Bailouts for Private Pension Funds

Pensionsby Jon N. Hall    12/14/15
For forty years it was illegal to cut certain pension benefits. That changed last December when the Kline-Miller Multiemployer Pension Reform Act of 2014 was slipped into a must-pass omnibus spending bill, which Pres. Obama signed in order to keep the federal government from shutting down. So struggling pension plans can now petition the federal government for permission to cut pension benefits. (The Pension Benefit Guaranty Corporation answers FAQs.)

On June 19 at the Wall Street Journal, Maxwell Murphy reported on a bill to repeal part of Kline-Miller, quoting AARP senior vice president Joyce Rogers: “Congress’ action [in December] broke forty years of settled pension law and put hundreds of thousands of retirees at risk.”

That “forty years of settled pension law” is the Employee Retirement Income Security Act of 1974, which Sec. 2 of the bill to repeal invokes: “Section 201 of [Kline-Miller] and the amendments made by such section are repealed, and the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 shall be applied as if such section and amendments had never been enacted.” More from the Journal’s Murphy (link added):

The bill, known as the Keep Our Pension Promises Act, has broad support from unions, including the Teamsters and the Machinists union, along with retiree advocates AARP Inc. The measure additionally protects workers by setting up a $29 billion fund paid for with the elimination of certain loopholes on estate and expensive-art-sales taxes. […]

Under the act [Kline-Miller], companies whose pensions are insolvent, or are on pace to become insolvent, over the next two decades, may petition the Treasury Department for potentially dramatic cuts to future benefits payments. The floor for the reduction is set at 110% of the Pension Benefit Guaranty Corp.’s guaranteed benefit, which varies by plan and is calculated based on years of service, and the rate benefits are earned.

One pension plan seeking to reduce its benefit payouts under Kline-Miller is the Central States Pension Fund, which provides benefits for former truck drivers, i.e. the teamsters. The plan’s been taking in less in contributions than it’s been paying out in benefits. At The Hill, Tim Devaney reports:

Hurtling toward insolvency, the Central States Pension Fund is looking to slash benefits by an average of one-third in order to prevent the program from running out of money in the coming years.

Central States is the first multiemployer pension fund to apply for the Treasury Department’s rescue program, created by federal legislation in 2014. […] pension officials acknowledge the cuts will be steep but argue it’s the only way to stanch the bleeding.

But the International Brotherhood of Teamsters, whose members make up the largest chunk of Central States’ more than 400,000 participants, is fighting the benefit reductions.

With lobbyists from both sides ratcheting up their efforts, the Treasury Department has until early May to make a decision. Approving Central States’ petition could set a precedent allowing for benefit reductions for some 10 million retirees who participate in other multiemployer programs. […]

Central States […] blames the crisis on thousands of “orphan” retirees whose companies have gone out of business and no longer contribute to the pension, even though they still receive benefits.

Democrat presidential candidate Sen. Bernie Sanders introduced the bill to repeal Kline-Miller. At his Twitter account Sanders posted a 6-minute video about his bill and tweeted: “Pensions are a promise made to workers and paid for by workers that simply cannot be nullified.” But who made the “promise”?

Some have classified pensions as “compensation.” Compensation is paid by employers. And when employers deposit money into pension funds, they’re discharging their part of the bargain. Pensions then become the responsibility of the pension fund managers, not employers. The employer may have gone out of business, but the pension plan continues to pay out benefits. Bernie Sanders wants a fourth party to make pensioners whole, and that fourth party is taxpayers, but not all the taxpayers, just a tiny sliver of them. Those taxpayers didn’t “promise” to pay the private pensions of the teamsters.

Pension plans have a fiduciary responsibility to manage their funds, finding investments that grow in value, like stocks and bonds. The stock market has been growing lately, so why is there a problem? Perhaps the benefits being paid out are too large. The solution would be to cut benefits of current retirees, as per Kline-Miller, or to hike the contributions of current workers. But that’s too old-school for Bernie & Co. Sanders thinks these mismanaged private pension plans deserve to be rescued; he’s trying to shame America into yet another bailout.

We bail out the banks; we bail out the car companies; our infantile college kids want a bailout from their student loans, (which mount up to more than a trillion); and now Sanders wants to bail out private pensions. Everyone in America seems to expect someone else to pay for them. It’s pathetic and it needs to stop. But what’s really disturbing is that the character of our nation has so devolved that many Americans are comfortable with having the federal government take other people’s money and give it to them.

We wouldn’t be concerned about any of this if we all owned our retirements in “defined contribution” pensions. Instead, we still have these “legacy” systems; pensions that are “defined benefit” plans. Defined benefit pensions depend on, yet again, other people — current retirees’ benefits are paid for by current workers’ pension contributions. But current and future workers may want to own and manage their pensions themselves. Besides, we already have one defined benefit pension plan, Social Security, and that system is also cash-flow negative.

Central States had $27B in assets in 2007, which is now down about a third. It’s rational that pension plans wouldn’t want to eat further into their portfolio of investments just to pay pensions. But that, coupled with the unions’ desires to keep paying benefits at the same clip, doesn’t constitute an emergency where a fourth party must bail them out. Central States has assets enough to keep paying benefits until 2026. Central States and the unions have enough time to make the needed adjustments to remain solvent without a bailout.

What Bernie Sanders has proposed is the exact wrong path. His idea of another federal “fund” (with $29B in it) is just as fraudulent as other federal trust funds, such as the Social Security trust fund. The federal government has no mechanism to actually “save” money. Sanders’s “fund” for pensions would be just another “slush fund” for Congress to raid. (Nevertheless, “Feel the Bern”)

Sen. Sanders wants the same Americans who are paying the lion’s share of income taxes and who are making up for the ongoing shortfall in revenue from the Social Security tax to also bailout private pensions. The man has no shame. (That or he’s a socialist.) And so America continues to lose wealthy individuals and corporations because of our idiot tax system; e.g. Pfizer Inc. is leaving America for Ireland with its 12.5 percent corporate tax rate.

Pensions are just one of many unfunded liabilities with which the feds will soon be grappling. A lot of “promises” are going to be broken. Americans need to brace themselves for cuts in all their benefits. For if we continue down the path of more bailouts, more taxes, more borrowing, more spending, more money printing, and ever more government, the good old U.S. Dollar may just up and die.

Jon N. Hall is a programmer/analyst from Kansas City. • (1156 views)

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5 Responses to Bailouts for Private Pension Funds

  1. Timothy Lane says:

    Many states are already having to deal with defined benefit plans for government employees. We face severe problems in Kentucky. The problem is that making the legally required contributions has sometimes been diverted when money for spending with immediate political benefits ran short. In addition, they tend to assume higher rates of growth than are likely (usually treating the highest rates as normal), which allows them to keep contributions down (i.e., more pork-barrel spending). So the pension plans in states consistently are short of money, with the problems greatest in the most corrupt (and/or most devoted to big-spending plans) states.


    We should first distinguish between private and public defined-benefit plans. In the case of public plans, what has happened is that the Democratic Party entered into an alliance with the public-sector unions to fleece the taxpayer and buy votes by offering much more in health care and pension benefits than was necessary to fill the positions. The Democrats failed to meet their responsibility to the taxpayers to bring government in at minimal cost; thus future taxpayers cannot be held morally responsible to meet the excessive spending by paying ever-increasing taxes.

    The private sector is different. I cannot agree with Jon that the companies discharged their obligations when they made some payment into the pension plans; their duty continues until the plans are sufficiently funded to pay the pensions retirees are owed. Of course the defined-benefit model is obsolete, but that’s what the company agreed to and that’s what they should be held to.

    Taxpayers should not have to make up any shortfalls, but the companies’ owners should. The pension plan should be able to levy against any assets the business has in order to meet the obligations which they freely undertook. (Again the important distinction: the taxpayers never agreed to fund excessive public-sector pensions; the Democratic Party did, betraying its trust and fiduciary responsibility). They should have equal priority with the secured creditors, being considered secured creditors themselves. If that means the shareholders are left with nothing, then that’s the way it goes – profitability is not guaranteed, and shareholders should not have priority over pensioners.

    Kline-Miller was exactly the sort of disgusting “bi-partisanship” that Conservatives should abominate. It was part of Cromnibus (’nuff said). Establishment Republicans voted along with Democrats to allow businesses to fail to pay money owed to their retirees, once again showing that they care more about large business interests than ordinary Americans – the source of many of their electoral problems.

    • Kung Fu Zu Kung Fu Zu says:


      You are so right about on the question of private company pension plans.

      their duty continues until the plans are sufficiently funded to pay the pensions retirees are owed

      Exactly! This is similar to the fractional banking/derivatives debacle which hit in 2008. How can a government allow the fiction of a company pension plan when the plan is not funded? And be sure that they government wrote the laws to give companies some sort of advantage for setting up such plans.

      Large publicly listed companies have such a broad ownership that they, in effect, belong to nobody in particular. In such cases, management too often run things with little, if any, regard for the future. They will act as if they are building for the future, but are generally concerned with squeezing out as much as possible asap! They know they will be long gone when the problems they neglected to address come to the fore.

      But in the end, the owners of the company are responsible. If they didn’t agree with the policies, they should have voted against them. If that fails then they should vote with a “sell” instruction to their brokers.

      To be clear, I do not expect angels to run public companies, but I am somewhat tired of nexus between government and big business that allows crooks to abuse the system with such impunity. Walking await from promised pension plans is just another example of this.

      • Timothy Lane says:

        This management problem applies to more than pensions, of course. Top level salaries are determined by a board of directors that most likely consists of top executives of other corporations (I got this from a friend with long experience in finance), and they all scratch each others’ backs. Mergers, too, enhance the power of the board and top management, often at the expense of shareholders. This is why I think there are some decisions that should be made by the actual owners, not be management, because in these cases the interests of the two seriously diverge.

      • David Ray says:

        Interesting & grounded point on the fact angles are not CEOs.
        Milton Friedman made the same point on Donahue back in the 80’s.
        (Unlike gasbag Hillary who sequesters herself from challenging environments, Friedman was never shy from engaging hostile arenas.)

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