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The Face of America's Pension Crisis

Meet Tony. For years, Tony worked in a plant that manufactured industrial gases. He started working at the plant in 1979, joining the Teamsters after deciding, like many who worked there, that becoming part of the union, and participating in its pension plan, was a smart financial decision.

The plant, which used processes that were dangerous in retrospect, according to Tony, eventually declined into technological obsolescence. Newer, safer processes became the standard for producing the gases that his plant produced. After a long career, he retired from the plant, and at 58 years old, he and his wife now work at Sam's Club and continue to save diligently for retirement through Wal-Mart's 401(k) program.

It's a good thing Tony and his wife saved, and continue saving, because the pension he was promised when he started making contributions as a gas plant worker 38 years ago may not be available to him for much longer. In fact, his pension, part of the Central States Pension Fund, is facing a financial crisis of its own.

He receives reminders of the pension's problems through frequent mailings. The fund most recently wrote him to say that it is in "critical and declining" status, a label ascribed to pension plans that are expected to be insolvent in as little as 10 to 20 years, but Central States could be insolvent in less than eight years, failing by 2025.

If nothing is done, pension payments to participants could simply stop as the plan's assets slowly bleed out and government-organized pension insurance programs become insolvent under the burden of failed pension plans.

How the plan fell apart

The Central States Pension Fund covers workers and retirees from a variety of industries, but most of its retirees are truck drivers who worked for one of the thousands of trucking companies that once dominated American highways.

Though the trucking industry is as important as it has ever been to the way goods are shipped, its economic fortunes have faded since 1980, when the industry was deregulated. The passage of the Motor Carrier Regulatory Reform and Modernization Act of 1980 removed many of the barriers that restricted competition and buoyed profits.

The excess profits enjoyed by the trucking industry up until 1980 were more representative of a competition-free bubble than a normal competitive environment. An article written by Thomas Gale Moore, a senior fellow at the Hoover Institution at Stanford University, explained the unique protections afforded to the trucking industry by earlier legislation, which made them exempt from anti-monopoly laws.

"In 1948 Congress authorized truckers to fix rates in concert with one another when it enacted, over President Truman's veto, the Reed-Bulwinkle Act, which exempted carriers from the antitrust laws."

Alongside deregulation and decreased profitability, declining union membership also weighed on Central States and other pension funds' participation levels. Whereas as many as 60% of truckers in regulated corners of the industry were union in the 1970s, only 12% were union members in 2006.

Non-unionized transportation outfits were enabled by deregulation to publish lower rates and compete on price, scoring more business from costlier unionized service providers. After all, trucking is largely a commodity; price is paramount to winning business. And non-unionized shops simply had the better price, which was a big problem for pension plans that rely on union participation.

Central States feels the brunt

The decline of the trucking industry's profitability had a pronounced impact on the Central States Pension Fund, which relied on the industry to supply it with cash from working truckers to pay the benefits it promised to those who had retired. By 1984, just four years after trucking was deregulated, the pension was paying out more in benefits than it received in contributions. Investment income made up for the shortfall, but only temporarily. 

Central States is a multi-employer plan, which means that it serves as a pool into which employees of multiple companies pay in. The contributions are commingled, and the payouts are a collective liability. This type of plan is commonly found in fragmented industries with hundreds or thousands of smaller operators. The trucking industry, once made up of thousands of mom and pop shops, was a natural fit.

The actuarial value of Central States' assets adds up to less than half the actuarial value of its liabilities. Image source: Author.

But Central States began to fall victim to an issue that plagues many multi-employer plans: When companies that participate in the plan fail, they cease to make payments into the program, but the payments to retirees, who were promised years of consistent monthly checks after retirement, keep on flowing. In effect, less cash comes in, but the same amount goes out.

The failure of trucking businesses around the country has left financial scars for Central States. An analysis by Boston College revealed that of the 50 largest employers that participated in the pension plan in 1980, only four were still around in 2014. It wrote in its 2014 analysis that "roughly 50 cents of every benefit dollar goes to pay benefits to 'orphaned' participants, those left behind when employers exit."

Large, healthy, and profitable employers have also bought out of the Central States Pension Fund, exacerbating its financial problems. In 2007, the delivery company United Parcel Service paid $6.1 billion to exit the fund, an amount determined sufficient to pay for the pension payments to UPS retirees who were drawing from the fund. When UPS bought out, Central States was already in poor shape. After the UPS payment, Central States was funded between 70% and 75%, according to a 2008 estimate. 

The UPS exit is representative of the unique issues that multi-employer plans face. UPS' $6.1 billion payment to exit the fund might have covered the liabilities owed to its former employees, but there are still many more employees who were "orphaned" by the failure of their employers and need to be accounted for.

Compounding the issue of financial weakness, the 2007 exit of UPS from the plan proved untimely. Just months after UPS bought out, partially by transferring holdings of the S&P 500 index to the pension, stock and bond prices plummeted as the Financial Crisis unfolded, and thus the pension had to sell assets near their lows to fund payouts to retired workers.

A broken backstop

Anyone who participates in a pension has insurance from a government agency known as the Pension Benefit Guaranty Corporation (PBGC). The agency collects a small premium for each person who participates in a pension, and in turn, it promises to pay benefits to pensioners of failed plans, often at a reduced rate. An illustrative example on its website shows that workers who earned 30 years of service in a multi-employer plan can collect a maximum of $12,870 per year from the PBGC -- far less than many pensions originally promised to pay.

In effect, the PBGC is to pensions payouts what the FDIC is to bank deposits. It offers limited coverage with promises to pay out a reduced, but non-zero amount, to pensioners who are part of a failed system, just as the FDIC only protects bank deposits up to $250,000 per account.

For years, the PBGC operated at a surplus, taking in far more than it ever paid out. In fact, up until 2004, it was in the black virtually every single year.

However, as the baby boomer generation continues to reach retirement age, the PBGC is expected to make good on the liabilities of more pension plans that overpromised and underdelivered. Multi-employer plans like Central States are most likely to experience problems making good on their promises. In its most recent annual report, the PBGC estimated that its multi-employer liabilities tallied more than $60 billion, the bulk of which stems from nearly $59 billion it estimates it will have to pay in "financial assistance to 103 multi-employer pension plans that were probable to receive PBGC assistance in the future."

Even as stock prices have recovered from their Financial Crisis lows, estimates suggest that the PBGC could become insolvent as soon as 2025. Central States, by far one of the biggest and most troubled multi-employer plans, would put PBGC on fast-track to insolvency. In simple terms, the surpluses earned by the PBGC through 2004 were an illusion, as the agency simply underpriced the risk of pension failures.

Only recently has the PBGC increased its rates to reflect the increased probability that multi-employer plans run into trouble. Rates more than doubled from $12 per multi-employer plan participant in 2014 to $26 in 2015. In 2017, the rate increased to the current level of $28. At this point, it seems as though the rate increases are simply too little, and far too late.

Pensions get approval to slash benefits

In 2014, Congress passed a law that would allow pensions to do the once unthinkable: cut benefits to current recipients in order to stave off a crisis.

The law opened the possibility of a multi-tiered cut to benefits based on retirees' current age. Those who are 80 or older, or who receive disability-related pension payouts, couldn't have their benefits cut. Those who are aged 75 to 79 would have to tolerate some cuts. For those who are younger than 75, it was open season -- that group would experience the most substantial reductions.

For what it's worth, Tony, who is 58 years old, was supportive of a plan that would cut his benefits if it meant that payments would be made for longer. "Something is better than nothing," he opined.

Tony isn't being hyperbolic; for him, getting nothing is a very real possibility if Central States and the PBGC become insolvent. The letters he receives about Central States frequently refer to its financial problems in troubling language. He read aloud to me a recent letter that said his benefits, and the benefits of more than 400,000 people in the plan, could be "ultimately reduced to virtually nothing" if cuts were not made to the benefits of current recipients.

Tony's favorable view of cuts designed to elongate the life of the plan isn't necessarily a popular one among other participants, who see a cut to their benefits as an impossible solution. When Central States Pension Fund proposed deep cuts to pensions -- some as large as 50% for younger retirees -- Teamster members rallied to fight the reduction. The Department of Treasury ultimately struck down Central States' plan to cut benefits.

On the Teamster.org website, Teamsters general president Jim Hoffa referred to the Department of Treasury's decision against benefit cuts as a victory:

On behalf of our union and the more than 400,000 retirees and participants in Central States Pension Fund, I would like to thank Mr. Feinberg and the Department of Treasury for denying these massive cuts that would destroy so many lives. We worked with thousands of retirees to educate Treasury and Congress on the devastating impact of the proposed cuts. However, this is not over and the Teamsters Union will continue to fight to protect pensions.

The Teamsters Union wants to have its cake and eat it, too. The Teamsters don't want benefit cuts, but they want the payments to continue in perpetuity.

To make up the shortfall, one Teamster proposal suggested funding troubled multi-employer pension plans with a "$30 billion legacy fund over 10 years, paid for by closing two tax loopholes used almost exclusively by the super-rich to avoid paying taxes."

UPS also opposed benefit reductions, as its 2007 buyout included a clause that would put it on the hook for billions of dollars of supplemental payments if Central States ever lawfully cut benefits to its retirees who were left in the program. The final language in the bill carved out UPS employees from cuts, putting them last in line for reductions, a win for UPS that came from aggressive lobbying on the issue. 

What can we really do?

Hundreds of multi-employer pension plans could fail. The designated backstop, the PBGC, is almost certain to fail, too. That leaves taxpayers, through government legislation, as potentially the funding source of last resort for multi-employer pensions on the brink of insolvency.

Some argue that a "bailout" by the Federal government is justified, given it would provide a safety net to millions of Americans in retirement. To be sure, it isn't fair that millions of workers will receive less than they were promised (or potentially nothing), but there are few "fair" ways to fund insolvent pensions, given that a small minority of Americans participate in them. 

A government bailout, even if it is paid for by closing tax loopholes for the ultra-rich, shifts the benefit to a select group of pension participants. If taxes are raised on the top 0.1%, for example, why should pension participants, not the other 99.9% of taxpayers, enjoy the benefit?

Perhaps the bigger issue is that a full taxpayer-provided backstop might encourage pension plans to make even greater promises they can't afford, knowing that the taxpayer will make good on its impossibly high promises.

The issue has stumped lawmakers and participants alike, but one thing is clear: There will be a real impact for millions of Americans who paid into a failed system. 

Over the phone, Tony spoke to me so calmly and clearly about the issue it felt as though he had tossed it around in his head hundreds of times before.

He summed up the challenges succinctly, stating that "it's disappointing to find out, at this point at my life, that money that had been taken out of my paycheck every week is not going to be available for me when I need it most."

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