Understanding our pension
Part three in a series
Volume 122, No. 10November, 2022
By the Local 802 Communications Subcommittee (Deborah Assael, Bud Burridge, Sara Cutler, Martha Hyde, and Wende Namkung)
There has been and still is a lot of confusion over how our pension fund works and how pensions in general work. This series of articles is intended to examine the history of American pensions from the early retirement plans up to the American Rescue Plan Act of 2021.
A pension plan is one way to ensure wealth is carried to the end of a worker’s life, sometimes making it possible for that worker to pass wealth to offspring. Pension plans were not and still are not available to everyone. Private pension plans are often bargained with employers by unions, so a history of American pensions will hew closely to the checkered history of the American labor movement. In that history as in all American history, racism, sexism, elitism and political conflict are marbled throughout. This series will deal mostly with private, defined benefit pensions.
First, a quick primer for our newer members. Our pension plan is officially called the American Federation of Musicians and Employers’ Pension Fund. Every time you play a union gig that includes a pension provision, your employer makes a contribution on your behalf into the fund. Over time, you become “vested” in the pension plan, and when you retire, you may get a guaranteed monthly check . We’ll include more details in the future, but that’s how it works in a nutshell.
Second, here are some useful definitions:
Private “defined benefit” pension plan. The AFM pension plan falls into this category. These types of plans are usually bargained between an employer and a union. A prescribed amount of money is paid from a trust fund to the retired worker, usually in the form of monthly payments or annuities. The amount contributed to the fund by the employer varies according to what’s negotiated with the union but the amount of the monthly check received by the retiree does not vary. These plans are governed by the Employment Retirement Income Security Act and the Pension Benefit Guaranty Corporation.
“Defined contribution” plan. A 501(k) or 403(b) are examples of this type. Pre-tax funds (with set maximum limits on contributions) are deposited into an account for the worker. These funds can be invested in the stock market. Usually both the worker and employer contribute. Upon retirement, the amount paid out is what the account holds, which can vary depending on the market.
Public pension plan. If you’re a city or state worker, your pension may fall into this category. These pension plans are usually a defined benefit pension sponsored by the federal, state or municipal government. Often bargained between a union and the government. Not governed by the Employment Retirement Income Security Act or the Pension Benefit Guaranty Corporation but rather by acts of Congress, state legislatures or municipal governments.
A HISTORY OF PENSIONS IN THE UNITED STATES
PART THREE (2001-2022): A Deepening Crisis Leads to the American Rescue Plan Act
A little known provision of the 2001 Economic Growth and Tax Relief Reconciliation Act, better known as the George W. Bush tax cuts, removed the excise taxes on employer contributions to private pension plans that were considered overfunded. Unfortunately, many pension funds were already reeling from the dot com bubble so it was too little too late for them.
One such fund was the enormous Central States Teamsters pension fund with its 400,000 participants; three to four retirees for each active worker pushing the liability of the fund up while its assets sank.
The backstop for this and all other private, defined benefit pension funds is the Pension Benefit Guaranty Corporation (PBGC). If a pension fund becomes insolvent, the PBGC pays a basic guaranteed rate to each retiree. This rate is often pennies on the dollar amounts the retirees have been receiving. The PBGC is divided into two “sides,” single employer and multiemployer. Pension funds pay premiums to the PBGC and the PBGC invests this revenue and uses it to pay the basic guaranteed rate to retirees whose pensions have failed. Premiums paid by single employer funds are significantly higher because single employer funds which fail far more often, are a greater risk for the PBGC.
United Airlines was an example of a large single-employer pension failure in 2005 when it terminated four employee pension plans. This was the largest pension default since ERISA took effect in 1974 and a huge test for the PBGC which took over benefit payments and cut some benefits by as much as 50%.
The United Airlines pension failure was a wake-up call to legislators who finally realized action must be taken to protect the PBGC and troubled plans whose failures might bring down the whole system. It helped inspire the largest piece of pension legislation since ERISA. The Pension Protection Act (PPA) was introduced by Rep. John Boehner, Republican of Ohio and signed into law by President George W. Bush in 2006. The PPA raised PBGC premiums on single employer plans and required employers that skimped on funding their pensions to pay a surcharge. The PBGC had taken a major hit when the United Airlines pension plans failed and was running an annual deficit. The PPA also required actuarial certifications of a pension’s funding status, creating color zones: fully funded—green, endangered—yellow, critical—red. It also allowed for “rainy day” extra funding, though as with the 2001 tax bill, it was too little too late for many pension funds. The law also required employers to pay higher contributions to at-risk funds as part of pension fund rehabilitation plans. These additional payments were not subject to collective bargaining; rather, they were imposed on participating employers. Businesses that were already struggling had additional financial pressure put on them and these burdens discouraged non-participating employers from signing onto defined benefit plans. Endangered or critical pension plans were barred from making benefit improvements until they were better funded and in some cases, pension plans pared benefits down as far as ERISA would allow, causing a downward spiral in benefits and employer participation. ERISA protects benefits already earned but not benefits earned going into the future..
A year later, UPS reached a deal to withdraw from the already teetering Central States pension fund, paying about $6.1 billion in withdrawal liability as mandated by the 1980 law, MPPAA, requiring employers quitting multiemployer plans to pay a negotiated share of the future benefits owed to their employees. By this time Central States was below 60 percent funded, well into the red zone under the PPA.
In September 2008 financial markets crashed and a recession followed. A housing bubble fueled by years of cheap credit, low interest rates and subprime mortgages which were sliced and diced into mortgage-backed securities, led up to the crash. When the bubble burst, banks were left with trillions in worthless securities. The banks themselves had failed to hold adequate capital to protect themselves and investors. Multiemployer defined benefit pension funds, many of which had not fully recovered from the dot com bubble, lost 20 to 40 percent of their assets all while paying out full pension benefits every month. The resulting negative cash flow, made worse by job loss, blew a Titanic-like hole in the funds, making it impossible for them to fully recover and right themselves as they paid out two to three times in benefits what they earned in employer contributions.
In October 2009 two hearings were held, one by the Democratic-led House Ways and Means Committee and the other by the Democratic-led Senate Committee on Health, Education, Labor and Pensions (HELP) on funding rules for defined benefit pensions. Several employer, investment, labor, and advocacy groups testified. The Pension Rights Center (PRC), “a non-profit consumer organization founded in 1976 that works to promote and protect the retirement security of American workers and their families” petitioned for funding relief (allowing a longer amortization period) for single-employers that were committed to a defined benefit and an increase to the PBGC payout to $20,000 if a multiemployer pension became insolvent. The maximum guaranteed payout to participants of a failed multiemployer plan was $12,870 a year.
The PRC’s only other comment on multiemployer plans was “multiemployer plans in the future may find their way out of the current crisis…” The National Coordinating Committee for Multiemployer Plans (NCCMP), a non-profit, non-partisan organization founded in 1974 that “is dedicated exclusively to the advocacy and protection of multiemployer plans, their sponsors, participants and beneficiaries” petitioned for similar funding relief for multiemployer plans and the same increase in the PBGC payout to $20,000 if a fund became insolvent plus increased flexibility for smaller at-risk plans to merge with healthier plans.
While there was no immediate legislative response to either of these hearings, the testimony offered in both did influence future attempts to right the multiemployer ship.
A year later, Rep. Earl Pomeroy, Democrat of North Dakota and Rep. Pat Tiberi, Republican of Ohio, introduced the Preserve Jobs and Benefits Act (H.R. 3936), it would have permitted plans to increase their amortization periods by five years, spreading the liability further into the future and would have increased the PBGC guarantees. Despite having 45 Democratic and ten Republican co-sponsors, no further action was taken on the bill. Earlier in 2010, Senator Bob Casey, Democrat of Pennsylvania introduced a similar bill in the Senate. It would have increased the maximum PBGC guarantee from $12,870 to $16,000. The bill’s opponents called it a “taxpayer bailout” of union pension funds.
From the Wall Street Journal: “Feeling tapped out after stimulus, ObamaCare and everything else? Senator Bob Casey has one more deal for you. If the Pennsylvania Democrat gets his way, U.S. taxpayers will also pick up the astonishing tab for poorly managed union pension plans.”
From the National Legal Policy Center: “Sen. Bob Casey Jr., D-Pa., and Reps. Earl Pomeroy, D-N.D., and Patrick Tiberi, R-Ohio, the driving forces behind this measure, seek to shift the primary responsibility of keeping pensions adequately funded from unions and unionized employers to the general public. It’s another example of the bailout culture in action.”
In November of 2010, the Tea Party backlash led to a Republican takeover of the House. Rep. Pomeroy was one of the Democrats who lost his re-election bid.
In February, 2012 a hearing was held by the Republican-led House Subcommittee on Health, Education, Labor and Pensions on the $26 billion funding gap of the PBGC. NCCMP was one of the witnesses pointing out that the main sources of the PBGC liability were two large, troubled multiemployer funds, Central States being one of them, and that a solution like Pomeroy-Tiberi would address the problems.
Witnesses and members of Congress on both sides of the aisle continued the “anti-bailout” rhetoric:
- “This was a serious and, I think, substantive discussion of a real problem, and it is one I believe we can solve. I really do think we can thread that needle of making sure there are never any bailouts–taxpayer-funded bailouts of the PBGC–but doing so in a way that strikes the proper balance between a more rational accounting of what the situation really is and then more rational flexibility to raise revenue if we need to.” —Rep Robert E. Andrews, Democrat of New Jersey, ranking member of the subcommittee.
- “Congress should have the courage to address the real problems with MDBPs (multiemployer defined benefit plans). The solution is not to write a blank check to fund these pensions. The private sector is reflecting modern economic reality when it comes to pension plans. There will be a continued migration away from DB plans and toward 401K plans, or perhaps some combination of DB and 401K plans, and possibly forced contributions from both employers and employees to retirement plans.” —Dr. John R. McGowan, college professor and author and witness before the subcommittee.
- “So what our city did was a promise made is a promise kept. If you are working for the city right now that is the plan you have; we are going to honor that plan. But going forward, you are going to have a defined contribution plan if you are a new hire to the city so you will have some idea–future taxpayers down the road won’t be on the hook for just what you are talking about.” — Rep David P Roe, Republican of Tennessee, chairman of the subcommittee referring to when he was mayor of Johnson City, TN.
A TICKING TIME BOMB
Later that year, Central States’ funded percentage fell to 53.9%. The ticking time bomb enormous fund was the biggest looming liability for the PBGC. Even with the low PBGC guaranteed payments once the fund went belly up, it would would bankrupt the PBGC itself.
2012 saw yet another hearing on multiemployer fund held by the Republican-led House Subcommittee on Health, Education, Labor and Pensions. The witness from the NCCMP pointed out that during the 90s when plans were overfunded there was pressure on the trustees to raise benefits rather than holding the reserves because employer contributions in an overfunded pension were penalized with an excise tax. (Remember the 1986 tax law)? Subcommittee Chair Rep. Phil Roe, Republican of Tennessee suggested a defined contribution may be the more realistic way to go (as if the defined benefit pensions could suddenly convert to defined contribution).
The two pension advocacy groups tried to find their own solutions.
The NCCMP representative said his group was looking for a possible middle-ground solution.
The PRC participated in conferences and round tables, acknowledging the decline of defined benefit plans and searching for new retirement solutions that involve “shared risk.”
As the months and years passed, troubled funds began to get close to insolvency and their condition in turn imperiled the PBGC. Faced with indifference from other advocacy groups, a public unaware of the problem and “no bailouts” rhetoric from Congress, the NCCMP got the message that no financial assistance would be forthcoming for the troubled funds or the PBGC. On March 5, 2013 it presented a document called “Solutions Not Bailouts” to the House Subcommittee on Health, Education, Labor and Pensions. This was the first suggestion that trustees be given the authority to cut accrued benefits to prevent fund insolvency and by extension, the insolvency of the PBGC. It was a Hail Mary pass. The seriousness of the situation and the intransigence of lawmakers had left no other alternative to this catastrophic outcome.
It was at this point in the dialogue concerning troubled multiemployer pension funds that the PRC and the NCCMP separated in their views of the path forward.
“Solutions Not Bailouts” caught the attention of the PRC which issued a statement in October opposing the idea of trustees cutting benefits of retirees for any reason. They expressed a concern about retirees, particularly those over 80, being able to replace lost income. They suggested “identifying new sources of revenue” to shore up plans, increasing PBGC premiums and giving PBGC additional revenue to help industry-specific funds like Central States. The PRC had essentially arrived late to the party as Congress had already refused to authorize any funding to shore up the plans or the PBGC.
In November 2014, Republicans gained control of the Senate and broadened their control of the House, making any financial assistance to troubled funds even less likely. In December of that year Rep. John Kline, Republican of Minnesota and Rep. George Miller, Democrat of California introduced the Multiemployer Pension Reform Act (MPRA). It was attached to the Consolidated and Further Continuing Appropriations Act (Cromnibus), a must-pass bill to continue funding all ongoing government expenses. President Barack Obama signed it into law on December 16.
MPRA largely reflected “Solutions Not Bailouts.” It created a new color category—deep red or “critical and declining.” Plans in that category could apply to the Department of Treasury for the authority to cut benefits already accrued and in some cases, already being paid, to prevent insolvency. It increased PBGC premiums and gave the PBGC authority to facilitate plan mergers. In a nod to the PRC concerns it exempted disabled retirees and retirees over 80 from cuts and partially protected retirees over 75. It was particularly aimed at Central States which was projected to be insolvent within ten years and would have taken the PBGC down with it. PBGC insolvency would have reduced the already rock-bottom $12,870 maximum annual guarantee to a few hundred dollars a year.
Despite all the effort to address the looming Central States disaster, when that fund applied for the authority to make cuts under MPRA its application was denied in the spring of 2016. The PBGC remained imperiled and now all the constituencies and advocates like the PRC were suddenly up in arms about the possibility of benefit cuts. No one among the loud, angry voices had an alternative solution that would save both the funds and the PBGC.
As matters worsened, Donald Trump won the presidency in November 2016 and Republicans remained in control of both houses.
Senator Sherrod Brown, Democrat of Ohio and Rep. Richard Neal, Democrat of Massachusetts emerged as the two members of Congress most engaged in addressing the crisis. In November, Senator Brown introduced the first of several versions of the Butch Lewis Act, named for a member of the Teamsters who had passed away as he fought to resist cuts to pensions. The Butch Lewis Act would have created a Pension Rehabilitation Administration to grant and distribute low-interest loans to deeply troubled pension funds. The bill was referred to two committees: Banking, Housing and Urban Affairs and Finance.
In early 2018 the Trump White House Chief of Staff Mick Mulvaney reflected the White House’s hostility toward the Butch Lewis Act using once again, the “bail out” phrase:
“Here, they are simply taking advantage of the situation to insert not only a new topic, but — Marc may have mentioned this earlier — they’ve now introduced even another topic. I think you heard Mr. Schumer talk about it earlier today. Now they want to talk about bailing out union pension funds. That’s a new $60 billion topic that has been interjected to the conversation today.”
No further action was taken on this version of the bill.
In the summer of 2018 the Joint Select Committee on the Solvency of Multiemployer Pensions convened five hearings. The committee comprised eight members of the House—four Republicans and four Democrats and eight members of the Senate—four Republicans and four Democrats. It was co-chaired by Senator Orrin Hatch, Republican of Utah and Senator Brown. The committee heard from pension scholars, participant representatives, employer representatives and most notably Thomas Reeder, the director of the PBGC. Reeder laid it out bluntly. The enormous Central States was still on track to be insolvent by 2024 and when it failed, the PBGC would have to step in and pay the benefit rate guaranteed to the beneficiaries. This would bankrupt the PBGC and when other funds failed—and other funds were on track to fail—the PBGC would only be able to pay out from monies it received from current premium payments. This would reduce the benefits of participants in failed funds to a few hundred dollars a year. No action or policy proposal came out of these hearings.
Later that year, Democrats won control of the House while Republicans increased their share of seats in the Senate.
In 2019 Rep. Neal and Senator Brown tried again, proposing a pared down version of Butch Lewis. This would have limited the low-interest loans to imperiled funds which had been approved to make benefit cuts under MPRA. By this time a handful of funds had won that approval.
Later that year the chair of the Senate Finance Committee, Senator Chuck Grassley, Republican of Iowa, proposed the Multiemployer Pension Recapitalization and Reform Plan. This would have allowed partitioning of the troubled parts of plans, handing them to the PBGC while the less troubled parts carried on. The premiums to the PBGC paid by pension funds would have increased significantly, funded by “stakeholder” payments. Pension participants and their unions would have had to pay a surcharge to cover the increased premiums. This idea was widely seen as punishing pension participants for financial problems they did not create.
In March 2020, the Covid pandemic shut down most of the American economy and attention turned away from the still-troubled pension funds and toward the massive unemployment support needed by many Americans. In November Joe Biden won the presidency as Republicans gained seats in the House but fell short of winning control.
In December, Senator Grassley introduced the Chris Allen Multiemployer Pension Recapitalization and Reform Act (S. 5045). It reflected the proposals he made in 2019 and went nowhere.
On January 5, 2021 Raphael Warnock and Jon Ossoff, both Democrats, won the Georgia US Senate runoff election, handing control of the Senate to Democrats. The Senate was now split 50-50 with Vice-President Kamala Harris holding the tiebreaker vote.
In the spring of 2021 there was a flurry of legislative activity aimed at supporting the economy still reeling from the pandemic. In February the American Rescue Plan Act (H.R. 1319, ARPA) was introduced by Rep. John Yarmouth, Democrat of Kentucky. It included a vast number of Covid relief programs and provided for special financial assistance to pension funds facing insolvency. In March, Senator Sherrod Brown introduced the Butch Lewis Emergency Pension Plan Relief Act (S. 547, EPPRA). It proposed enough special financial assistance in the form of grants to pension funds facing insolvency for them to pay all benefits in full for the next 30 years. This included restoring benefits that had already been cut under MPRA. Also in March, Senator Grassley again introduced the Chris Allen plan.
The American Rescue Plan Act (ARPA) passed the Senate on a party line vote as a budget reconciliation bill to avoid a filibuster. Not one Republican voted for it. One Republican senator missed the vote so it passed 50-49, thereby avoiding a tiebreaker vote from the vice-president. It passed the House on a party-line vote with one Democrat, Rep. Jared Golden voting no with the Republicans. President Joe Biden signed it into law on March 11.
A bill the size of ARPA leads to a lot of regulation writing by the relevant agencies and departments in the executive branch who are responsible for enforcing the law. In the summer of 2021 the PBGC issued an Interim Final Rule (IFR). The rule set up a schedule of when funds could apply for the special financial assistance depending on the severity of their situations. It also imposed a maximum amount of time it gave itself to process the applications, necessitating control over the number of applications coming in at a time. Because the law specifically stated limitations on how the special financial assistance could be invested they said it could only be invested in investment-grade, or highest quality bonds. But they also said plans had to make funding projections based on a 5.5 percent interest rate. This was inconsistent because investment grade bonds at the time were only yielding about a 0.5 percent rate.
Pension plans, participants and the NCCMP pushed hard against this inconsistency and managed to get Senate majority leader Senator Chuck Schumer, Democrat of New York, to put pressure on the PBGC to modify that rule. In the summer of 2022, the PBGC issued a Final Rule. This rule stated a third of the special financial assistance had to be invested in bonds, interest rate assumptions could reflect reality and the monies from the assistance could be used first to pay ongoing benefits while other plan assets could be invested more aggressively to seek higher returns and make solvency beyond 30 years more likely.
Most pension plans will be cleared to apply for assistance in the spring of 2023. The program is funded on an ongoing basis so it is not a matter of a finite pot of money that will be tapped out at any particular time.
This concludes a three-part series on the history of defined-benefit pensions. Its aim was to answer some of the questions that arose in recent years, when a number of multiemployer plans were in a state of crisis. This history shows the unintended consequences of pension tax laws that left funds inadequately prepared for the one-two punch of the crashes caused by the dot com and housing bubbles. It also illustrates the impact of the bursting of those bubbles on industries that struggled and, in some cases, failed during the bear markets that followed. These two factors alone left many previously healthy funds trying to stay above water.
The second decade of the 2000s was a real-life, edge-of-our-seats thriller in which the future of the PBGC and the incomes of millions of retirees ultimately rested on a runoff election in Georgia. All of us participants in multiemployer pension plans have been on a decades-long roller coaster ride as legislators and politicians dangled hopeful proposals to heal plans in front of us and then withdrew them; as we faced cuts to our benefits and have seen them restored; and as we have achieved stability, for now, but still wonder what the future holds for us. We hope this series has been enjoyable and has answered some of your questions.
Read Part 1: Early history of pension plans
Read Part 2: Pensions from 1958 to 2001
This article was submitted by the Local 802 Communications Subcommittee, which includes as one of its members Martha Hyde, a trustee on the AFM pension fund. Martha invites members to contact her with general pension questions at email@example.com. (Specific pension funds relating to your own pension situation must be directed to the pension fund.)
DID YOU KNOW? The pension plan that covers Local 802 musicians (and all AFM musicians) is called the American Federation of Musicians and Employers’ Pension Fund. At Local 802 and in Allegro, we abbreviate this to the AFM Pension Fund or the AFM-EPF. Want to know more? Watch the movie clip below:
DID YOU KNOW? The AFM Pension Fund is a separate entity from Local 802. Local 802 cannot answer specific pension questions that relate to your pension benefit. For all questions, including your current pension estimate, start here and also watch the movie clip below:
DID YOU KNOW? You can specify a beneficiary to your pension payments in the event of your death before you begin receiving your pension. Want to know more? Watch the movie clip below: