[Senate Hearing 115-697]
[From the U.S. Government Publishing Office]
S. Hrg. 115-697
THE STRUCTURE AND FINANCIAL OUTLOOK OF THE PENSION BENEFIT GUARANTY
CORPORATION
=======================================================================
HEARING
before the
JOINT SELECT COMMITTEE
ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
UNITED STATES CONGRESS
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
MAY 17, 2018
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Joint Select Committee on
Solvency of Multiemployer Pension Plans
__________
U.S. GOVERNMENT PUBLISHING OFFICE
38-021-PDF WASHINGTON : 2019
JOINT SELECT COMMITTEE ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
Sen. ORRIN G. HATCH, Utah, Co-Chairman
Sen. SHERROD BROWN, Ohio, Co-Chairman
Rep. VIRGINIA FOX, North Carolina Rep. RICHARD E. NEAL,
Sen. LAMAR ALEXANDER, Tennessee Massachusetts
Rep. PHIL ROE, Tennessee Sen. JOE MANCHIN III, West
Sen. ROB PORTMAN, Ohio Virginia
Rep. VERN BUCHANAN, Florida Rep. BOBBY SCOTT, Virginia
Sen. MIKE CRAPO, Idaho Sen. HEIDI HEITKAMP, North Dakota
Rep. DAVID SCHWEIKERT, Arizona Rep. DONALD NORCROSS, New Jersey
Sen. TINA SMITH, Minnesota
Rep. DEBBIE DINGELL, Michigan
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Brown, Hon. Sherrod, a U.S. Senator from Ohio, co-chairman, Joint
Select Committee on Solvency of Multiemployer Pension Plans.... 1
Hatch, Hon. Orrin G., a U.S. Senator from Utah, co-chairman,
Joint Select Committee on Solvency of Multiemployer Pension
Plans.......................................................... 3
ADMINISTRATION WITNESS
Reeder, Hon. W. Thomas, Director, Pension Benefit Guaranty
Corporation, Washington, DC.................................... 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Brown, Hon. Sherrod:
Opening statement............................................ 1
Prepared statement........................................... 35
Hatch, Hon. Orrin G.:
Opening statement............................................ 3
Prepared statement........................................... 36
Reeder, Hon. W. Thomas:
Testimony.................................................... 5
Prepared statement........................................... 37
(iii)
THE STRUCTURE AND FINANCIAL
OUTLOOK OF THE PENSION BENEFIT
GUARANTY CORPORATION
----------
THURSDAY, MAY 17, 2018
U.S. Congress,
Joint Select Committee on Solvency of
Multiemployer Pension Plans,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:10 p.m.,
in room SD-215, Dirksen Senate Office Building, Hon. Sherrod
Brown (co-chairman of the committee) presiding.
Present: Senator Hatch, Representative Roe, Senator Crapo,
Representative Buchanan, Senator Portman, Representative
Schweikert, Representative Neal, Senator Manchin,
Representative Scott, Senator Heitkamp, Representative
Norcross, and Senator Smith.
Also present: Republican staff: Chris Allen, Senior Advisor
for Benefits and Exempt Organizations for Co-Chairman Hatch.
Democratic staff: Gideon Bragin, Senior Policy Advisor for Co-
Chairman Brown. Undesignated staff: Julie Cameron, PBGC
Detailee; and Constance Markakis, PBGC Detailee.
OPENING STATEMENT OF HON. SHERROD BROWN, A U.S. SENATOR FROM
OHIO, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
Co-Chairman Brown. I would like to welcome our colleagues
and everyone in attendance to this second hearing of the Joint
Select Committee on Multiemployer Pension Reform.
Our job on this committee, to be sure, is to find a
bipartisan solution on the multiemployer pension crisis
threatening 1.3 million Americans and thousands of small
businesses.
To do that, we have to confront the secondary crisis
threatening the Pension Benefit Guaranty Corporation. Congress
created the PBGC more than 40 years ago in 1973 to serve as the
insurance company for these retirement plans. Like any
insurance plan, PBGC coverage does not kick in until after the
damage has been done: after a plan has failed, after businesses
have gone under, and after jobs have been lost.
PBGC is supposed to cover part of the retirement that
workers earned.
Ask anyone who has ever totaled a car or dealt with
flooding or fire in their homes--you are sure glad you have
insurance, but you would much rather have avoided disaster in
the first place.
We have the opportunity, really beginning today, in the
work we do in the next 7 months, to do just that: to help keep
these businesses open and save these jobs to ensure workers get
the entire retirement they earned.
Simply propping up PBGC is not enough. We cannot take our
hands--continuing the metaphor--we cannot take our hands off
the wheel, close our eyes, and allow this car to crash simply
because we bought an insurance policy. We cannot do that to the
retirees whom we serve, we cannot do that to the businesses
which we want to thrive, whose plans are in crisis, and we
cannot do that to the multiemployer system.
As the crisis in the multiemployer plans has developed over
the last few years, a second, quieter crisis has developed at
the PBGC, a crisis that means allowing just one of these major
plans to fail could put enough strain on the insurance system
to bring down the entire PBGC multiemployer system.
According to the latest estimates, the multiemployer system
at PBGC faces a deficit of some 65-billion-and-growing dollars.
It has just $2 billion in assets. It is projected to become
insolvent within the next 7 years. We are all familiar with
those numbers.
We see the writing on the wall. When one of these large
plans on the brink of failure requires PBGC to step in, the
PBGC will also fail, potentially leaving taxpayers on the hook,
not just for millions, not just hundreds of millions, not just
billions, but tens of billions of dollars.
It is our job to make sure that that does not happen. The
Federal Government helped create this crisis; the Federal
Government must help solve it.
Each plan is different. There are many factors that
contributed to bringing them down. There is no question that
Wall Street squandered some of this money, but the government
also played a role through perverse tax incentives,
insufficient premium levels, inadequate tools and financing for
PBGC--all parts of this system that were designed by Congress
and put in place by Congress.
We have a responsibility to correct each of these errors.
That means, yes, addressing future actuarial assumptions within
these plans, but we know that is an inadequate, incomplete
solution.
To truly address this crisis, we must do two things: first,
update and upgrade PBGC so that it never happens again; and
second, solve the current crisis facing retirees, workers, and
businesses. We really cannot do one without the other.
Updating and strengthening PBGC alone would still lead to
massive pension cuts. It would leave small businesses drowning
in withdrawal liability and active workers paying into a
premium that they will never receive.
We need to make it clear to all Americans whose lives will
be upended by the failure of these plans--way more than the 1.2
million workers, now retirees, way more than the thousands of
businesses--we need to make it clear to all Americans whose
lives will be upended by the failure of these plans that we
will not let that happen. That is the seriousness and gravitas
of our mission.
At the same time, we cannot just put out the fire we are
fighting today and leave the PBGC as a box of kindling waiting
to ignite another crisis a few years down the road. We must
ensure we never get to this place again.
I am confident we can do both together and that the
information we obtain today will be an important part of that
process.
The committee will continue to hold hearings--two more in
June, another two in July. At the same time, we are holding
numerous staff and member-level briefings, including with
members of both parties, not the 16 of us on this committee. We
are continuing to receive comments and input on our website,
pensions.senate.gov.
This will continue to be a bipartisan process. The
committee was structured that way. Senator Hatch and I insist
on it and have the relationship to work together to do it.
This information will arm our members with the information
we need and give the people we serve the opportunity to weigh
in.
In July, when the bulk of these hearings conclude, we will
have to start the process of negotiating a bipartisan solution
to this crisis. Remember, we need five Democrats and five
Republicans to support this. And Chairman Hatch and I are very
aware of that.
I am ready and willing to consider any idea that solves the
current crisis and helps prevent a future crisis. I know
Chairman Hatch shares that approach.
And with that, I yield to my co-chair, Senator Hatch, for
his opening statement. Thank you.
[The prepared statement of Co-Chairman Brown appears in the
appendix.]
Co-Chairman Brown. Orrin?
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
Co-Chairman Hatch. Well, thank you, Senator Brown.
This is the Joint Select Committee's second hearing to
delve into issues concerning the operations of the
multiemployer pension system.
As I noted last time, it is critical for us to remember
that the mandate of the Joint Select Committee is not just to
develop reports and recommendations on the multiemployer plans,
but to also review the solvency of the Pension Benefit Guaranty
Corporation.
To do this, we have brought in one of the Nation's top
experts on the PBGC, Tom Reeder, who happens to also be the
current Director of the Corporation, which insures benefits for
the more than 30 million Americans in defined benefit pension
plans.
To provide context, one of the core issues confronting
pension policymakers is the issue of benefit security. Pension
benefit security and protection can be approached in a number
of ways, including strong pension plan funding rules, robust
asset management requirements, and meaningful disclosure
mandates.
In the United States, we have historically used a benefit
guaranty system, essentially a form of insurance, for many
defined benefit pension plans to cover lost pension income if a
retirement plan becomes insolvent or sponsoring employers go
bankrupt.
The problem is that the U.S. system is very complicated and
often difficult to effectively operate. There are a lot of
moving parts and numerous variables for which to account.
Some of those variables include questions on how plans are
insured, to what extent benefits are guaranteed, and how we can
sufficiently fund the system while still ensuring employers are
properly incentivized to sponsor retirement plans.
The problems do not end there, though. It is clear that
since its inception in 1974, the PBGC has faced design and
operational issues that have made achieving its policy goals
difficult.
This morning, Mr. Reeder will provide an overview of the
PBGC's structure and finances, answering key questions about
the organization, including how it is structured and, most
important, how it is financed. It is imperative that the Joint
Select Committee develop a solid base of knowledge about the
corporation and how it is funded before turning to the PBGC's
current funding status.
And in a word, that funding status is troubled. I will not
recite the grim statistics, because we have all read them and
we are all deeply concerned.
Over the course of the next number of weeks and months in
the Joint Select Committee, I trust that we will learn more
about the economic and demographic forces that impact the
multiemployer system and, consequently, the financial health of
the PBGC.
But today, let us dig into the fundamentals first. After
all, it is hard to plot a course without getting a good map of
the terrain.
As we work today with Mr. Reeder, here are some fundamental
questions I think both sides should keep in mind. What is the
corporation's charter and how does that affect its operations
and success? What does it mean to be a wholly owned government
corporation? What are the PBGC's core functions, and how is it
structured to achieve these functions? Does PBGC have the right
tools and flexibility to intervene in the management and
operation of troubled multiemployer plans? How does the
corporation manage the funds under its management? Also,
importantly, how do the insurance premiums work to fund the
plan guarantees? And is this all the right model for the
economic and demographic markets in which these plans operate?
That is an important question, and it is something we are going
to have to answer. And I am very concerned about it, it is easy
to see.
Frankly, I believe we need to get these answers and then
spend some time understanding what those answers mean before
the Joint Select Committee can effectively consider any
proposals to repair the multiemployer system.
So let us get started.
Senator Brown, we will turn it back to you.
[The prepared statement of Co-Chairman Hatch appears in the
appendix.]
Co-Chairman Hatch. I have to be at the Judiciary Committee
this morning, but I have every confidence in Senator Brown and
others on this committee to move this along in the proper way.
Co-Chairman Brown. Good. Thank you, Senator Hatch.
I have the pleasure to introduce W. Thomas Reeder. He
serves as the 15th Director of the Pension Benefit Guaranty
Corporation.
Mr. Reeder began his employee benefits career as an
associate attorney at Akin, Gump, Strauss, Hauer, and Feld and
later at Paul Hastings, where he became a partner in the
national employee benefits practice group.
In February of 2000, he joined the office of Benefits Tax
Counsel in the Office of Tax Policy at the Treasury Department,
where he worked for three administrations. He was named
benefits tax counsel in 2005. He joined the staff of the Senate
Finance Committee, meeting in this room, in May of 2009. He was
a key adviser as such in several significant legislative
initiatives affecting the employee benefits area. Starting in
March of 2013, Mr. Reeder served as an executive in the Office
of Chief Counsel at the IRS.
A native Texan, Mr. Reeder is a graduate of the University
of Texas at Austin College of Arts and Sciences, Graduate
School of Business, and School of Law.
Welcome back to the Senate, Mr. Reeder. We are now ready to
hear your testimony. Director Reeder, thank you.
STATEMENT OF HON. W. THOMAS REEDER, DIRECTOR, PENSION BENEFIT
GUARANTY CORPORATION, WASHINGTON, DC
Mr. Reeder. Thank you, Chairman Brown and Chairman Hatch
and members of the committee.
I really very much appreciate the opportunity to appear
before you to discuss the key challenges PBGC faces in
protecting pensions earned by participants in multiemployer
plans.
I have submitted my full statement for the record, as is
the custom, and will focus my oral testimony on what I believe
are the most pressing points.
To aid in conveying my points, we have prepared a
collection of seven charts from my prepared statement, which I
believe you have before you. And I apologize in advance for
making it look like a PowerPoint, but I think it is better to
have some of the information in graphic form.
As has been mentioned, Congress established PBGC as part of
ERISA in 1974 to provide basic insurance for participants'
defined benefit pensions. Today, PBGC insures 10 million people
in the multiemployer system in addition to a little less than
30 million in the single-employer system.
Multiemployer plan participants face three major problems.
First, and I believe foremost, PBGC lacks the money needed to
ensure workers will receive the benefits guaranteed under ERISA
if their plan fails. Second, even if PBGC were able to meet its
obligation to these workers, many still face significant losses
because the pension they earned is greater than the ERISA
guarantees. Third, even though most multiemployer plans are not
in imminent risk of failure, ERISA rules do far too little to
prevent plans from becoming severely underfunded in the future.
Looking first to PBGC's ability to keep its commitments,
you can see from Figure 1 that our multiemployer program is in
dire condition. It has liabilities of more than $67 billion and
assets of just over $2 billion.
The comparison of those two numbers--the $65-billion
deficit is one thing. The fact that you are using $2 billion in
assets to pay $67 billion is another thing. In other words, we
cannot grow our way out of this.
This is in stark contrast to the single-employer program,
which has liabilities of $117 billion and assets of $106
billion, leaving a deficit of only $11 billion. This is as of
our last annual report.
Annual premiums paid for single-employer plans are $6.7
billion a year. Annual premiums paid in the multiemployer fund,
on the other hand, total only $291 million. In other words, we
are dealing with a deficit measured in dozens of billions of
dollars with premiums measured in millions of dollars.
Both the single and multiemployer programs have been in
deficit for about 15 years.
In Figure 1, you can see that in the single-employer
program, the deficit has been steadily declining. We are still
in deficit, but it is steadily declining.
During the same period, there has been a rapid increase in
the deficit of the multiemployer program. That is the blue.
The multiemployer deficit is the direct result of an
unprecedented level of plan failures that we expect in the very
near future. Approximately 130 multiemployer plans covering 1.3
million participants have publicly reported to their
participants and to the PBGC that they are in critical and
declining condition. That means that they expect to fail within
the next 20 years, some much sooner than that.
This is in addition to the 93,000 participants in plans
that have already become insolvent that we are providing
assistance to.
Figure 5, what we call the flag chart, shows that critical
and declining plans cover about 13 percent of the participants
in the multiemployer system. That is the area to the right of
the solid black line.
You can also see that there are many more participants in
critical plans--that are in the red zone--that are still at
significant risk of failure, even though they are not yet
critical and declining.
And then the chart shows that more than half of all
multiemployer participants are in green zone plans. Let me
emphasize that green zone does not mean hunky-dory. Green zone
means anything other than critical or in danger.
So Figure 3 shows PBGC's most recent projections report. It
shows that before the end of 2025, plan failures in the near
future will lead to claims for PBGC financial assistance--
measured by the red bars--in amounts that will exceed the money
in our multiemployer insurance program--measured by the green
area.
As you can see, the green area gradually increases until
about 2022, at which time it takes off on a very steep slope.
It is not the beginner slope, it is the Olympic slope.
The program's insolvency would be catastrophic for many
participants and surviving beneficiaries. The maximum
guaranteed benefit for a retiree in a multiemployer plan is
often cited as $12,870, but that is $12,870 for somebody with
30 years' experience and 30 years of working under the plan.
And unlike the single-employer system, the multiemployer
system guarantee level is determined by how many years you have
under the plan. So most people have a guarantee level that is a
lot lower than $12,870.
If PBGC's program becomes insolvent, the benefit would only
be a small fraction of the amount that is under the statute.
Again, in Figure 3, the green line at the bottom of the
chart represents PBGC's annual premium income. That is the only
benefits we will be able to pay once we become insolvent. That
would result in us being able to pay only about an eighth or
less of the amounts we already pay under ERISA. And again, we
already pay a very low amount compared to what many people are
earning today in their pensions.
Even if sufficient funds are provided to PBGC, many people
will suffer significant losses, because the pensions they earn
are well over the ERISA guarantee level.
We saw this last year when the Road Carriers Local 707
pension fund failed. As a result of that failure, nearly half
of the 5,000 participants lost 50 percent of their earned plan
benefit.
Figure 7 shows the size and distribution of the cutbacks to
the multiemployer guarantee limit for the retirees in the 707
plan. The green is the amount they will receive due to the
financial assistance provided by PBGC. It is a jagged line
because each of those lines represents an individual, a human
being, and some of them have a higher guarantee level than
others based on their years of service and their accrued
benefit.
The red is the amount of benefit they earned by working
under the plan--and they are not getting. The full benefit
earned by current retirees and beneficiaries in the 707 fund
averages $1,313 a month or a little bit less than $16,000 a
year. Not a rich benefit. But the average guaranteed benefit is
only $570 a month. As a result, the average loss for the 3,000
retirees in the plan is $743 per month for the rest of their
life.
Protecting against these kinds of losses would require a
much higher ERISA guarantee or cash infusions into the plan
from either contributing employers or third parties.
Finally, better protecting participants and plans that are
not in danger of insolvency in the near future will likely
involve limiting the broad discretion given to unions and
contributing employers when they negotiate plan contributions,
and to plan trustees when they consider benefit improvements.
Figure 4 shows the distribution of participants in
multiemployer plans and single-employer plans by the funding
ratio in the plan. As you can see, most participants in the
multiemployer system are covered by plans with a funding ratio
of less than 50 percent.
On the other hand, most participants in the single-employer
system are in plans with funding ratios greater than 60
percent. This is not a new phenomenon.
Figure 4 shows that for several decades the funding ratio
of plans in the multiemployer system has been consistently and
significantly less than the funding ratio for single-employer
plans. The relatively lower funding ratios of multiemployer
plans put their participants at greater risk when our economy
encounters adverse conditions, such as the Great Recession.
While there are many challenges facing participants in the
multiemployer plans, I want to return to the first issue I
discussed earlier. The looming insolvency of the PBGC
multiemployer program could be the most drastic consequence to
those affected by plan insolvencies.
If this insurance program becomes insolvent, the only money
available to provide guaranteed benefits will be incoming
premiums, and that will cover only a fraction of the benefit
that we cover now. This will be catastrophic for many people:
current and former workers, retirees, beneficiaries, their
families, and their communities.
Employers are also concerned and are pushing for action to
prevent further damage in the system. As many have already
said, and I cannot overemphasize it, this problem is now. As
more time passes, it will become increasingly difficult or
impossible to craft a solution that could be viewed as fair or
even viable.
I appreciate the leadership of the members of this
committee in addressing the challenges faced by multiemployer
plans and the PBGC multiemployer program. And I look forward to
continuing to work with you to ensure that the PBGC guarantee
is one that workers can rely on in the future.
And I will do my best to answer whatever questions you
have.
Co-Chairman Brown. Thank you, Director Reeder. A pretty
sobering presentation.
[The prepared statement of Mr. Reeder appears in the
appendix.]
Co-Chairman Brown. The task that the 16 of us face is not
easy. Our success, as you point out and others on this
committee have pointed out in their States and districts and
here, is that our success is critical for the millions of
workers and retirees and companies that they work for across
the country.
I want to ask you, Director Reeder, a series of questions
to help us understand what is at stake, what action means, what
inaction means.
Start with this: what happens to these plans and benefits
if nothing is done? Walk us through so we understand the
severity of this and the importance of doing this by the end of
the year. Walk us through the fallout, not just for your
agency, but for retirees and current workers. Keep your answer
to what happens to the workers and the retirees.
Mr. Reeder. If you do nothing today, workers and retirees
will continue to lose the benefits that have been promised to
them. That is the red zone in the crescent-shaped chart I
showed earlier. People will continue to lose this red benefit.
And there will be dire consequences.
If you do nothing for the next couple of years, you will
erase the green part without a significant infusion of cash to
the PBGC.
Right now, the administration has laid out a proposal for
increased premiums to pay the benefits that are promised, and
that is at $16 billion spread out over 10 years. The longer we
wait to put that money into the PBGC, the more that money will
have to be over a shorter period of time.
Co-Chairman Brown. Thank you. Talk about the business side.
What would be the impact on withdrawal liability for businesses
who employ these workers, again, if we do nothing?
Mr. Reeder. If you do nothing, the withdrawal liability,
which is already significant, will not go away. But I believe
that most--and I think the consensus at PBGC is that most--
plans that will be facing insolvency in the near future will
not terminate, and they will continue on. So there will not be
a mass withdrawal.
And so employers will not incur withdrawal liability, but
they will have a continuing obligation to make a contribution
to a plan that has already become insolvent. So they are making
contributions for active workers for benefits that they will
never get.
Co-Chairman Brown. Thank you. We are seeing--obviously, we
all hear from pensioners in our State about what has happened
to benefits in many cases. And I wanted to ask you about that.
The minimum guaranteed benefit PBGC pays to retirees if a
plan fails is already much lower than the retirement these
workers earned, that they bargained for, that they gave up pay
raises for, that they budgeted for when taking out mortgages,
and that they count on to pay their bills.
I remember many years ago a steel plant ended up in PBGC,
and the workers got huge cuts in what they expected as the
minimum payment you all made.
Absent congressional action, would the PBGC even be able to
pay that minimum guaranteed benefit?
Mr. Reeder. No. We would be cutting to about one-eighth of
what the minimum benefit is, a little less.
Co-Chairman Brown. Talk more about that. So you would be--
the minimum benefit, which is markedly less than what people
were promised, what they negotiated, what they were getting,
what they thought they were getting, that minimum benefit is
already small, relatively. You would be forced to cut the
average benefit how much then?
Mr. Reeder. If they are making $8,000 in guaranteed
benefits today, they would get less than a thousand dollars. I
am talking about an annual number.
Co-Chairman Brown. So it would be cut. It would be cut down
to one-eighth perhaps----
Mr. Reeder. Or less.
Co-Chairman Brown [continuing]. Of what they were getting.
Mr. Reeder. And, Mr. Chairman, I have to point out----
Co-Chairman Brown. One-eighth of a smaller number already.
Mr. Reeder. Yes.
Co-Chairman Brown. Okay.
Mr. Reeder. Yes. These are modest benefits to start with.
As I showed you earlier in the 707, the highest benefit there
that was promised, that was earned under the plan, was about
$40,000. It is a rich plan in the multiemployer world, but it
is a modest benefit. And as you can see, most benefits, more
than half of the benefits, were much less than that, about
$15,000, $16,000.
Our guarantee cuts it way down from there, cuts it by 50
percent or more. And then if we cannot make good on the
guarantee, it is going to cut that low amount to one-eighth.
Co-Chairman Brown. So it may have been, when you said
$40,000, it may have been $3,000-plus a month. Then your
guarantee is maybe $1,200 a month, and this would cut it by 70,
80, 90 percent below that, beyond that, more or less.
Mr. Reeder. You are faster than I am in math.
Co-Chairman Brown. No, I am not. [Laughter.]
So after that devastation, you know, we have the PBGC
guarantee, which is much less. We have companies going out of
business because of the withdrawal liability issue; we have
PBGC paying way less than you normally paid.
If Congress then steps in to ensure the minimum PBGC
benefit--the minimum PBGC benefit--what is the potential cost
to taxpayers then?
So we do nothing, after all that devastation, we have done
nothing, then Congress needs to step in to ensure the minimum
PBGC benefit. What is the potential cost to taxpayers then?
Mr. Reeder. The number that is out there now that we have
produced is $16 billion over 10 years beginning today. So if we
delay, that number is going to move. But that keeps PBGC alive
for approximately 2 decades. And it may need more after 2
decades.
Co-Chairman Brown. So you talk about what inaction means.
What you are saying is, after the pensions have been cut, the
businesses have suffered, the workers have lost their plan,
after all that, the taxpayers would still have to pay a massive
price to keep the PBGC in operation.
Mr. Reeder. If Congress elected to provide that. Right now,
we are not backed by the full faith and credit of the U.S.
Government, and so Congress could elect not to do that. But I--
--
Co-Chairman Brown. Well, I cannot imagine that. So thank
you.
Congressman Roe?
Representative Roe. Thank you, Mr. Chairman.
And just a couple of quick questions.
So basically, the options are this: you have an increased
premium, decreased benefits, increased earnings, or a cash
infusion. Does that pretty well summarize it?
Mr. Reeder. Yes, sir. I do not know about the increased
earnings, because we are working, if you are talking about
PBGC, we are working with the----
Representative Roe. No, I am talking about the plans.
Mr. Reeder. Yes.
Representative Roe. If the plans had, you know--obviously,
if the market does well, their investments do well. That
extends it a little longer. So that would be--some combination
of those four things I just mentioned; there is not any other
combination.
Mr. Reeder. Yes.
Representative Roe. And let me ask you just a couple of
other questions. How much of a premium increase would it take?
And why is there such a disparity--I think I know the answer--
but why is there such a disparity between the single and multi
plans and what is paid into the PBGC? And I know this is
negotiated as an hourly wage and so forth. I know all that. But
why are there--so are single-employer plans negotiated plans
too?
Mr. Reeder. Are you talking about the amount that goes into
the plan, not the premium?
Representative Roe. No, the premium that goes to the PBGC;
there is a huge disparity between a multi and a single.
Mr. Reeder. Well, that is not negotiated. That was set back
in 1980 and again revised in about 2000. And it was set low in
order to--in 1980, it was not that low, and it was not
increased with inflation.
Representative Roe. Okay.
Mr. Reeder. Whereas the single side has been increased with
inflation, as have premiums. Premiums have increased and the
guarantee has too.
Representative Roe. So what if you made the premiums the
same? That is more cash coming into the PBGC.
Mr. Reeder. Well, that would definitely do the trick, but
that is a lot--that is, the disparity is so wide that making
them the same would be----
Representative Roe. But again, that is my question. Why is
that disparity so wide? They are both a defined benefit pension
plan. Why was there ever allowed to be that much disparity?
Mr. Reeder. I believe there was a perception in 1980 when
the law was written that because there are lots of employers
contributing to the plan that it was less likely to become
insolvent.
Representative Roe. Okay, which was wrong.
Mr. Reeder. Yes, sir.
Representative Roe. Badly wrong. And when we look at this,
you said the way to make this function--as I understand Senator
Brown's questioning--is, it is maybe $1.6 billion a year over
10 years from the taxpayers that would do exactly what?
Mr. Reeder. Just to put a finer point on it, we are talking
about premiums from the plans. Many regard that as a tax, but
it could be income taxes, but the proposal is increased
premiums, and that would keep PBGC's multiemployer program
afloat, we believe, for approximately 2 decades, maybe longer.
Representative Roe. Okay. So in other words, however that
$1.6 billion a year comes in, whether it is premium increases,
earnings, whatever, whatever combination, am I getting that
right?
Mr. Reeder. Yes, sir. But the earnings are not likely
because we are starting with only $2 billion, and we are going
to go down really fast.
Representative Roe. Okay. So there is an opportunity. So
how much would the premiums have to go up?
Mr. Reeder. We are talking about an average of $1.6 billion
and I guess an average of five, five-and-a-half times.
Representative Roe. Okay, so they would have to go up
multiple. Could you bring this up on a graduated--reduce the
premium a little bit so you do not get all the bad medicine in
one year? I mean, that would be hard to swallow.
Mr. Reeder. I think the proposal is to do that.
And let me also say that that is not a flat-rate premium.
It would introduce a variable-rate premium that would be higher
for less funding.
Representative Roe. Okay. And in your testimony, you noted
that financial assistance to multiemployer plans is technically
a loan to the insolvent plans, but only one of these loans has
ever been repaid, according to your testimony.
What happens to these loans when a plan cannot repay them?
Does the PBGC ever recoup that loan?
Mr. Reeder. No, except in that one case.
Representative Roe. In the one case, and that was not one
where it was a long term, as I read a little more detail about
it.
You mentioned that the variable premium proposal in the
President's budget in 2019 is projected to keep the
multiemployer program alive for 20 years. Is that correct?
Mr. Reeder. Yes, sir.
Representative Roe. What do you think? I mean, the
employers that I have talked to are really pushing back on the
premium increase. And I understand that; it is an extra cost to
their business. I do get that. But there is going to have to be
more money from somewhere. I mean, after hearing this, it is
not complicated math. We know exactly--it has to come from one
to three or four places. Am I correct?
Mr. Reeder. Yes, sir.
Representative Roe. Okay, thank you.
I yield back.
Mr. Reeder. Thank you, Dr. Roe.
Co-Chairman Brown. Thank you.
Thank you, Director Reeder.
Nobody contested in some cases premiums have been too low,
but raising premiums alone only addresses part of the problem.
Obviously, it does not even solve that part----
Mr. Reeder. Just PBGC.
Co-Chairman Brown. Yes.
Congressman Neal?
Representative Neal. Thank you very much, Mr. Chairman.
When we talk about multiemployer pension plans and the
crisis that we are confronting, we often talk about plans
slated to go insolvent. When we talk about plans like Central
States and United Mine Workers, it is important to remember,
however, that PBGC has been paying assistance to many smaller
insolvent plans for a long period of time.
How many plans are currently relying on PBGC for financial
assistance?
Mr. Reeder. Seventy-two.
Representative Neal. Seventy-two. If PBGC were to go
insolvent, as has been depicted by some, what would be the
impact on multiemployer retirees who will then be relying on
PBGC for benefit payments?
Mr. Reeder. That is an important point. Not only will
participants in future plans that go insolvent be cut to the
bare, bare, bare minimum, but the ones that are already getting
assistance will be cut.
Representative Neal. Acknowledging that the Mine Workers
will likely be insolvent by then, this is all likely before
plans like the Central States and other very large plans become
insolvent. Correct?
Mr. Reeder. Yes.
Representative Neal. Okay. What are the chances PBGC could
become insolvent before 2025?
Mr. Reeder. I think there is a good chance that it happens
in 2024. By ``good,'' I mean not more than 50 percent. It is
somewhere below 50 percent, but it could happen in 2024. We do
not believe it will happen before then, just based on the plans
we see coming in. And there is a tiny chance that it could
happen in 2026. But we are about 90 percent certain that it
will happen by the end of 2025.
Representative Neal. Mr. Reeder, why, given the climate
that you have noticed across America today, why are the
American people not paying more attention to what is happening
to pension planning everywhere?
Mr. Reeder. That is a philosophical question.
Representative Neal. Philosophical, but it is entirely
relevant to what is happening everywhere. I read a piece this
morning about a State on the East Coast where I believe that
$119 billion in liability is out there on the public side.
From time to time, we discuss the realities of what is
happening with 401(k) plans, the catch-up provisions that
happened after the recession; people are working longer. There
have been pretty staggering consequences for retirement. And
yet, it does not seem to gain the same traction that many other
controversial issues do every day in America when you consider
that there are people who are looking--in the audience perhaps
today--at their pensions being cut in half.
Mr. Reeder. I think when you are looking at--the answer, by
the way, in State and local may be different. But I think when
you are looking at compensation packages, I think there is a
human tendency to look at what you get today: health care,
cash, other benefits that you are using today.
And if you have a limited pot, I think you are less likely
to put a significant amount of that limited pot into the
benefits that you are going to get in 20 years or 30 years.
Representative Neal. Is it safe to say that most pension
plans today in America, they would need a return north of 7\1/
2\, 8 percent annually to remain solvent?
Mr. Reeder. I certainly would not say that about most
pension plans, but I would say that about most critical and
declining plans. They would need significantly higher earnings
than that to remain solvent.
And I think that is true with other plans that are not
critical and declining. There are some yellow zone plans and
other red zone plans that would need earnings north of that to
stay afloat.
Representative Neal. Thank you very much.
Thank you, Mr. Chairman.
Co-Chairman Brown. Senator Portman?
Senator Portman. Thank you, Senator Brown.
And, Director Reeder, we appreciate your coming today and,
more importantly, the help you have given us already on this
commission.
PBGC, as some of you know, has some real experts in this
area.
And your assistant general counsel, Connie Markakis, and
your actuary, Julie Cameron, come highly recommended, and we
need them.
Mr. Reeder. We miss them.
Senator Portman. Thanks for letting us borrow them.
This is tough. And you know, your testimony today was very
sobering, because it lays out clearly the huge challenge that
we face.
You were just talking back and forth about when PBGC might
go insolvent. And it sounds like 2025 is the year that you have
kind of focused on, understanding there could be some changes
that push that a little forward or a little bit back. That is
only 7 years from now, and that is PBGC insolvency, which is
sort of the most dramatic of the potential problems that we
face.
And to me, the drastic cuts in the earned pensions--again,
we talked a lot about that today, what that is, but if you go
insolvent, it is about a 90-percent cut probably to the Central
States fund and the Teamsters. Is that about right?
Mr. Reeder. Yes. It is on the order of that.
Senator Portman. And then the impacts to the broader
economy. Central States has said that the insolvency of their
fund alone would result in less than half of the promised full
benefits.
And again, if 400,000 Teamsters see the PBGC go under in 7
short years, then it is about 90 percent. Is that about right?
Mr. Reeder. Yes.
Senator Portman. And how about the mine workers? As I
understand it, there are about 76,000 mine workers who would
lose, on average, about 21 percent of their promised benefits
if their plan goes insolvent--and of course, much deeper cuts
if PBGC goes under.
What would it be like for the mine workers if the PBGC runs
out of money?
Mr. Reeder. They would be cut down to about the same level
as the----
Senator Portman. About the same as the Teamsters?
Mr. Reeder. Not percentage-wise, because their benefits are
lower, but the dollar amount would be cut down to the same
amount.
Senator Portman. Yes. Pretty modest pensions there with the
mine workers.
Mr. Reeder. Yes.
Senator Portman. Average about 600 bucks a year, right?
Mr. Reeder. Very small. The retirees are averaging lower
than the actives. The actives would suffer more because their
benefits are richer.
Senator Portman. Yes. Active, about 10,000; retirees, about
100,000 mine workers.
Mr. Reeder. That sounds right.
Senator Portman. Is that about right?
Mr. Reeder. I have the numbers in here, but I----
Senator Portman. Yes, it is upside-down. In other words,
that is a big problem.
Mr. Reeder. Yes, sir.
Senator Portman. And already, again, the benefits are very
modest.
Then there are probably over 100 additional multiemployer
plans that are at risk, right, in addition to those two big
ones?
Mr. Reeder. One hundred and thirty.
Senator Portman. And so, you know, I do not think most of
my colleagues in the broader Congress are focused on this yet.
But I think we have to get these numbers out there and talk
about it.
Could you talk a little about the cost to the government of
insuring guaranteed financial assistance payments the longer we
wait?
In other words, for the government--and I would say to the
taxpayer--what is the danger of waiting?
Mr. Reeder. We would just have to raise the same amount
over a much shorter period of time. Right now we are talking
about $16 billion over 10 years.
Senator Portman. And that is just to keep PBGC afloat.
Mr. Reeder. Yes. I thought that was your question.
Senator Portman. Yes.
Mr. Reeder. But just to keep PBGC afloat. And the longer
you wait, the more compact that number will be.
Senator Portman. So the $16 billion over 10 years is your
calculation.
Mr. Reeder. Yes.
Senator Portman. And you are saying that if we were to wait
a couple of years, you are going to have more requirements in a
shorter period of time.
Mr. Reeder. And a shorter period of time to ramp up to the
higher premiums.
Senator Portman. Can you talk for a second about the
contagion effect? I do have employers come to see me quite
often very concerned about the impact on their solvency. And if
there were an insolvency by one of the big plans, or certainly
by PBGC, you know, the possibility is that their liability
would be such that they would become bankrupt, and we
understand that. And a lot of small businesses in Ohio are very
concerned about that.
But could you talk a little about the broader contagion on
the economy and what you think would happen based on your
experience?
Mr. Reeder. Well, we do not have a lot of experience with
big plans going under.
Senator Portman. There has actually been nothing like this
ever in history.
Mr. Reeder. Right.
Senator Portman. But let us assume that we do not act and
we allow the status quo to continue because we have gridlock
here, we cannot get anything done, we cannot figure out a
solution, all the answers are tough, and we end up with a
situation where these plans go insolvent, but also PBGC, in 7
short years, goes insolvent. What is the impact on the economy?
Mr. Reeder. Well, as I mentioned earlier, I think that
there will be very dire consequences for the communities where
many of these people live.
I do believe that there is a possibility of contagion
affecting other plans that are much more healthy. We cannot
measure that yet, and we are working on that.
Senator Portman. But talk about what that contagion means.
Mr. Reeder. Well, the contagion I normally hear, when
people are using the word in the context of the multiemployer
world, is when a plan, a large plan--it does not necessarily
have to be large--but when a plan goes under but its
contributing employers also contribute to other plans--and
there is a hypothesis that if a plan goes under and incurs mass
withdrawal liability, that puts those companies under--that
that could affect the health of many other plans.
And this is particularly true in the Teamster world.
Senator Portman. Yes. So let us be specific. When the
contractors were in this week talking about infrastructure, I
asked them about pensions. Some of these contractors have as
many as five different multiemployer plans. So they may have a
plan with the carpenters, they may have a plan with the
Teamsters, they may have plans with other operators.
And you are saying that if one of the big plans goes under,
let us say the Teamsters plan, that company will not be able to
make its premium payments to the other plans as well. And the
contagious issue is that there is contagion with these other
plans.
Is that accurate?
Mr. Reeder. Well, that is the hypothesis. One big variable
is that a lot of these plans, such as 707, will not actually
terminate and will not actually trigger mass withdrawal
liabilities, and employers will just continue to contribute to
the plan. It is a little bit sad, because they are contributing
to an insolvent plan, but it does not put the employers under.
And I would suspect that many of the plans that go under in
the near future, especially the big ones, will be hard-pressed
to terminate and declare a mass withdrawal.
So that is the big variable in measuring how serious the
contagion effect really is.
Senator Portman. Yes. Well, I think the broader impact--my
time is well over; I apologize, Mr. Chairman--but I think that
that is the bigger issue we have to talk about too. As bad as
it is for these retirees and for these individual plans, it
also has a broader impact on our economy. Not just the local
communities that will obviously be affected, but the larger
economy.
Thank you, Mr. Chairman.
Co-Chairman Brown. Thank you, Senator Portman.
And Rob is so right about that in terms of the contagion
effect.
I think it is important to remember that two-thirds of
these plans are in fact in the healthy green zone area. But it
means the system can be saved if we act in the months ahead.
Senator Heitkamp?
Senator Heitkamp. Thank you, Mr. Chairman.
I want to just walk a little bit through history, Mr.
Reeder. And so I would like to talk about how we ended up with
pension insurance in the first place. I know you talked a
little bit about that to begin with.
But prior to 1974, there was basically no protection for
private pensions in this country. So as a worker, when your
employer went down, you were on your own; you were really out
on the street.
And we saw that happen with the old automaker Studebaker.
It halted U.S. operations at the end of 1963, and it terminated
its pension plan. And for 4,000 of their workers, including for
some who had worked there 40 years, they lost the bulk of their
pensions.
That event, I think, woke up the people of this country,
and it stirred Congress to act because they looked around and
thought, we have to have a better system to protect our
workers, to make sure people are playing by the rules, and to
make sure pension promises are kept.
Mr. Reeder, I am sure you know that the legislative
initiative that resulted from Studebaker's collapse was ERISA
and then the agency that you chair.
And you know who the chief proponent of that legislation
was. It was Jacob Javits, a Republican Senator. And it was
signed into law by a Republican President: Gerald Ford.
When Gerald Ford signed the bipartisan legislation, he said
ERISA will provide assurances that retirement dollars will be
there when they are needed. That was the promise.
And that is what this is all about: making sure retirement
dollars are there when they are needed. And I mentioned that
Republican history because we all need to realize that this is
a bipartisan issue.
To be sure, we have heard a lot about reforms that need to
happen, and I am all ears. And I think we should take a hard
look at how we can improve the retirement guarantee system.
This is probably a long time coming; it should have been
addressed years ago as we looked at changing demographics and
as we looked at more and more erosion of defined benefit plans
to a 401(k) system.
But right now, we have an emergency. And I think Senator
Portman outlined the contagion effect, so no one should feel
safe. This could result in dire consequences. And at the tip of
the spear is our Central States pension and the Mine Workers.
So simply raising premiums is not going to get the job
done. I think we all need to recognize that, that there are no
easy solutions.
My colleagues and I have put forth the Butch Lewis Act,
which is a type of loan program that would help workers
rehabilitate their pension plans so that they can keep their
benefits.
I know there has been a fair amount of criticism of that as
a result of what people see as overt involvement of the Federal
Government in providing that level of assistance and that level
of loan guarantee.
But I want to look at the history of loan programs in the
United States of America and with the American economy.
AGI, we loaned them $67 billion. Bank of America, we loaned
them $45 billion. Goldman Sachs, we loaned them $10 billion.
JPMorgan Chase, $25 billion. These are just a few of the big
financial companies.
We also helped the automakers. General Motors, we loaned
them $50 billion; Chrysler, $10 billion; U.S. Airlines, up to
$10 billion; Farm Credit, $4 billion in bonds.
And I raise that history because I think that, as we are
looking at the amount of Federal taxpayer exposure to help at
times of economic crisis in this country, we have been willing
to disburse a whole lot of money. In fact, by our calculation,
when you add it all up, it is over $600 billion.
And today, the taxpayers have come out ahead as a result of
that. We have not only prevented catastrophic economic decline,
but we have been able to right the ship and improve the
economy.
So when big corporations get in trouble, the answer has
been clear: we help them out.
As distasteful as that may be and as politically challenged
as that may be, we have stepped up, and the Federal Government
has become the lender of last resort.
So, Mr. Reeder, would you agree that loan programs in the
past have been used in times of economic crisis?
Mr. Reeder. I believe so.
Senator Heitkamp. And do you believe that challenges facing
funds like Central States and other similarly situated plans
could cause massive economic damage to workers, their families,
small businesses, and, by contagion, the entire economy? Would
you agree?
Mr. Reeder. Yes, I agree with that.
Senator Heitkamp. So clearly, when it is the banks or the
insurance companies or the automakers, we provide loans to
stabilize our economy.
I am open to anything that works, but I would ask
colleagues to take a similarly open-minded position on helping
during this time.
And so, if I can just close with a statement that, yes, we
have to look at the macroeconomic challenges that we have.
But behind you are a number of workers who do not know that
there is any certainty and economic dignity for them and their
families. Watching this hearing are other hundreds of thousands
of American workers who wonder when is it their turn to get
listened to.
And so I just want to make sure that we do not dismiss out
of hand plans that would in fact respond to this challenge the
way we have responded to many, many dire economic challenges in
the past, and that is to provide the security and support to
make sure that these funds are fully funded and that our
pensioners get the pensions they deserve.
Thank you, Mr. Chairman.
Co-Chairman Brown. Congressman Norcross?
Representative Norcross. Thank you.
I appreciate the hearing on this. And it is remarkable that
we have been talking about this a long time, but nothing has
happened. And when we think about the PBGC and the numbers you
go through, there are, what, about 1,400 plans on the multi
side?
Mr. Reeder. Yes, sir.
Representative Norcross. And there are about a hundred of
those critical or declining?
So when we had an opportunity as a country back in the
1990s, when things were going really well, there was a rule in
place that said you can only fund them to 110 percent or they
lose their tax status. Correct?
Mr. Reeder. Yes.
Representative Norcross. So that prevented us from creating
a better cushion for the times that were not so well and to go
back on that. So that is a structural issue.
And what we heard about here today is PBGC, by its nature,
is the insurance company, and we heard how we can keep it,
which is $16 billion over 20 years. So it is the healthy plans
that would have to pay that. If you are insolvent, you are not
paying your premiums. Is that correct?
Mr. Reeder. Well, yes, healthy a little bit less, yes.
Representative Norcross. So here we are, we are trying to
hold up an insurance plan that by design is created not to pay
enough money to those people who are retiring. It is set up
this way. This is the insurance we bought. We have the formula
set for those insolvent plans. Correct? That is where we get
the $12,870?
Mr. Reeder. That is right.
Representative Norcross. We bought cheap insurance. And
when you try to compare that to the single employers, they made
a different decision to pay much different premiums.
So we are trying to create and prop up an insurance company
that is already structurally flawed by the money they are
paying out. If you were as healthy as a horse and plans were to
go under, they would still get a rotten benefit paid out.
So we need to understand that there are two very different
issues here. And when we look at what the problem is, the
problem for PBGC is one thing, but it is the problem of the
actual insurance for those pension plans. Why are they failing?
What is it that we are doing that we have these massive
failures?
Nobody is talking about that. We get this great loan
program and then we are still in the same boat. The causes for
those different plans to go down--bankruptcy, does that play a
role in it?
Mr. Reeder. Yes.
Representative Norcross. Why don't you explain how
bankruptcy--if a company goes under and they have $100 million
worth of unfunded liability, where does that go?
Mr. Reeder. It usually goes to the back of the line.
Representative Norcross. The last man standing--everybody
else picks it up. Correct?
Mr. Reeder. That is right.
Representative Norcross. Okay, so that is a structural
issue that changes.
Pension--what position does that have when a company goes
bankrupt? Do they get paid first?
Mr. Reeder. No.
Representative Norcross. No. They rarely if ever--the
pension obligation rarely if ever gets paid from the
bankruptcy. Is that correct?
Mr. Reeder. In the multiemployer world. In the single-
employer world----
Representative Norcross. But we are not talking about that.
Mr. Reeder. Yes.
Representative Norcross. So that is a structural problem.
If we change everything here and we do not change that, we are
back in the same boat.
Let us take one step further: the assumptions that are
made. When a plan is healthy or it is in the red zone or
critical and declining, it has made that decision based on
over-assuming the payback on a yearly basis. Each pension plan
makes a decision each year how many assets come in, how we are
going to pay it out. Is that correct?
Mr. Reeder. That is right.
Representative Norcross. So if I overpromise my employees
that you are going to get a higher pension, that starts us down
the road where that plan could fail.
Mr. Reeder. That is correct.
Representative Norcross. So how do we fix what got us into
this problem? I do not hear you talking about the pension
position in bankruptcy. I do not hear us talking about the
actual assumptions that are given out. You are thinking you are
getting too much money in or you are promising too much money
out, because those in the green zone have been making those
decisions properly.
Now, we were all hit by the same market downturns. But we
have structural problems, wouldn't you say?
Mr. Reeder. Yes. And I agree, as I outlined in testimony, I
agree that we do need to make changes to those structures if we
are going to prevent this from happening in the future.
Representative Norcross. So anything we do to fix the
current situation so PBGC is still alive has to go hand-in-hand
with structural changes. If not, we are just going to keep
going to the healthy plans saying, hey, I am glad you made
those tough decisions, now you have to pay up.
Because the part I missed is, during the downturn of the
recession when the banks failed, they did not go to the other
banks and say, ``Oh, you are going to pay.''
Trying to limit the source to just those in the plan who
will get nothing out of it, I think is wholly unfair. If we can
do it for the auto companies and the banks, too big to fail--do
you know what is too big to fail? Those pensioners. And we have
to come together to make sure that they get an opportunity,
because they are getting a raw deal here.
And there is a lot of blood in the water from a lot of
different people. But the cost of doing nothing is
unacceptable.
I will yield back the balance of my time.
Co-Chairman Brown. Congressman Schweikert?
Representative Schweikert. Thank you, Mr. Chairman.
And forgive me. As often, when you are running around from
meeting to meeting--at some point we should have a discussion
about scheduling. I say we start doing these in the middle of
the night. But then, being a House member, we are always
annoying to Senators. [Laughter.]
I actually want to walk through just a couple of math
concerns.
First off, you had made a statement earlier that I had
picked up that the number of multiemployer plans that you saw
as in the green zone, you know----
Can I ask you, if I came to you right now with your
background--and oddly enough, I think you have one of the most
interesting jobs in government--and said, you are going to use
a perpetual horizon, you are going to calculate to high-quality
bonds as your net-present-value calc, how many plans truly stay
within that green zone if we were actually to use those types
of actuarial tests?
Mr. Reeder. I do not know the exact number, but as I
mentioned earlier, green zone does not mean----
Representative Schweikert. Healthy.
Mr. Reeder [continuing]. Healthy. It means not distressed.
And so I do not think most of those green zone plans do use the
bond rate you refer to.
Representative Schweikert. Okay. We did some of this math
in our office a few weeks ago, and we walked away a little--
what would be the right word?--shaken that the number, like,
tripled of what we thought would be stressed, particularly if
they were
single-employer plans and used those types of test
measurements.
So the reason I bring that back up again for all of us is
almost exactly what you were saying. As we do this, we need a
holistic approach that actually just does not fix the current
identified centers, but actually says, how do we make this
whole system much more robust?
Now I have the question for PBGC. If I came to you and
said--I look at some of my notes on the reports of what your
identified liabilities are. And there are some statements I
have come across--and I need you to help me just because of
time constraints--that look like they were some outside reports
saying your liabilities may be double what you report on your
annual statement.
Help me understand where those differences are coming from.
Mr. Reeder. We use pretty conservative interest rate
assumptions. But in calculating, some people may--and I
understand the CBO has done this--some people may actually
factor in a variability analysis.
Representative Schweikert. And the variability analysis
would be a projection of a number of plans that would make
claims or a cascade effect or what?
Mr. Reeder. Well, it is the cost of--it is the value of
assets that are not invested in fixed-income funds.
Representative Schweikert. Okay.
Mr. Reeder. And it is a variability factor. And just in
starting the answer to this question, I have gotten myself in
the weeds above my head. And I would be happy to provide you
with backup on a QFR.
Representative Schweikert. On your staff, do you have
someone whom you consider to be sort of your freaky-smart quant
or someone who can deal with a couple of creative ideas a
number of us are talking about? Because there is not a single
solution here. It is going to actually require lots of
different inputs and maybe a couple of different types of
financing mechanisms.
And in some ways, you might be the appropriate conduit to
manage, control, house.
So I mean, do you have the bandwidth if someone like myself
and a couple of us others came to you and said, would this
mathematically possibly work if there were sort of these risk-
sharing models, these other things that were also presented?
Mr. Reeder. We have more quant freaks per capita than any
place on the planet. [Laughter.]
Representative Schweikert. That is a term of love,
understand that.
Mr. Reeder. It is. It is. And I have to admit that two of
them are sitting behind you, because they are on detail to the
committee.
Representative Schweikert. Can I give you--can we grab your
cards? Because I have a couple of things where either I am
going to sound brilliant or like an idiot if I try asking them
from behind the microphone, because I need a whiteboard.
But I want to know if some of the solutions we are trying
to build in our office to present to the team here are actually
sound.
And with that, I will yield back, Mr. Chairman.
Co-Chairman Brown. Senator Manchin?
Senator Manchin. First of all, thank you, Mr. Chairman.
This is an important meeting.
I would like to note for all of us, we are 4 months into
this, 4 months in, and we do not have one agreed-on solution
yet, not one agreed-on path from either side of where we are
going.
And for 4 months--we have 6 months left to come up with
something by legislation. We are going to have to agree that we
have a crisis on our hands.
I have the United Mine Workers in my State, and so many
people in my State have a very small pension that it will
destroy people's lives.
And I do not know what progress has been made by staff on
both sides--if we have agreements or disagreements. I would
like to know that.
So hopefully by our next meeting, Mr. Chairman, we can get
a status on the staffs, if we have agreement, any type of
movement forward.
There has been a lot of good information that has come out.
Congressman Norcross came across that bankruptcy--I am very
much concerned about that. You have to fix the problem. And any
time you put a financial institution in front of a human being,
you have a problem. And that is what has been happening for far
too long.
We are talking about putting undue burden on businesses. We
do not want to do that. We just gave the greatest tax cut in
the history of the United States of America--the greatest tax
cut we have ever given.
You can sit here and debate it all day long--too much, not
enough, whatever--but everyone got a benefit from that except
the working people. And now we are afraid that we are adding a
little bit more of a premium, and the premium is not going to
solve my miners' problem.
The premium right now, short-term premium, is not going to
fix what I have facing me in a few years. We need to know how
we can do this.
And the only way you are going to be able to do it is be
able to have a loan program. There is no other way of infusion
of cash that can keep us from this crisis.
So my question to you would be, compare this crisis that we
are going to be facing with what happened in 2008 when we
bailed everybody out. On what scale would you say is the crisis
that we have looming between our State's pension and the
miners' pension? The miners hit first. And if the miners hit
first and we do not do something, what does it do to your PBGC
and how quickly does that start accelerating to your 2025?
Mr. Reeder. That is the main accelerator to 2025.
Senator Manchin. So the UMWA, if we do not fix that one
first--we had a fix for this, you understand. We were using AML
money. That is coal money. Every ton of coal we mine, there is
a fund we pay into, abandoned mine land. And they have taken
that and used it for everything but what it is supposed to be
used for. That is the problem we have.
We cannot get the legislators to look at how to fix a
problem and do it with money that we are generating from
products that we are selling. And now we are looking--we are
not looking for a bailout. But if, as Senator Heitkamp had
mentioned, we are able to come to the aid of every corporation
that has an effect on the economy of this country, surely to
God we can come to the aid and help of the people who made the
country. That is what we are talking about.
So we need some suggestions. Every time, I ask somebody who
comes and sits where you are sitting to help us, because we
have to have some things that we are going to put on the table,
and I think the public needs to know what we agree and do not
agree, because this is a bipartisan challenge. It is going to
take a bipartisan solution.
And right now, we have gotten nowhere except having great
information and testimony. So if you are recommending that we
have to have an infusion of cash or we need a borrowing, the
only thing I can see that is going to help us right now is if
we have a borrowing, the same as we did with the banks--a
bailout. They paid it back. We are going to pay it back.
And we have corporations now that can afford to pay a
little bit more, I am sure, if you look at the bottom line of
what we were able to do with this last tax cut.
Do you think that that is feasible and it is realistic?
Mr. Reeder. Well, we have been working hard. And we have
been working with staff. I think we have all identified the
dials. Congressman Schweikert may have another one, the dials
that can be turned. But we do not have suggestions as to where
they should be turned.
We can help you analyze----
Senator Manchin. No, but, I mean, you know how much cash it
is going to take.
Mr. Reeder. Yes, sir.
Senator Manchin. How much cash is it going to take to keep
the United Mine Workers of America from going down the tube in
2022? We are at about $3 billion, $3\1/2\ billion the last time
we looked. We were about $2 billion when we could have fixed
it. We could not get it on the bill; they separated that out
from the health care, which was absolutely horrific, what was
done. This would have been over; we would have had that behind
us and been working towards our Midstate pension. We could
have, I think, had a pathway forward.
So what we need to know is, how much money is it going to
take to keep the miners from going down the tube, to keep the
Midstate from rolling up into one of the greatest calamities
that we have had?
Have you all evaluated the crisis that we have coming?
Mr. Reeder. We have.
Senator Manchin. Is it as great as the 2008 collapse?
Mr. Reeder. I am not an expert on the 2008 collapse, but
there is bound to be some comparison. I do not know.
Senator Manchin. What part, how much of the economy--you
know, can you help answer these questions if I would ask them?
Mr. Reeder. Well, we know the number of participants that
will be affected. But, as has been pointed out here, the
contagion of the effect on those participants is a lot broader.
It is their families and their communities and, to some degree,
the whole country.
Senator Manchin. Well, we have 6 months left. We have to
have a piece of legislation to go to the floor. And I am
determined to get a piece of legislation that fixes it.
Bankruptcy--you have to fix bankruptcy to keep it from
repeating itself. The human being should be at least equal to
the financial institution when it comes to divvying up what is
left when a bankruptcy happens. When there is an intentional
bankruptcy and we have diversion going into different
companies, we should be able to reach back; there should be a
claw-back provision in bankruptcy that allows us to keep the
individual, the human being whole.
And if the premiums have to be increased for the
businesses, we want to make sure we do not put them in a
hardship. But if we have given them the greatest tax cuts in
the history of this country, we could negotiate something that
would not be a hardship to them. This is all reasonable.
But someone has to tell us how much cash it is going to
take, where we are going to get it, and what is the payback.
And we have got to start fixing some problems here.
I am willing to start voting on fixing a problem. If we
have a discrepancy, then we have to sit down and work through
that. But my goodness, we have--I think the examples have been
given here of what we have been able to do when we hit a
crisis. I guess we are going to wait until 2022, and then I
have to look at the miners and say, ``Okay, we are here,
guys.''
Most of these are retired widows, is what I am dealing
with--$595. And you take that away, they have nothing. They
cannot make it.
So we are not talking about a windfall; we are talking
about survival. And all I am asking for is compassion.
But we are going to need some help. We need some answers.
And you know, you all, you have the expertise, and we
appreciate it. We need you now to lay it on the table. Tell us
what we have to have, and we will figure out how to make it
happen.
Mr. Reeder. We can give you those numbers.
Senator Manchin. Thank you. If you will do that by our next
meeting----
And if we can have some direction, Mr. Chairman, of what we
want to start making some decisions on, I would appreciate that
very much. Because I have to know if there is a difference that
we have from one side to the other. Let us find out how we--and
I think the public needs to know.
They cannot wait until November and say, okay, we have come
to an impasse. I want to make sure we start.
Mr. Reeder. Can I make one point on the mine workers?
Senator Manchin. Yes, please.
Mr. Reeder. And that is, I understand the discussion about
premiums, and I understand the disagreement about premiums. But
an infusion to keep PBGC afloat will have a very positive
effect on mine workers, retirees, and beneficiaries.
Senator Manchin. What I am saying is, that premium will not
save me by 2022.
Mr. Reeder. Well, but it will save your participants; it
will save most of your participants.
Senator Manchin. Keep them whole?
Mr. Reeder. No, it will not----
Senator Manchin. I know that. I am just saying--I am only
talking $595.
Mr. Reeder. Okay.
Senator Manchin. You take me down to a hundred, two hundred
dollars, these people are destroyed. I cannot let that happen.
But I am saying I need to know what it does and what extra
cash we are going to take--or a loan or AML money or
something--and then we have to repay that. That is what we are
asking for.
We are not asking for a handout; we are not asking for a
bailout. We are asking for a bridge to get us from point A to
B, which we have done in so many instances in this country.
Mr. Reeder. We can tell you how the dials calibrate, but we
cannot tell you which one to turn.
Senator Manchin. By our next meeting then, hopefully we
will have some answers.
And hopefully, Mr. Chairman, we will be able to start
looking at our differences or coming to an agreement and moving
a piece of legislation forward.
Co-Chairman Brown. Thank you, Senator Manchin.
We have hearings in June and July. We will, I hope, start--
I mean, the staffs are already talking; we are already talking
individually among ourselves. I would hope we would have some
serious negotiations beginning no later than July.
We have put the Butch Lewis Act out, which we think is
actuarially sound. There has been some bipartisan support for
it in the House, less so in the Senate, but we are open to
other discussions with my Ohio colleague and others on both
sides.
Senator Smith?
Senator Smith. Thank you, Senator Brown.
And thank you so much, Mr. Reeder, for being here today.
I am gleaning from this committee a sense of real urgency
and a sense of frustration and a sense of real concern. And I
appreciate you being here to answer our questions.
And, Senator Brown, I am really thinking about a meeting
that I was at with Senator Heitkamp up in Moorhead just a
couple of days ago. And I can tell you that that sense of fear
and frustration and concern is even more intense amongst those
folks who are trying to figure out how they are going to be
able to take care of themselves.
And I appreciate what you are saying. You cannot give us
the answers, but you can give us the data that we need to make
the decisions that we need to make.
And another observation I have about this is that this is
really complicated; it is really difficult. And we need people
giving us this information and providing us with background who
know what they are doing and have a background in this area.
And I would just like to thank you for your expertise on
this area, if you get my drift.
I want to just go to this question of solutions. Because
when I was in Moorhead and when I have, you know, been in other
places talking with mostly people in Central States, they keep
saying, you know, we want solutions, we need to know what we
are going to do about this.
And as I am understanding this--and I am not an expert--
there are some ideas that have to do with premium increases and
some ideas that have to do with loans. Is that right?
Mr. Reeder. Yes. There are other dials. I mean, you could--
but those are two that are being discussed.
Senator Smith. Those are two that are being discussed. And
what would be the other? Give me an example of another dial
that we would be looking at.
Mr. Reeder. Increasing the guarantee level so that when a
plan does fail, for the people in it, it would be a reasonable
insurance.
As others have referred to, changing the funding rules to
make sure this does not happen again.
Senator Smith. Yes, okay. And let me just ask you about
this premium increase idea. I mean, if we were to go down that
path, would that be something that would be sustainable or
feasible for the businesses that would need to pay these
increased premiums?
Mr. Reeder. Well, we believe it would be sustainable. It
seems like a lot because it is a very large multiple of what
they are paying now. But they have been paying very low
premiums for a very long time.
Senator Smith. Is there some concern that there would be
sort of, like, a sticker-shock effect, I guess?
Mr. Reeder. Yes. There would be a sticker shock. However,
the increased premiums under the proposal would go towards a
variable rate premium so that you would only pay it to the
extent you are underfunded.
Senator Smith. Okay. And what about the loan ideas that
have been proposed out there? There is certainly Butch Lewis,
maybe there are others. You know, do you see those as being
feasible also as ways of solving this problem?
Mr. Reeder. From a selfish point of view, from the PBGC
point of view, if you can keep more plans off of our doorstep,
it will keep us solvent longer.
Senator Smith. Yes.
Mr. Reeder. But I think that the proposals are charged with
controversies.
Senator Smith. Right. Well, there is going to be a heck of
a lot of controversy if all these plans, you know, become
insolvent and it all falls on the PBGC, right? Then we have
millions of people affected by this.
A lot of this has been discussed, but I just have--I want
to just thank Senator Heitkamp for pointing out how we have
mustered the political will and the kind of sense of common
good to provide loans in other situations when we saw that
organizations that are crucial to our economy were going to go
out of business if we did not all come together. And I totally
agree with her that that is a way.
I mean, if that, why not this? Seems to me to be so clear.
The other thing I just have to observe, Mr. Chairman, is
that, you know, we just gave a $1.5-trillion tax cut, which
would have paid for the solution to this problem many times
over. So this makes me realize again that what we do not--you
know, some people say, well, we have a math problem here. Well,
I think what we have is a people problem. We have a real
problem making sure that people do not literally, as the man I
talked to in Moorhead, find themselves scooping poop in the
local parks as the only thing that they can do in order to keep
themselves in their apartment.
So I look forward to the increased conversation, more
conversation about the solutions that we need to explore here
to make sure that that does not happen anymore.
Thank you.
Co-Chairman Brown. Thanks.
Congressman Scott?
Representative Scott. Thank you.
And thank you, Mr. Reeder, for being here.
I apologize for being late, but the Committee on Education
and Workforce had a full committee hearing that started at
10:00, and four members of this committee serve on that. And so
I would hope, Mr. Chairman, that we can have a little better
communication in the future to avoid the conflicts.
Mr. Reeder, the PBGC has charged all of the funds a premium
for essentially insuring up to the insured level. You have
assets that are totally insufficient to pay the liabilities in
the future. What is the legal and moral obligation of the PBGC
to continue paying benefits even though the funding may be
gone?
You may have a legal problem paying if you do not have the
money, but what is the government's moral obligation to
continue making payments?
Mr. Reeder. I am sorry. I consider myself a very moral
person, but I am not an expert. I do believe that most
participants and probably the public as a whole believe that
the guarantee level, at least the amount that PBGC is obligated
to pay, is a debt of the people of America. But I do not--that
is not the law.
Representative Scott. But you believe, as I do, that having
provided a guarantee and having people live under that
guarantee, paying the required premium, they would expect, just
from a moral basis, the payments to be made.
Now, Senator Brown has talked about what we are on the hook
for if we do not do something. Have you looked--including the
contagion effect--have you looked at the total government
obligation that would be triggered if everything goes under,
people losing their pension, not paying tax on it, going on
food stamps and Medicaid and what the effect to the Federal
budget would be if we do not do something?
Mr. Reeder. PBGC has not done that research, but I
understand it is being undertaken, and other people have
already taken long strides in that direction.
Representative Scott. The last-man-standing rule--can you
explain what corporate assets are vulnerable to insolvency of
plans? Is the whole corporation subject to pay off the deficit,
or is there some limit to what a corporation can be asked to
pay as the last man standing?
Mr. Reeder. If withdrawal liability is in fact triggered,
then the corporate assets would be subject to--and all the
assets of the corporation. There is an exception for a small
employer that wants to liquidate. If the small employer
liquidates, they can set aside a small amount or a percentage
of the sales proceeds to pass along or to keep. But generally,
the entire corporate assets are subject.
But let's bear in mind that withdrawal liability is
invariably negotiated between plan trustees and the employers
themselves. And plans do not like to get employers illiquid.
And so they will negotiate something lower to keep the employer
afloat if the employer has the means to stay afloat.
Representative Scott. But the entire corporate--all of the
corporate assets are vulnerable to pay debts owed by the funds?
Mr. Reeder. Yes.
Representative Scott. There are legislative proposals that
would allow you to identify troubled plans and invest some
money to get them kind of over the hump. Are you familiar with
those plans, one introduced by the gentleman from Texas, Mr.
Sessions, which would allow investments into the funds to get
them over the hump if people will stay in the plans?
Mr. Reeder. Yes, we are. We are aware.
Representative Scott. Do you have that authority now?
Mr. Reeder. No. Well, we have the authority to approve
alternative withdrawal schemes, and we do, and we are analyzing
them. And we are working with Senator Sessions's staff to come
up with----
Representative Scott. Representative Sessions.
Mr. Reeder. Representative Sessions, thank you; sorry.
Representative Scott. You are working with his staff to see
if that is a possible solution, whether you already have the
authority or whether you need legislation?
Mr. Reeder. We do have the authority, and we are working
with him to come up with regularized procedures for making
approvals of those alternatives.
Representative Scott. Thank you, Mr. Chairman.
Co-Chairman Brown. Thank you, Congressman Scott.
We will do a second round for those who want to stay. And I
know Congressman Norcross is able to, and I think Congressman
Neal has a couple of questions.
Thank you for your candor with all of us and your
cooperation.
The administration has put forth a proposal to raise
premiums in order to stabilize the PBGC insurance program. And
I understand the importance of that as a component in this
solution.
First question: does this proposal, does the
administration's proposal, do anything to prevent the
insolvency of the Mine Workers or Central States or Bakers and
Confectionary of Ohio, Southwest Carpenters?
Mr. Reeder. No.
Co-Chairman Brown. Nothing; okay. You can only, it seems to
me, turn the premium--I guess you said dials earlier, dials,
levers--you can only turn the premium dial so far because
multiemployer plans pay premiums out of the same pot of money
as benefits. Correct?
Mr. Reeder. Yes.
Co-Chairman Brown. Okay.
Mr. Reeder. The proposal has a waiver provision that allows
the PBGC to waive premiums if it is going to make the plan
worse off.
Co-Chairman Brown. If you raise premiums, though, do you
risk accelerating the insolvency of some of the most vulnerable
plans?
Mr. Reeder. Yes, that risk does exist, and it is recognized
in the proposal by allowing us to waive increased premiums or
premiums altogether in a situation where it would make the plan
worse off.
Co-Chairman Brown. So how would you prevent that proposal
from making the financial position of these plans even worse?
Mr. Reeder. Well, we would have to analyze the--in other
words, I do not think the premiums would be levied on critical
and declining plans. I think it would be counterproductive to
increase the premiums on a plan that is about to come into the
PBGC.
Co-Chairman Brown. So if you waive that 20-percent of the
premium, can you guarantee the variable rate premium will not
make the problem worse in some cases?
Mr. Reeder. We would do our best. Guarantees are tough. But
the legislation needs to be drafted, and regulations would need
to be made towards that end.
Co-Chairman Brown. Okay.
Congressman Neal?
Representative Neal. Thank you, Mr. Chairman.
Just if we could maybe use the opportunity to be better
educated here on the panel about the last-man-standing rule. It
is oftentimes used to describe the general insurance principle
of multiemployer pension plans where risks are pooled amongst
employers.
But as employers leave the plan or go insolvent, the burden
remains on the employers that are left in the plan.
Deregulation in the 1980s and 1990s as well as large-scale
economic downturns in 2001 and 2008 led to waves of industry-
wide employer insolvencies.
The remaining employers in these plans are now the last man
standing in their respective multiemployer plans.
What makes the multiemployer pension plans particularly
vulnerable to the last-man-standing rule?
Mr. Reeder. In my mind, it is the very essence of why
multiemployer plans are subject to less rigorous funding rules,
lower premiums, lower guarantee rates, because of the
perception that those employers that are left in the plan can
pick up the slack for employers that become insolvent or
bankrupt.
It only works, though, if the population of contributing
employers remains relatively the same. So if one employer goes,
if one trucking company, for example, goes bankrupt, another
company will take up those routes and will pay those employees
and will contribute that amount to the plan.
If, however, the replacement trucking company hires
nonunion workers or uses fewer workers, then there is a
decrease in the number of actives, and the system falls apart.
Representative Neal. So to follow up, under the current law
then, is there anything an employer can do to counteract the
problem if they cannot afford to withdraw from the plan?
Mr. Reeder. Well, I do need to note--the short answer is
``no.'' But I do want to note that withdrawal liability
payments are made on an annual basis. It is not the big plan
coming after the employer for one big chunk of money. They pay
it on an annual basis, and they do not have to pay any more
than generally what they have been paying.
Representative Neal. Thank you, Mr. Chairman.
Co-Chairman Brown. Congressman Norcross?
Representative Norcross. I want to follow up. That is
exactly where we want to go.
So when we take a look now, Mine Workers, Central States,
which are in a, I hate to say, unique position, but are in very
dire straits, taking care of the PBGC as an insurance entity
still only gets them $12,870 if everything is perfect. Is that
correct?
Mr. Reeder. Or less, yes.
Representative Norcross. Right.
Mr. Reeder. Based on their service.
Representative Norcross. So that is life support; we are
trying to save them from dying. But what Richie spoke about and
where I wanted to go is, how do we make it a wellness program
where, (a) structurally things change, but then we get new
infusions of employees who want to be part of the system?
And that is part of the problem: too many retirees and not
enough new folks. Because who wants to sign on to an unfunded
liability of several billion dollars?
The opportunity for growth in these funds is almost nil
when they are in a critical or declining status. Is that
correct?
Mr. Reeder. Yes.
Representative Norcross. So we have all the old debt, all
the retirees, and nobody new.
A mechanism to allow new companies to become involved,
bringing more employees in without being saddled with that--if
not, they cannot grow. Would you agree with that?
So we have an emergency patient, trying to keep them alive.
And we can talk about how we got there, but the fact of the
matter is, you have to keep them alive. And that certainly is
Central States.
But collectively, coming together, what is the most
important thing that you can do to prevent a plan coming to
PBGC? You talked about regulatory--you did not have the
authority.
Mr. Reeder. And if it is critical and declining, the only
thing that will help them is an infusion of cash.
Representative Norcross. Before that, we are trying to
prevent----
Mr. Reeder. Right.
Representative Norcross. Because the Central States is
already there.
Mr. Reeder. Yes.
Representative Norcross. We are trying to prevent piling on
by others. What can you do as PBGC before they get there?
Mr. Reeder. Well, we do not have the tools right now. We do
not have tools to keep them from coming. We do not have the big
stick to require employers to make necessary contributions and
actuaries to make reasonable assumptions. We do not have those
tools.
Representative Norcross. So what you are telling me is,
individual plans can make any type of projection they want,
fund a pension plan on that basis----
Mr. Reeder. Subject to the fiduciary rule, yes.
Representative Norcross. Right, and then you pick up the
mess.
Mr. Reeder. Right.
Representative Norcross. Do you think it is altogether
proper and part of our responsibility that we fix the
structural problems along with saving the pensions that are in
critical condition now?
Mr. Reeder. I am really not--as you know, I am not
empowered to talk about positions, especially of the
administration. Maybe you do not know, but I am----
Representative Norcross. Well, is there any reason why you
would want to fix this if you are----
Mr. Reeder. But I think there is a general consensus that,
especially if we are going to do something about the current
problem, as Co-Chairman Brown mentioned at the beginning, we
are going to have to make sure that we do not have this problem
again.
I do not think people are going to make the sacrifices that
they are going to have to make to fix the current problem
unless they can be convinced that it is not going to happen
again.
Representative Norcross. The human factor we have heard so
much about, the Mine Workers, Central States, and others. But
the financial condition to our country when some of these plans
start going under, the impact in all of our neighborhoods--
there are companies going out of business because this vortex
is going to suck everybody down, major corporations and small
ones, and they are the ones that provide the jobs.
So, (a) the Butch Lewis Act has to go in whatever form it
is, but we also have to be there so those in the future can
have a plan so they get that golden nest egg that is eluding so
many people.
I yield back.
Co-Chairman Brown. Congressman Scott?
Representative Scott. Thank you.
Mr. Reeder, following up on the last-man-standing rule, as
Mr. Norcross indicated, no sane person would join a plan, and
so the plans cannot grow. If others would come in, you might be
able to get through this. But with nobody, no new companies
coming in, it is just going to get worse.
What proposals are out there that would, I guess, immunize
or encourage people to come into programs that are presently
underfunded?
Mr. Reeder. Well, most plans are underfunded. And I do
believe that there are a lot of underfunded plans that are
growing. There are green status plans that are growing. But as
Congressman Norcross pointed out, a critical and declining plan
is not going to grow.
The only thing that will grow the critical and declining
plan is a promise to the employer that they are not going to
have to be subject to the consequences of the insolvency of
that plan. And that does not help the plan any, because it does
not contribute towards preventing the insolvency. You are
between a rock and a hard place.
Representative Scott. Well, if it injects money coming in--
if you had more companies joining the plan, you would have more
premium money and more money coming into the pension fund.
Mr. Reeder. Well, employers are making contributions to the
plans. That is not a problem. The only way somebody is going to
make a contribution to a plan is if they are accruing benefits
commensurate with those contributions.
And so I will stick by my point that, if it is critical and
declining, the only solution I see is an infusion of cash.
Representative Scott. According to your testimony, there
was not much of a problem with the multi plans until about
2012, 2013, then all of a sudden everything went south. Were
there signals that we missed in that time when we could have
done something to prevent a total collapse?
The single-employer plans, according to the graph, seem to
be recovering from the 2008 financial crisis, but the multi
plans seem to have collapsed. Is there something we missed
along the way?
Mr. Reeder. Well, the 2008 collapse happened right after
the 2006 improvements in the funding rules; there were small
improvements to the multi rules. But they were not commensurate
to what--they were not the same as the improvements to the
single-employer plan rules.
And so the single-employer plans were better equipped to
weather that storm. And they came out looking better.
As far as earlier signs, I think we began to see signs
right after 2000, but they did not become that apparent until
the dot-com crisis and bubble and 9/11.
Representative Scott. Well, you had virtually zero unfunded
liability through 2010, 2011. And then all of a sudden in 2014,
you see a big loss, and then it just drops off the scale.
Mr. Reeder. That is right. So the signals were not bright
and clear, but they were there.
Representative Scott. You mentioned in your testimony that
some funds found themselves, because of investment returns,
overfunded. And the reaction, rather than kind of bank the
money, was to increase the promises, which made it more likely
that they would go insolvent.
Do you have recommendations on allowing overfunding up to
certain levels and prohibiting increasing promises until you
can really afford them?
Mr. Reeder. Yes. The problem that Mr. Norcross referred to
about the tax cap on contributions--I think it was you--that
was part of the problem, and that was fixed in 2006, and I do
not think it is a problem today.
If it is, we need to know about it, because there are very,
very few plans that are at that level.
But I also think that the plans that weathered the storm
and the effect of that problem were ones that, when they did
increase benefits, they increased them with benefits that can
be restricted later in bad times. And there are lots of plans
that have done that. They have increased benefits, and then
when hard times come, they have restricted future accruals, and
they are doing fine today.
Representative Norcross. Can I follow up, please?
Co-Chairman Brown. Really quickly, because I have a vote on
the Senate floor. I apologize. Really quickly.
Representative Norcross. Let us follow up.
Are you talking about a 13th payment piece, that we are
able to deal with?
Mr. Reeder. Yes. Well, that is an example.
Representative Norcross. Because if you included it as a
cost of living, you cannot roll that back. Is that correct?
Mr. Reeder. Right. Right. Right.
Representative Norcross. That is a very big difference.
Mr. Reeder. There are some you cannot roll back. I am not a
catalogue of which ones you can and which ones you cannot. But
I am mainly talking about reducing future accruals.
Representative Norcross. Yes.
Mr. Reeder. You can always do that.
Representative Norcross. Thank you.
Thank you, Mr. Chairman.
Co-Chairman Brown. And, Congressman Scott, you were done?
Representative Scott. I am done.
Co-Chairman Brown. Okay, thank you.
Thanks to the members of the committee.
And, Director Reeder, thank you for your terrific public
service. I would like to see you be there a lot longer. I guess
that is my personal view, anyway.
But thanks to Ms. Markakis and to Ms. Cameron for the work
that they will do with us. You know, I appreciate the
administration's work on working to save the PBGC itself, even
with, you know, the minimalist way that you are able to act,
but the very important way. It is an important component, but
only a component.
I have been very pleased with the staff work already on
both sides. I think we are making major progress on this. And
as we have all said all along, it has got to be bipartisan. We
need five votes on each side. And I am so very hopeful we get
here.
So, Director Reeder, thank you so much.
Mr. Reeder. Thank you.
[Whereupon, at 11:40 a.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Sherrod Brown, a U.S. Senator From Ohio, Co-
Chairman, Joint Select Committee on Solvency of Multiemployer Pension
Plans
WASHINGTON, DC--U.S. Senator Sherrod Brown (D-OH)--co-chair of the
Joint Select Committee on Solvency of Multiemployer Pension Plans--
released the following opening statement at today's hearing.
I call the committee to order. I would like to welcome my
colleagues and everyone in attendance to the second hearing of the
Joint Select Committee on Multiemployer Pension Reform.
Our job on this committee is to find a bipartisan solution to the
multiemployer pension crisis threatening 1.3 million Americans and
thousands of small businesses.
To do that, we also have to confront the secondary crisis
threatening the Pension Benefit Guaranty Corporation, or the PBGC.
Congress created the PBGC in 1973 to serve as the insurance company
for these retirement plans. Like any insurance plan, PBGC coverage
doesn't kick in until after the damage has been done--after a plan has
failed, after businesses have gone under, and after jobs have been
lost, PBGC is supposed to cover part of the retirement workers earned.
Ask anyone who's ever totaled a car or dealt with flooding or fire
in their homes--you're sure glad you have insurance, but you'd much
rather have avoided the disaster in the first place.
We have the opportunity to do just that: to keep those businesses
open, to save those jobs, and to ensure workers get the entire
retirement they earned.
Simply propping up the PBGC is not enough. We can't take our hands
off the wheel, close our eyes, and allow this car to crash, simply
because we bought an insurance policy.
We can't do that to the retirees and businesses whose plans are in
crisis, and we can't do that to the multiemployer system.
You see, as the crisis in the multiemployer plans has developed
over the last few years, a second, quieter crisis has developed at the
PBGC--a crisis that means allowing just one of these major plans to
fail could put enough strain on the insurance system to bring down the
entire PBGC multiemployer system.
According to the latest estimates, the multiemployer system at the
PBGC faces a deficit of more than $65 billion, and growing. It has just
$2 billion in assets, and is projected to become insolvent within the
next 7 years.
So we can see the writing on the wall. When one of these large
plans on the brink of failure requires the PBGC to step in, the PBGC
will also fail--potentially leaving taxpayers on the hook for tens of
billions of dollars. It's our job to make sure that doesn't happen.
The Federal Government helped create this crisis, and the Federal
Government must help solve it.
Each plan is different, and there are many factors that contributed
to bringing them down. There's no question that Wall Street squandered
some of this money.
But the government also played a role, through perverse tax
incentives, insufficient premium levels, and inadequate tools and
financing for the PBGC--all parts of this system that were designed and
put in place by Congress.
We have a responsibility to correct each of these errors. Yes, that
means addressing future actuarial assumptions within these plans, but
that's not a complete solution.
To truly address this crisis, we must do two things:
1. Update and improve the PBGC going forward, so this never
happens again; and
2. Solve the current crisis facing retirees and workers and
businesses.
We can't do one without the other.
Updating and strengthening the PBGC alone would still lead to
massive pensions cuts. It would leave small businesses drowning in
withdrawal liability, and active workers paying into a pension they
will never receive.
We need to make it clear to all the Americans whose lives will be
upended by the failure of these plans--we won't let that happen.
At the same time, we cannot just put out the fire we're fighting
today, but leave the PBGC as a box of kindling, waiting to ignite
another crisis a few years down the road. We must ensure that we never
get to this place again.
I am confident we can do both together, and that the information we
obtain today will be an important part of that process.
This committee will continue to hold hearings--two more in June,
and another two in July. At the same time, we are holding numerous
staff and member level briefings and continuing to receive comments and
input on our website, www.
pensions.senate.gov.
This will arm all of our members with the information they need,
and give the people we serve the opportunity to weigh in.
In July, when the bulk of our hearings conclude, we will have to
start the process of negotiating a bipartisan solution to this crisis.
I am ready and willing to consider any idea that solves the current
crisis and helps prevent a future crisis, and I know Chairman Hatch
shares that approach.
And with that, I yield to my co-chairman, Senator Hatch, for his
opening statement.
______
Prepared Statement of Hon. Orrin G. Hatch, a U.S. Senator From Utah,
Co-Chairman, Joint Select Committee on Solvency of Multiemployer
Pension Plans
WASHINGTON--Joint Select Committee on Solvency of Multiemployer Pension
Plans Co-Chairman Orrin Hatch (R-Utah) today delivered the following
opening statement at a committee hearing examining the state of the
Pension Benefit Guaranty Corporation (PBGC).
This is the Joint Select Committee's second hearing to delve into
issues concerning operations of the multiemployer pension system.
As I noted last time, it is critical for us to remember that the
mandate of the Joint Select Committee is not just to develop reports
and recommendations on the multiemployer plans, but to also review the
solvency of the Pension Benefit Guaranty Corporation.
To do this, we have brought in one of the Nation's top experts on
the PBGC, Tom Reeder--who happens to also be the current Director of
the corporation, which insures benefits for the more than 30 million
Americans in defined benefit pension plans.
To provide context, one of the core issues confronting pension
policymakers is the issue of benefit security.
Pension benefit security and protection can be approached in a
number of ways, including strong pension plan funding rules, robust
asset management requirements, and meaningful disclosure mandates.
In the United States, we have historically used a benefit guaranty
system--essentially a form of insurance--for many defined benefit
pension plans to cover lost pension income if a retirement plan becomes
insolvent or sponsoring employers go bankrupt.
The problem is that the U.S. system is very complicated and often
difficult to effectively operate.
There are a lot of moving parts, and numerous variables for which
to account.
Some of those variables include questions on how plans are insured,
to what extent benefits are guaranteed, and how we can sufficiently
fund the system while still ensuring employers are properly
incentivized to sponsor retirement plans.
The problems don't end there though. It is clear that since its
inception in 1974, the PBGC has faced design and operational issues
that have made achieving its policy goals difficult.
This morning, Mr. Reeder will provide an overview of the PBGC's
structure and finances, answering key questions about the organization,
including how it is structured and, most important, how it is financed.
It is imperative that the Joint Select Committee develop a solid
base of knowledge about the corporation and how it is funded before
turning to the PBGC's current funding status.
And, in a word, that funding status is troubled. I won't recite the
grim statistics because we have all read them, and we are all deeply
concerned.
Over the course of the next weeks and months in the Joint Select
Committee, I trust that we will learn more about the economic and
demographic forces that impact the multiemployer system, and
consequently the financial health of the PBGC.
But today, let's dig into the fundamentals first.
After all, it's hard to plot a course without getting a good map of
the terrain.
As we work today with Mr. Reeder, here are some fundamental
questions I think both sides should keep in mind.
What is the corporation's charter, and how does that effect its
operations and success?
What does it mean to be a wholly owned government corporation?
What are the PBGC's core functions, and how is it structured to
achieve those functions?
Does PBGC have the right tools and flexibility to intervene in the
management and operation of troubled multiemployer plans?
How does the corporation manage the funds under its management?
Also, importantly, how do the insurance premiums work to fund the
plan guarantees?
And, is this all the right model for the economic and demographic
markets in which these plans operate?
Frankly, I believe we need to get these answers and then spend some
time understanding what those answers mean before the Joint Select
Committee can effectively consider any proposals to repair the
multiemployer system.
______
Prepared Statement of Hon. W. Thomas Reeder, Director,
Pension Benefit Guaranty Corporation
Co-Chairman Hatch, Co-Chairman Brown, and members of the committee,
thank you for the opportunity to appear before you today to discuss the
Pension Benefit Guaranty Corporation (PBGC) and the challenges it faces
in protecting pensions of American workers. We are grateful to the
members of the committee for undertaking this important work.
protecting pensions
Every American worker should have the opportunity to earn a secure
retirement. A vital part of retirement security for nearly 40 million
private-sector workers, retirees, and beneficiaries comes from
traditional defined benefit pension plans. For decades they have been
an efficient vehicle for a secure retirement. Traditional defined
benefit plans provide lifetime retirement income that does not depend
on a participant's investment choices or the market price of annuities
when the participant retires.
PBGC's mission is to protect the lifetime retirement income that
comes from
private-sector pension plans when employers are unable to make
contributions to the plans sufficient to fund the promised benefits.
Today, about 1.5 million current and future retirees and beneficiaries
depend on PBGC for pensions they earned for years of work but may have
lost without PBGC.
Congress established PBGC as part of the Employee Retirement Income
Security Act of 1974 (ERISA). By law, PBGC is financed from premiums
and, in the case of the Single-Employer Program, assets from failed
plans. PBGC is administered by a Director. PBGC has a three-member
Board of Directors consisting of the Secretary of Labor, who is Board
Chair, and the Secretaries of the Treasury and Commerce.
PBGC operates two separate insurance programs: one for single-
employer plans (the Single-Employer Program) and one for multiemployer
plans (collectively bargained plans with more than one employer) (the
Multiemployer Program). While each program is designed to protect
participants' pension benefits when plans fail, they differ
significantly in the level of benefits guaranteed, how the guarantee is
provided, the event that triggers payment of the guarantee, and
premiums paid by insured plans. By law, the two programs are
financially separate. Assets of one program may not be used to pay
obligations of the other.
Both programs have been in a deficit position for 15 years or longer,
meaning that, for each of our two insurance programs, assets are less
than liabilities. While the financial condition of the Single-Employer
Program has been improving, the Multiemployer Program's financial
condition has been deteriorating rapidly and without action the changes
required to remedy the deficit become more difficult (see Figure 1).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
As of September 30, 2017, the Single-Employer Program had
liabilities of $117.1 billion and assets of $106.2 billion, resulting
in a $10.9-billion deficit, down from a $20.6-billion deficit at the
end of FY 2016. Continued improvement in the Single-Employer Program is
projected but not a certainty.\1\
---------------------------------------------------------------------------
\1\ PBGC uses stochastic modeling that produces a probability
distribution of potential outcomes for the future financial condition
of PBGC's two insurance programs. The FY 2016 Projections Report
continues to show a wide range of potential outcomes.
In sharp contrast, the Multiemployer Program had liabilities of
$67.3 billion and assets of only $2.3 billion, resulting in a deficit
of about $65 billion. The Multiemployer Program is projected to fail in
just a few years, and without action, the changes required to remedy
the deficit become increasingly difficult.
multiemployer program
PBGC's Multiemployer Program provides financial assistance to
multiemployer plans that have run out of money so that they can pay
benefits at PBGC guaranteed levels.\2\ The program is funded by
premiums paid by the plans. Our financial assistance is technically a
loan to the insolvent plan. But because the plans have already run out
of money, repayment of financial assistance loans is highly unlikely.
To date, only one loan has been repaid, and that loan was made in the
circumstance of a plan having a temporary financial need rather than a
permanent need.
---------------------------------------------------------------------------
\2\ Financial assistance also covers reasonable administrative
expenses.
PBGC's FY 2016 Projections Report shows a projected FY 2026 year-
end mean deficit of about $78 billion (in nominal dollars) in the
Multiemployer Program, even assuming that some plans use benefit
suspensions and partitions as allowed under the Multiemployer Pension
---------------------------------------------------------------------------
Reform Act of 2014 (MPRA) to avoid insolvency (see Figure 2 below).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The assets and income of PBGC's Multiemployer Program are only a
small fraction of the amounts PBGC will need to support the guaranteed
benefits of participants in plans expected to become insolvent during
the next decade. Projections show that the Program is more likely than
not to become insolvent by the end of FY 2025, absent changes in law
(see Figure 3 below).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
As insolvency of the insurance program grows closer, the changes
required to prevent insolvency become more disruptive.
multiemployer plans
A multiemployer plan is a pension plan maintained through a
collective bargaining agreement between employers and a union. The
employers are usually in the same or related industries. Multiemployer
plans provide benefits for people in industries such as transportation,
construction, mining, and hospitality.
Multiemployer plans have provided retirement benefits to millions
of American workers for more than half a century. Today, America's
1,400 multiemployer plans provide retirement security to more than 10
million participants and their families.
There are multiemployer plans and participants in every State.
Multiemployer plans range in size from small local plans with a hundred
or fewer participants to large national plans covering hundreds of
thousands of participants. Businesses of all sizes, including hundreds
of thousands of small businesses--doing business in every State--
participate in multiemployer plans.
Multiemployer plans provide pension portability, allowing workers
to accumulate benefits earned for service with different employers
throughout their careers. They pool longevity risk, which provides much
lower-cost annuities than those available in the individual market, and
they spread the risk of any individual employer's failure across many
firms.
Benefits to Employers
Among the advantages of this type of plan is that assets are pooled
among employers in a single consolidated trust. Efficiencies of scale
broaden and diversify investment opportunities and lessen the
administrative and investment costs of operating a separate single-
employer plan. Investment professionals manage the plans' assets,
helping to reduce risks for contributing employers, employees, and
retirees.
Importance to Small Businesses
Multiemployer plans enable employers to provide retirement benefits
to their employees without imposing administrative burdens on any
individual employer. Employers generally need only to remit
contributions set by collective bargaining and are relieved from the
responsibilities of operating a plan, which are handled by an
independent joint board of trustees, consisting of equal
representatives from labor and management. Consequently, these plans
have historically offered employers, especially small businesses, an
affordable way to provide pensions to their employees, without the
administrative burdens.
funded status of multiemployer plans
Multiemployer plans overall are less well funded than single-
employer plans. The disparity between the funded status of single-
employer plans and multiemployer plans has existed for many years (see
Figure 4).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Plan Zone Status
The Pension Protection Act of 2006 categorized multiemployer plans
based on funded status, compliance with minimum funding standards, and
time until likely insolvency: Endangered Status, (commonly referred to
as ``Yellow Zone''), Seriously Endangered Status (``Orange Zone''), and
Critical Status (``Red Zone''). The Multiemployer Pension Reform Act of
2014 (MPRA) created a subcategory of Red Zone plans--Critical and
Declining; these plans project that they will run out of money within
15 to 20 years. Plans that do not fall within these categories are
categorized as Not in Distress (``Green Zone''). Table 1 summarizes the
criteria for each zone status.
Table 1
Summary of Plan Zone Status Criteria
------------------------------------------------------------------------
------------------------------------------------------------------------
Not in Distress (Green Zone) - Not Yellow, Orange, or Red Zone
------------------------------------------------------------------------
Endangered (Yellow Zone) - Plan is less than 80-percent
funded or a funding deficiency is
projected within 7 years.
------------------------------------------------------------------------
Seriously Endangered (Orange Zone) - Plan is less than 80-percent
funded and a funding deficiency
is projected within 7 years.
------------------------------------------------------------------------
Critical (Red Zone) - Various alternative criteria
indicating severe funding or
liquidity issues--generally less
than 65-percent funded ratio,
insolvency projected within 5-7
years, or a funding deficiency is
projected within 4-10 years.
------------------------------------------------------------------------
Critical and Declining (Red Zone - Plan is projected to become
subset) insolvent within 15 years (20
years if the plan is less than 80-
percent funded or there is less
than one active for each inactive
participant).
------------------------------------------------------------------------
The majority of multiemployer plan participants are in Green Zone
plans. A significant minority of multiemployer plans--about 130 plans,
some very large--covering 1.3 million participants, are in Critical and
Declining Status (see Figure 5). The underfunding in Critical and
Declining plans totals about $100 billion on a market basis.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Causes of Multiemployer Plan Underfunding
Lower funding levels in multiemployer plans in part reflect the
less stringent funding rules that have always applied to multiemployer
plans. For many years, multiemployer plans were widely considered to be
inherently more financially stable than single-employer plans because
they rely on contributions from many employers, unlike single-employer
plans that generally rely on one employer. If an employer failed,
others were there to make contributions to fund the promised benefits.
Perhaps because risks were pooled in this way, the law allowed plans to
take more time to pay down underfunding created by benefit improvements
or adverse experience, such as investment returns that were lower than
anticipated or industry declines.
Many other factors--financial, economic, and demographic--also have
contributed to underfunding in multiemployer plans and the financial
distress of some multiemployer plans.
Before the decade of the 2000s, defined benefit plans, including
multiemployer plans, earned historically high rates of return, which
kept plans well-funded without large employer contributions. High
investment returns financed benefit improvements, such as increased
benefit accrual rates, past service credit, new or increased early
retirement subsidies, and disability pensions.\3\ These new obligations
elevated plan liabilities in the late 1990s in a way that was difficult
to reduce later.
---------------------------------------------------------------------------
\3\ Because of maximum deductible limits, some plans increased
benefits during this period to avoid losing deductible treatment of
employer contributions for Federal income tax purposes, which also
contributed to longer-term cost. These limits were raised in the
Pension Protection Act of 2006.
The significant market losses in the early 2000s and especially in
the 2008 market crisis and Great Recession took a huge toll. Average
funded ratios (market value of assets divided by liabilities discounted
using a standardized PBGC interest factor that reflects group annuity
prices) exceeded 90 percent in the 1990s, then dropped to the mid-60-
percent range in the mid-2000s and fell below 50 percent after the 2008
---------------------------------------------------------------------------
market crisis.
Even before the 2008 market crisis, Congress recognized the
seriousness of multiemployer plan underfunding and enacted the Pension
Protection Act of 2006 (PPA). Under PPA, plans classified as Critical
Status (Red Zone) generally must establish a Rehabilitation Plan
detailing how they intend to emerge from Critical Status (generally
within 10-13 years), through actions such as increasing contributions
and reducing or eliminating future accruals or adjustable benefits. If
they are not projected to emerge from Critical Status during the
rehabilitation period after exhausting all reasonable measures, they
must develop an alternative scenario that allows them to emerge at a
later time or to otherwise forestall possible insolvency.
A significant number of plans were not able to recover, including
some very large plans covering thousands of participants and in a few
cases hundreds of thousands. As the financial markets and the economy
improved, many plans became better funded, and the percentage of
participants in plans that were Not in Distress (Green Zone plans)
increased markedly. But the percentage of participants in Critical
Status plans declined only slightly, reflecting the stagnant or
shrinking contribution base and high percentages of retirees that
characterize struggling plans (see Figure 6). About one-third of the
participants in Critical Status plans are in Critical and Declining
Status plans.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Factors such as declines in unionized employment, competitive
pressures from non-unionized businesses, and declines in demand for
products or services, caused some companies to go out of business. They
left behind the unfunded benefits of their inactive and retired workers
(sometimes referred to as orphan liabilities).
Today, the ratio of active to inactive participants is at its
lowest point ever. Among multiemployer plans in the aggregate, fewer
than 4 out of every 10 covered participants are actively employed by a
participating employer.\4\ In addition, contributions by downsized
companies that remained in business declined.
---------------------------------------------------------------------------
\4\ Active participants account for about 35 percent, separated
vested participants about 35 percent, and retired participants about 30
percent.
As underfunding in these plans deepens, remaining employers are
faced with a difficult choice: higher contributions if they stay;
higher payments for their allocated share of plan underfunding
withdrawal liability if they leave (withdrawal liability). And if they
do leave, the plan will be at greater risk of failure.
Contagion
Some have asked whether the failure of a multiemployer plan could
cause failure of other multiemployer plans in which the affected
employers also participate (``contagion''). This situation would most
likely occur as a consequence of the insolvency of a very large plan.
We have not yet experienced the failure of a very large plan, so it is
too early to test the contagion theory, but it seems plausible. Some
also have asked whether failure of an employer that contributes to more
than one multiemployer plan could lead to failure of multiple plans
(another type of contagion). This would most likely occur as a
consequence of the failure of a company that is a dominant employer in
multiple plans. Here also the theory seems plausible. We are aware of
at least one instance where bankruptcy of a major contributor to
multiple plans put financial stresses on those plans.
Severity of the Problem
PBGC's Financial Statements \5\ reflect the serious underfunding in
multiemployer plans that are in financial distress. Our Projections
Report \6\ shows how this underfunding is likely to result in a growing
deficit and, more important, the inability of the Multiemployer Program
to provide the financial assistance to cover guaranteed benefits.
---------------------------------------------------------------------------
\5\ PBGC FY 2017 Annual Report: https://www.pbgc.gov/sites/default/
files/pbgc-annual-report-2017.pdf.
\6\ PBGC FY 2016 Projections Report: https://www.pbgc.gov/sites/
default/files/fy-2016-projections-report-final-signed.pdf.
In FY 2017, PBGC paid $141 million in financial assistance to 72
insolvent multiemployer pension plans, covering the benefits of over
63,000 retirees with another 30,000 people entitled to benefits once
they retire. In the coming years, the demand for financial assistance
from PBGC will increase as more and larger multiemployer plans run out
of money and need help to provide benefits at the guarantee level set
---------------------------------------------------------------------------
by law.
As of September 30, 2017, the Multiemployer Program had assets of
$2.3 billion to cover $67.3 billion in liabilities in 187 plans. The
liabilities \7\ consist of:
---------------------------------------------------------------------------
\7\ The liabilities add to $65.4 billion rather than $67.3 billion
due to rounding.
$2.7 billion for the 72 plans currently receiving financial
---------------------------------------------------------------------------
assistance (about 93,000 participants).
$2.0 billion for 68 plans that have terminated but have not
yet started receiving financial assistance payments from PBGC
(about 78,000 participants). Terminated multiemployer plans no
longer have employers making regular contributions for covered
work, though some plans continue to receive withdrawal
liability payments from withdrawn employers.
$62.7 billion for 47 plans that are ongoing (i.e., have not
terminated), but PBGC expects they will exhaust plan assets and
need financial assistance within 10 years (about 1,160,000
participants).\8\
---------------------------------------------------------------------------
\8\ The liability for ongoing plans includes a small probable bulk
reserve of $1.1 billion.
The last two categories--terminated plans and ongoing plans
expected to need financial assistance within 10 years--are classified
---------------------------------------------------------------------------
as ``probable'' obligations of the Multiemployer Program.
The $67.3 billion in Multiemployer Program liability is an increase
from $61.0 billion in FY 2016. In addition to the $67.3 billion booked
as a liability in our financial statements, there is $14 billion in
underfunding in ongoing multiemployer plans projected to become
insolvent in the next 10 to 20 years; these plans, which are not booked
as liabilities, are classified as ``reasonably possible'' future
obligations.
As noted earlier, our most recent projections show that, absent a
change in law, the mean 2026 deficit is about $78 billion (in nominal
dollars), and Multiemployer Program assets are likely to be exhausted
in 2025.\9\
---------------------------------------------------------------------------
\9\ PBGC FY 2016 Projections Report: https://www.pbgc.gov/sites/
default/files/fy-2016-projections-report-final-signed.pdf.
---------------------------------------------------------------------------
helping plans avoid insolvency: previous legislative efforts
Congress enacted two pieces of legislation to address underfunding
in multiemployer plans: the Pension Protection Act of 2006 (PPA),
discussed earlier, and more recently, the Multiemployer Pension Reform
Act of 2014 (MPRA).
MPRA defined a subcategory of Critical Status plans that are
``Critical and Declining.'' These are Critical Status plans whose
actuaries project that plan insolvency will occur within the current
plan year or any of the 14 succeeding plan years (or in certain
situations, within 19 succeeding plan years).
MPRA gives the trustees of Critical and Declining plans additional
options to address the risk of insolvency. Under MPRA, Critical and
Declining plans may take steps to improve long-term solvency by
reducing benefit promises to participants and beneficiaries if they
meet certain requirements, including application to and approval by the
Department of the Treasury.\10\ MPRA permits participants' benefits to
be reduced to 110 percent of the PBGC guaranteed amount, subject to
statutory protections that prohibit or limit reductions for
participants who are disabled or elderly. These statutory protections
from MPRA benefit cuts for the disabled and elderly do not extend to
insolvent plans that receive financial assistance from PBGC.
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\10\ Prior to MPRA, reduction of benefits already accrued was
generally prohibited by the ``anti-cutback rule.''
MPRA also changes PBGC's ability to provide early financial
assistance to plans, either by assuming part of the plan's liabilities
via a plan partition or by providing assistance to facilitate a merger.
To receive partition assistance, the plan must take all reasonable
measures to avoid insolvency including the maximum benefit reductions
allowed by MPRA (i.e., reduction to 110 percent of the PBGC guarantee,
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with the MPRA protections for the disabled and elderly), if applicable.
Mergers can stabilize or increase the base of contributing
employers, combine plans' assets for more efficient investing, and
reduce plans' administrative costs. Under MPRA, PBGC is authorized to
help plans merge with other multiemployer plans. Plans may request
technical assistance, and Critical and Declining plans may also apply
for financial assistance to facilitate a merger, if necessary to avoid
plan insolvency. Importantly, a partition, or any facilitated merger,
must reduce PBGC's expected long-term loss and cannot impair its
ability to provide financial assistance to meet existing obligations to
other plans.
To date, 19 troubled plans have applied for benefit reductions,
with five also seeking financial assistance from PBGC in the form of a
partition to remain solvent. One joint application for a suspension and
partition, and three applications to reduce benefits (without
partition), have received all the required approvals and authorizations
to proceed. One suspension-only application has been approved, with
authorization to implement the suspension dependent on a participant
vote. Two joint
suspension-partition applications and four suspension-only applications
are under review.
MPRA can help some Critical and Declining plans but cannot help all
of them. In some cases, underfunding is so large relative to future
cash inflows that benefit suspensions and partition cannot keep the
plan solvent long-term.
The United Furniture Workers Pension Plan A is an example of a plan
that is helped by MPRA. The Road Carriers Local 707 Pension Fund is an
example of a plan for which MPRA could not work because of the plan's
severe underfunding and inadequate projected cash inflows. Outcomes for
both plans are described below.
United Furniture Workers Pension Plan A
The United Furniture Workers Pension Plan A (``UFW Fund''), based
in Nashville, TN, is using MPRA to avoid plan insolvency. In August
2017, PBGC approved the partition of the plan in conjunction with
approval by Treasury of benefit suspension under MPRA. This was the
first MPRA partition approved by PBGC. With this early financial
assistance from PBGC, along with required benefit reductions, the UFW
Fund is projected to avoid insolvency and pay benefits above the
guarantee level to nearly 10,000 participants and beneficiaries over
the long term. Under the law, benefits of approximately 7,100
participants and beneficiaries were not reduced, because MPRA includes
statutory limitations that protect against cuts for certain
participants and beneficiaries based on age, disability status (as
defined by the plan), and whether benefits are not more than 10 percent
greater than PBGC guarantees would provide. The remaining approximately
2,800 participants will see future benefit reductions to 110 percent of
the PBGC guaranteed amount, averaging a 12.7 percent cut in benefits.
Road Carriers Local 707 Pension Fund
The Road Carriers Local 707 Pension Fund (``707 Fund''), which is
based in Hempstead, NY and covers nearly 5,000 participants, was unable
to use MPRA to avoid insolvency. The 707 Fund applied for a MPRA
benefit suspension and a PBGC partition in order to preserve benefit
payments above PBGC guarantee levels. But projected future
contributions and other income were insufficient to avoid insolvency,
even with the maximum benefit reductions allowed under MPRA and a PBGC
partition.
As a result, the 707 Fund became insolvent early in 2017, and PBGC
began providing financial assistance to the plan to cover benefits at
PBGC guaranteed levels.\11\ For nearly one-half of all 5,000
participants in the plan, the guarantee covers less than 50 percent of
the benefits earned.
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\11\ News release: ``PBGC Provides Financial Assistance to Road
Carriers Local 707 Pension Fund--Participants' Benefits Payments Cut to
PBGC Guaranteed Levels,'' https://www.
pbgc.gov/news/press/releases/pr17-02.
The red area in Figure 7 below shows the benefit losses for the 707
Fund's 3,000 retired participants as a result of the plan insolvency
(approximately one-third experienced benefit cuts of over 50 percent).
The green area shows what PBGC will pay as long as we have sufficient
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assets to pay the current guarantee.
The benefit losses will result in hardship for many of the plan's
participants and beneficiaries. There also will be economic effects
that go beyond these individuals and their families. They will have
less money to spend in the local economy and they will pay less in
Federal and State income taxes. In some cases, they will need to rely
on social programs to provide basic needs that they previously had paid
for with their earned pension benefits.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Where MPRA is a viable option, the degree to which plans will
attempt to extend solvency through requests for benefit reductions and
early financial assistance remains unknown.
Outlook for PBGC Multiemployer Program
In modeling projected insolvency dates and deficits for the
Multiemployer Program, PBGC looked at scenarios where some plans use
MPRA benefit suspensions or early financial assistance and where no
plans used such MPRA tools. The mean year for Multiemployer Program
insolvency was FY 2025 in both scenarios. The mean FY 2026 deficit in
nominal dollars differed only slightly by scenario--$77.8 billion with
MPRA and $78.8 billion without use of MPRA.
consequences of multiemployer program insolvency
Insolvency of the Multiemployer Program will dramatically reduce
the already relatively low guarantee for multiemployer plan
participants. Under current law, when Multiemployer Program assets are
exhausted, the only money available to provide financial assistance for
benefit payments will be incoming multiemployer premiums. Multiemployer
premium income in FY 2017 was under $300 million, and the annual
premium rate, $28 per participant for 2017 and 2018 plan years, will
increase only by indexing.
The Multiemployer Program will soon be spending more in financial
assistance than it receives in premium income. Funds in the
Multiemployer Program will represent only a small fraction of the
amount required for current guarantee levels. Under the program's
authorizing legislation,\12\ PBGC would submit to Congress, in advance
of Multiemployer Program insolvency, a schedule of reduced basic-
benefit guarantees which would be necessary in the absence of a premium
increase. Such reduced guarantees would result in participants in
failed multiemployer plans, receiving a very small fraction--an eighth
or less, on average--of the current guarantee level, no matter when
their plan became insolvent.
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\12\ ERISA section 4022A(f)(2).
Even if the Multiemployer Program were adequately funded, a
remaining challenge to benefit security is the guarantee for
multiemployer plans. Multiemployer guarantees are much lower than
single-employer guarantees. The multiemployer guarantee has not
increased since 2001 and is not indexed for inflation. For example, the
maximum guaranteed benefit for a retiree with 30 years of service is
$12,870 annually. In contrast the maximum guaranteed benefit for a
retiree in a single-employer plan is $65,045 annually. The Single-
Employer guarantee is indexed for inflation. The single-employer
guarantee typically protects full benefits of approximately 85 percent
of participants in terminated plans. While the multiemployer guarantee
has provided similar protection in the past, lack of indexing has
eroded severely the value of the guarantee.
need for legislation
We work with troubled multiemployer plans and their sponsors who
come to us seeking to prevent plan insolvency. We provide advice and
assist them in whatever way we can. But the tools PBGC has to address
the multiemployer crisis are very limited. We have been working with
stakeholders and policy makers to find new ideas for shoring up the
program.
Legislation is needed to address the looming insolvency of PBGC's
Multiemployer Program and again make the PBGC guarantee something
American workers and retirees, and their families, can count on. A
number of proposals have been put forward. Some are designed to help
plans avoid insolvency and thus help PBGC indirectly. Others are
designed to help PBGC avoid insolvency.
The President's FY 2019 budget includes a proposal to shore up the
PBGC's Multiemployer Program. The budget proposes adding a variable-
rate premium on unfunded benefits, similar to the Single-Employer
Program, with provision for waiver to avoid accelerating insolvency in
the most troubled plans. The proposal also includes an exit premium on
companies that withdraw from multiemployer plans. The proposal is
estimated to raise an additional $16 billion over the 10-year budget
window and is expected to be sufficient to fund the Multiemployer
program for the next 20 years. However, additional actions may be
necessary to address all the problems facing the broader multiemployer
plan system.
conclusion
While the Single-Employer Program is improving, the Multiemployer
Program is headed toward insolvency--more likely than not by the end of
2025.
If the PBGC Multiemployer Program is allowed to become insolvent,
the only money available to provide guaranteed benefits will be
incoming premiums. Only a small fraction of the current, very modest
guarantee will then be funded. The result will be catastrophic for many
people--current and former workers, retirees, beneficiaries, and their
families. These losses have consequences beyond the immediate parties,
increasing demands on social programs. Employers are also concerned and
are pushing for action to prevent further damage in the system.
As more time passes, it is increasingly difficult to craft a
solution that can be viewed as fair, or that is even viable.
I appreciate the leadership of the members of this committee in
addressing the challenges faced by multiemployer plans and the PBGC
Multiemployer Program. I look forward to continuing to work with you to
ensure that PBGC's guarantee is one that workers and retirees can count
on in the future.
I am happy to answer any questions.
[all]