Act of 1974 (ERISA), in establishing the PBGC, specified that it would never take any money from the Treasury. As the PBGC annual report explains, “ERISA requires that PBGC programs be self-financing.” Whoops. Furthermore, “ERISA provides that the U.S. Government is not liable for any obligation or liability incurred by the PBGC.” Should we ever believe such protestations? The same provision was made for the debt of Fannie Mae and Freddie Mac, but they got bailed out anyway.

Last year, Congress set up the Joint Select Committee on Solvency of Multiemployer Pension Plans to figure out what to do. The name was nicely diplomatic, since the core issue was rather the “Insolvency” of these plans. The special committee held hearings and did its best, but disbanded without issuing its required report.

Now it inevitably occurs to many politicians that there should be a bailout to benefit the pensioners, unions, employers, and the PBGC, while moving losses to the taxpayers. A bill to this effect, the “Rehabilitation for Multiemployer Pensions Act,” was introduced this year and is headed to a mark-up in the Ways and Means Committee of the House.

Suppose you have decided that a taxpayer bailout is less bad than having pensions cut, unions embarrassed, employers faced with unaffordable pension contributions, and watching the PBGC’s multi-employer program head to default. How would a bailout best be structured? I suggest the following essential points:

Congress should be honest about what it is doing. You can’t think clearly about the principles and effectiveness of bailouts if you don’t face up to the fact that you are designing a bailout.

Congress should adapt for use in this case a globally tried and true method for dealing with hopelessly insolvent financial entities: the Good Bank/Bad Bank structure. This structure should be required for any pension plan receiving appropriated taxpayer funds in any form.

A fundamental principle is reform of the governance of bailed out entities. Those who ran the ship on the rocks should not be left in command. They should not be in charge of spending the money taken from other people to make up their deficits.

The Good Bank should contain what has a high probability of being a successful, self-sustaining entity going forward.

The Bad Bank should contain the deficits and unfunded obligations from past unsuccessful operations, plus the bailout funding. It should be run as a long-term liquidation. It will make clear the real cost of the bailout and dispense with the need for further bailouts in the future.

The Good Bank should begin and continue on a fully funded basis. The required contributions of the employers should be determined as a mathematical result of the committed pensions, not be a result of bargaining subject to the moral hazard of the government guarantee. This calculation should use the discount rates required for single-employer plans. Employers should have to book as their own liabilities their pro rata share of any underfunding which might occur. Finally, data and reporting should be revised to be made timely and more transparent.

The Bad Bank should have whatever assets, if any, are left over after forming the Good Bank, all the plan’s pension commitments already made but not funded, the obligations of employers for contributions to those commitments, and the bailout funding. It should purchase high quality annuities to meet its pension obligations, not try to run risky asset portfolios. In time, it would disappear, with remaining funds, if any, returned to the Treasury.

The Good Bank should be governed by a board of independent directors with fiduciary responsibility for the good management of the plan.

The Bad Bank should be run by a government-appointed conservator.

If you are going to have a bailout of the insolvent multi-employer pension plans, a Good Bank/Bad Bank structure along these lines would be highly advisable.

Golden Years

Published in Barron’s.

After considering the many problems of retirement finance in a lower-return world, the article (“The New Retirement Strategy,” Jan. 5), gets to David Blanchett’s suggestion: “It might be better to simply work longer.”

Yup. The best way to finance retirement is not to retire, at least not too soon. Shorten the time to be financed. Lengthen the time when savings can be generated. The math is simple and inescapable.

Saving for Retirement

Published in Barron’s.

A house with no mortgage left on it is a classic retirement asset and a good way to save for one’s older years (“Remaking Retirement,” Cover Story, Nov. 19). A big issue not mentioned in your otherwise informative articles on 401(k) and other retirement savings accounts is how to utilize these accounts, now completely focused on stocks and bonds, to address the hardest financial problem of many young families. This is how to finance the down payment on their first house, which is also an excellent retirement asset.

In my view, Congress should amend the governing acts for retirement accounts to provide for a simple and penalty-free withdrawal from 401(k) and individual retirement accounts for the down payment on a first house, with the tax deferred on the income withdrawn (perhaps starting amortization at age 70½). We should give investing in a house of your own the same retirement-account tax treatment as investing in stocks and bonds.

Congress did have bills introduced in this direction in the 1990s—it would be a good bipartisan project to actually do it now.

Chapter 11 for Social Security?

Published in Barron’s.

In their Other Voices essay, Dudley Kimball and Robert Morgan said that Social Security will be insolvent in 2034.

In the sense of having liabilities vastly greater than assets, it is deeply insolvent today. Social Security really needs the equivalent of a Chapter 11 bankruptcy reorganization.

Life expectancy for 20-year-old white men in the 1930s was 66—meaning that, on average, he’d get one year of Social Security. Today, a 20-year-old man has a life expectancy of 82.

Social Security has become a complex mix of financial functions. It is partly a welfare program; Kimball and Morgan would make it more so. It is partly a forced savings program with a very low average rate of return. It is partly insurance against outliving your savings. And it is entirely broke in present-value terms, reflecting cash already paid to those who took out much more than they put in.

It is time to draw a line and have a reorganization. Those people who can easily afford it could take substantial haircuts on their future benefits, receiving say 60 cents to 70 cents on the dollar, in exchange for voluntarily opting out of the program. This would make Social Security much less insolvent.

For the other creditors, Congress should step up, write off the Treasury’s loss, put in whatever it takes to pay off the accrued benefits at par, and put Social Security into runoff. To this extent, the government would then have honest, as opposed to dishonest, books. A program designed for the now-irrelevant demographics of the 1930s would slowly liquidate.

Then a sound retirement finance program could be put in place to go forward, based on 21st century demographics. Doubtless, the politics would be interesting. But perhaps starting over offers a better chance than trying to remake the 1930s DC-3 of Social Security into a jumbo jet while it’s flying.

Iron Chancellor was a good actuary too

Published in the Financial Times.

Sir, “Retirement age for young Germans will have to rise to 69, central bank warns” (Aug. 16). That is a quite reasonable, even generous, retirement age if you are going to live to 85 or 90 or more.

Moreover, it would not be the highest retirement age Germany has had. When Otto von Bismarck introduced the first state pension scheme in the German Empire of 1889, the retirement age was set at 70! Needless to say, on average you were going to live many fewer years after 70 then than now. The Iron Chancellor knew what he was doing, actuarially speaking

Who will pay for the Pension Benefit Guaranty Corp.’s huge losses?

Published in Real Clear Markets.

The government’s pension insurance company, the Pension Benefit Guaranty Corporation (PBGC), is broke. Because its creditors can’t demand their money immediately, it won’t have spent

its last dollar for “a significant number of years” yet (maybe ten) — but its liabilities of $164 billion are nearly twice its assets of $88 billion: there is no way it can honor all its obligations.

The PBGC has two programs, one insures single employer pensions and the other multiemployer, union-sponsored pensions. Both are insolvent, but the multiemployer program is in far worse shape: it is well and truly broke. Its liabilities of $54 billion are 27 times its assets of $2 billion. There are on top of that “reasonably possible” losses of another $20 billion.

The PBGC was supposed to be, according to its charter act, financially self-supporting: obviously it isn’t. Also according to the act, its liabilities are not obligations of the United States government: but it couldn’t continue to exist even for a minute except as part of the government. Will the taxpayers end up paying for its losses-or if not, who?

A month ago (June 17, 2016), Labor SecretaryThomas Perez, who chairs the PBGC board, wrote disingenuously to the Congress, that the board wants to work with Congress “to ensure the continued solvency of the multiemployer program.” A forthright statement would have been: “to address the disastrous insolvency of the multiemployer program.”

In the background of the PBGC’s huge net worth deficit are a large number of deeply underfunded multiemployer pension funds. “Overall,” Perez’s letter admitted, “plan assets in the multiemployer pension system are now less than half of earned benefits.” You could call that underfunding with a vengeance.

An instructive example is the Central States plan (formally, the Teamsters union’s Central States, Southeast and Southwest Areas Pension Fund). The financial stress of this large and utterly insolvent multiemployer plan brings the inescapable problems into sharp focus. As an officially “critical and declining” multiemployer pension plan, Central States was able under the Kline-Miller Multiemployer Pension Reform Act of 2014, to submit a plan, which ran to 8,000 pages, to reduce its pension obligations to a level more in line with its assets and income. The reduced pensions under this proposal, consistent with the 2014 act, would still have been higher than if the fund went into the PBGC.

The U.S. Treasury Department rejected the proposed plan, pointing out various technical shortcomings and the hard fact that even with the pension reductions, the proposal did not fix Central States’ long-term insolvency-which is indeed a requirement included in the 2014 act (put in, apparently, at the insistence of the Democratic legislators). This has the ironic result, as the Washington Post editorialized, that “if Central States collapses and the PBGC takes over, retirees would, by law, get even less than they would under the just-rejected proposal.” And that is assuming that the PBGC itself can pay its obligations over time, which it can’t.

Some observers have suggested that the Treasury’s motivation was political rather than technical. In other words, that the incumbent administration could not afford to approve any reduction, even if a better deal than the PBGC would provide, in the pension benefits of a union-sponsored pension plan, no matter how broke that plan is.

Of course, the Treasury’s action leaves Central States just as broke as it was before, the multiemployer pension system just as hopelessly underfunded as it was before, the PBGC’s multiemployer program just as broke as it was before, and the overall PBGC the same.

Let’s consider the fundamental truths. The money needed to pay the pension obligations of Central States was simply not put into the pension fund, so it’s not there to pay them. The money needed to pay the pension obligations of the multiemployer pension system as a whole was simply not put into the funds, so it’s not there to pay them. The insurance premiums needed to make the PBGC able to honor its insurance obligations were not set at the necessary levels and were therefore not collected, so it is not there to pay them.

The resulting deficits are huge and real. Someone is consequently going to suffer the losses which are unavoidable because they have already happened. Who is that someone?

There are multiple candidates for taking or sharing in the losses:

1. The pension beneficiaries who have claims on insolvent pension plans. Their pensions could be reduced, as in the Detroit bankruptcy, or if they are still working, their own contributions to the pension plans significantly increased, or both. Also, they might start paying individual insurance premiums to the PBGC, just as government-insured mortgage borrowers pay individual premiums to the Federal Housing Administration.

2. The employers who unwisely committed to pension plans whose benefits have proved unpayable. They could make much bigger contributions to funding the plans, or pay vastly higher insurance premiums to the PBGC, or both.

3. The union sponsors of the multiemployer plans. They could be removed from any control of insolvent multiemployer plans, in effect putting such plans into PBGC receivership, as in a normal insolvency proceeding and as with failed single employer pension plans. There is no reason for multiemployer plans to be different. But as it is now, the PBGC merely pays the tab for failed multiemployer plans.

4. The creditors of employers. The deficit of a pension plan is an unsecured creditor’s claim on the employer. That could be made a senior claim, just as deposits were made senior claims on banks after the financial crisis of the 1980s. This would force some of the burden on to other creditors of failed employers.

5. Taxpayers. It is inevitable that a taxpayer bailout will be proposed, despite the pious statutory assurance that PBGC’s debts are not government obligations. Against this proposal, it will be fairly asked why people with no pensions themselves or who don’t have defined benefit pensions should pay for those who do have them-a good question. On the other side, the hardship of existing pensioners of insolvent pension funds will be sincerely urged.

6. Some combination of the above.

Needless to say, whoever ultimately has to take the unavoidable losses will not like it.

Consider this striking historical parallel to the probable fate of the PBGC’s multiemployer program: the decade-long descent into humiliating failure of the government’s deposit insurer, the Federal Savings and Loan Insurance Corporation (FSLIC). This government insurer, along with the savings and loan industry whose obligations it guaranteed, sank into a sea of insolvency in the 1980s. When this finally had to be publicly confessed, FSLIC became notorious. It certainly seems that the PBGC is the new FSLIC.

The PBGC: A broke insurance company sponsored by your government

Published in Real Clear Markets.

Imagine an insurance company with assets of $88 billion, but liabilities of $164 billion. It has a huge deficit: a net worth of a negative $76 billion, and a capital-to-asset ratio of minus 87 percent.

Would any insurance commissioner anywhere allow it to remain open and to keep taking premiums from the public to “insure” losses it manifestly cannot pay?  Of course not. Would any rational customer buy an insurance policy from it, when the company cannot even hope to honor its commitments?  Nope.

But there is such an insurance company, open and in business and taking in new premiums for obligations it will not be able to pay. Needless to say, it is a government insurance company, since no private entity could continue in business in such pathetic financial shape. It is the Pension Benefit Guaranty Corp. (PBGC), a corporation wholly owned by the U.S. government, operating on an obviously failed model. Its board of directors comprises the secretaries of the departments of Labor, Commerce and the Treasury; quite a distinguished board for such egregious results.

There are two financially separate parts of the PBGC: the Single-Employer Program, which insures the defined-benefit pension plans of individual companies; and the Multiemployer Program, which insures union-sponsored plans with multiple companies making pension contributions. The Single-Employer Program has a large deficit, with assets of $86 billion, liabilities of $110 billion and a negative net worth of $24 billion. That is bad enough.

But now imagine an insurance company with assets of $2 billion and liabilities of $54 billion. That is a truly remarkable relationship. Its net worth is negative $52 billion, or 26 times its assets. That is the PBGC’s Multiemployer Program – which, as no one can doubt, is well on the way to hitting the wall.

The PBGC can continue to exist for only two reasons: because the government forces pension plans to buy insurance from it and because its political supporters entertain the abiding hope that Congress will somehow or another give it a lot of other people’s money to cover its unpayable obligations.

Congress should not do this, and so far, it has shown no inclination to announce a taxpayer bailout. But the real simultaneous financial and political crunch will occur when the disastrous Multiemployer Program runs out of cash while still being oversupplied with obligations. This moment is readily foreseeable, but has not yet arrived and is estimated to be a number of years off.

The PBGC was created by the Employment Retirement Income Security Act of 1974 (ERISA). This put into statue an idea created by the research department of the United Auto Workers union in 1961: let’s get the government to guarantee our pensions. The idea was politically brilliant but, financially, less brilliant.

According to the law, the PBGC was not supposed to be able to get itself into the insolvent status in which it not finds itself. As each PBGC Annual Report always informs us, “ERISA requires that PBGC programs be self-financing.” But they aren’t—not by a long shot, where the value of that long shot is at least $76 billion. What does the “requirement by law” to be self-financing mean when you aren’t and have no hopes to be so?

One thing originally intended to be quite clear we find in the next Annual Report sentence: “ERISA provides that the U.S. Government is not liable for any obligation or liability incurred by PBGC.” To repeat: Not liable. But of course, they said the same thing in statute about Fannie Mae and Freddie Mac. They made Fannie and Freddie put that in bold face type on every memorandum offering their debt for sale. But they bailed out Fannie and Freddie anyway.

As it has turned out, the Fannie and Freddie bailout has proved to provide a positive investment return to the taxpayers: an internal rate of return of about 7 percent so far. But any bailout money put into the PBGC will be simply gone. It would not be an investment, but purely a transfer payment.

That reflects the fact that Fannie and Freddie, when their operations were not perverted by politically mandated excess risk, had a fundamental model capable of making profits, as they did before the housing bubble and now are again. This profit potential is not shared by the PBGC. Its fundamental model is to take politically mandated excess risk in order to promote unaffordable pensions, not to insure them according to rational actuarial principles.

Defined-benefit pension plans have proved beyond doubt to be an extremely risky financial construction. The idea that the government is guaranteeing them encouraged the negotiation of pensions unaffordable to the sponsors in the first place, and the underfunding of pension obligations later. These are the kinds of very costly moral hazards entailed in the very existence of the PBGC. Of course, the PBGC might have, had Congress allowed it to, charged vastly higher premiums. But this would be against the other of its assigned missions: to encourage and promote defined-benefit pensions.

You can understand how this was felt to be a nice idea, but it creates an irresolvable conflict for the PBGC. The corporation is simultaneously supposed to promote the use and survival of defined-benefit pension programs, while it is also supposed to run a sound, self-financing insurance company. Obviously, it has utterly failed at being a sound insurer. Arguably, by creating incentives to design unaffordable pensions, it also failed at promoting defined-benefit pension plans, and has rather accelerated their ongoing demise.

There is no easy answer to the PBGC problem as a whole, but Congress took a sensible and meaningful step with the Kline-Miller Multiemployer Pension Reform Act of 2014. We will devote the next essay to examining the implications of this act and the reasonable attempt to use it recently thwarted by the U.S. Treasury Department.