Who Will Bail Out Insolvent Union Pension Funds?
Bernie Sanders isn’t going to be the next president, but one of the bills he has sponsored, the Keep Our Pension Promises Act (KOPPA) could become law during the next president’s term. That ought to worry anyone who knows that the collectivistic instincts of Bernie Sanders mean spreading the costs of bad policies to the entire population.
Here’s the background.
The Central States Pension Fund (CSPF) of the International Brotherhood of Teamsters has a troubled history going back to its founding in 1955 by long-time Teamsters president Jimmy Hoffa. (Carl Horowitz of the Organized Labor Accountability Project looks into that history in this Capital Research study.) It is a multi-employer pension fund. Some 1,500 companies with Teamster contracts from states mostly but not exclusively in the Midwest pay into the fund, which in turn pays defined pension amounts to a huge number of retirees.
For years, however, the fund has been paying out money at a much faster rate than it comes in. Currently, $3.46 goes out for every $1.00 paid in, and that ratio is certain to worsen. It has less than half of the money needed for financial stability, underfunded by some $18 billion. Projections are that the fund will be insolvent in ten to fifteen years.
At that point, as this CNN Money article notes, 407,000 Teamsters pensioners will find their pensions reduced to “virtually nothing.”
Congress has known about the problem of underfunded pension plans for a long time, but has never been able to resist the urge to meddle in a problem that properly belongs to “the states or the people” under the Tenth Amendment. (I would say that pensions are not a matter for government at any level, but entirely a private concern subject to general common law principles.) Back in 1974, Congress established the Pension Benefit Guaranty Corporation (PBGC), a federally-sponsored insurance agency that is supposed to protect pension plans the same way the FDIC is supposed to protect bank deposits.
Under the law, PBGC can only take over a multi-employer plan after it has become insolvent, and then, the maximum annual benefit it can pay out $12,870 per person. CSPF isn’t yet insolvent, and most of its pensioners are due far more than $12,870 per year.
Trying to head off the problem of multi-employer plan disasters, in 2014 Congress passed the Multiemployer Pension Reform Act, which allows such plans, once they’re in “critical and declining status,” to reduce benefits temporarily or permanently, but not to less than 110 percent of the amount guaranteed under PBGC.
If a multi-employer plan wants to reduce benefits, it has to submit a proposal to the Treasury Department. Central States did so, but as we learn in this Wall Street Journal article, the plan it submitted was rejected by Treasury on May 5. It had been opposed by none other than the current Teamsters president, James P. Hoffa, Jr. In true labor union boss style, Hoffa decried any reduction in payments and lobbied against the plan.
Instead of allowing CSPF to reduce pension payments to the level it can sustain, what Hoffa and his political allies want is a federal bailout. In this Detroit News op-ed piece, he advocates passing KOPPA to “protect our retirees while also strengthening multi-employer pension plans.”
It would supposedly do that by, Hoffa writes, “closing two tax loopholes used almost exclusively by the super rich” so as to create a $30 billion legacy fund that would then be used to pay promised pension benefits in full.
In their July 25 Washington Examiner article, F. Vincent Vernuccio and Jeremy Lott of the Mackinac Center for Public Policy point out that in 2014, the Teamsters Union had just under $256 million in assets and $183 million in income, not including all the locals. Vernuccio and Lott write, “Perhaps the union would do a better job of looking after its workers’ retirements if it had some skin in the game.”
Even if we make the unlikely assumption that KOPPA’s closing of those tax loopholes actually brings in that $30 billion, it won’t, contrary to the thinking of Senator Sanders, Hoffa, and other big government devotees, only affect the “super-rich.” Whatever money those tax changes divert from those rich people into the federal treasury would have otherwise been spent, invested, or donated in ways that benefited people who are not rich.
So, even if KOPPA worked exactly as planned, it would still have a detrimental impact on many Americans who aren’t rich. Whenever politicians and their allies say that they can “pay” for some new program just by taxing the rich more, they’re practicing deception. Moving resources around to accomplish their political objectives always has hidden economic costs.
What I believe is likely to happen if KOPPA passes is that the “legacy fund” won’t be nearly adequate to cover all the demands on it and then Congress will make up the difference out of general tax revenues.
Either way, however, we face the same problem: When pension funds don’t have enough money to cover the payouts, the unfulfilled promises are not “our” promises, but instead the promises of specific private parties. Collectivists want us to think that the responsibility for the bad design and poor investments of this and other pension plans lies with “society.” It doesn’t. The responsibility lies only with the people who are party to these contracts.
I fear that Hoffa will get his wish and CSPF will be bailed out by the feds. That, in turn, will keep other unsound pensions plans from undergoing the pain of restructuring so that they will be financially sound. We will never get our fiscal house in order as long as politicians are allowed to socialize the losses from bad decisions – pensions, college loans, failed businesses, and so on.
Originally posted on Forbes.
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