Multiemployer pension funds — which are responsible for the retirement accounts of more than 1.3 million Americans — grew rapidly in popularity over the last several decades but now face a crisis, with roughly 10 percent at risk of going bankrupt. The federal government is supposed to serve as a lender of last resort for these at-risk Americans, but unfortunately congressional legislation threatens to entrench the risk these Americans are facing rather than make meaningful reforms to strengthen the system.
The House of Representatives passed H.R. 397, the Rehabilitation for Multiemployer Pensions Act, before leaving town for summer recess. Proponents claim that this legislation would protect the pensions of over a million private employees whose pension funds have gone insolvent. In truth, all H.R. 397 does is kick the can down the road while saddling taxpayers with the cost in the meantime.
Multiemployer pension funds grew in popularity several decades ago as a means to protect employees against losing their pensions if their employers were to go bankrupt. The basic idea is this: Businesses and employees with some factor in common (this could be geographical area, union, industry, etc.) band together to create one single, collectively bargained pension fund for all participating employees. That way, if one business participating in the fund goes under, the fund remains operational.
But what if the funds themselves are at risk of running out of money? That’s the problem that roughly 10 percent of the nation’s 1,400 multiemployer pension funds find themselves in. Through mismanagement and promising benefits out of proportion with employee contributions, these pension funds are at risk of becoming insolvent.
In theory, there’s a federal safety net that comes into play here. The Pension Benefit Guaranty Corporation (PBGC) is an independent agency that, in return for small premiums, partially guarantees employer pension funds. Yet the PBGC is also running out of money, in large part because it does little to hold insolvent pension funds responsible for becoming insolvent. Last year the PBGC ran a $51.4 billion deficit, driven entirely by a $53.9 billion deficit covering multiemployer pension funds. The PBGC will most likely completely run out of funds by the end of fiscal year 2025.
In this context, H.R. 397’s solution is thoughtless. H.R. 397 would create a new federal agency, the Pension Rehabilitation Administration (PRA), in charge of issuing low-interest loans to failing pension funds. Yet in order to qualify for these bailout funds, pension funds would not have to make any substantial changes to the way they operate. In fact, they would have to restore benefits reduced under previous reform legislation.
If you’re thinking that “loans” issued to insolvent pension funds with few or no strings attached are unlikely to be repaid, you’re not alone. H.R. 397 provides that if pension funds are unable to repay the loans provided by the PRA after the loans mature in 30 years, they would become eligible for alternative repayment or even forgiveness. In other words, these are “loans” that taxpayers should consider themselves fortunate if they ever see again.
The Congressional Budget Office has estimated that H.R. 397 will cost taxpayers $67 billion over the next ten years. Yet even this obscures the true cost, as the loan periods are 30 years long — over the full 30 years, the costs to taxpayers are likely to be much higher. For context, even the Wall Street bailout in the wake of the 2008 financial crisis was eventually paid back with interest.
Action is needed to protect the pensions earned by American workers. But a simple bailout only encourages the corporations and unions that irresponsibly designed these insolvent funds to continue as they were. Failing to demand any significant reforms as a precondition for loan funds creates moral hazard, plain and simple.
As H.R. 397 moves out of the House, hopefully the Senate will work to design more responsible legislation, pairing loans and assistance with accountability and reform. Congress has a responsibility to pensioners, but it also has a responsibility to taxpayers to ensure that they will not have to cover the cost of insolvent pension funds once again 30 years from now.