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Pension Meltdown
No One Is Safe: The Dangers of Defined-Benefit Pensions

Multi-employer pension plans, in which multiple companies pool their pensions together so that other employers can pick up the slack if one company goes under, were long considered some of the safest in the business. And because the plans are also covered by federal insurance plans, the idea that workers would fail to receive their benefits seemed exceedingly unlikely. Yet that’s exactly what’s happening: over the past few years, many of these plans have already failed, and those that haven’t are headed for disaster unless something changes.

The problems are the same as those that are devastating other pension plans. A larger share of company workers are retiring, increasing the amount of benefits the plans need to pay out even as less money is coming in. The collapse in the stock market during the recession cut into their assets. The NYT reports:

The Central States plan, for example, pays $2.8 billion a year to retirees but takes in only about $700 million from employers. It must rely on investment returns to keep from exhausting its assets, but Thomas C. Nyhan, director of the pension plan, said it would take returns of at least 12 percent a year, every year, to come out even, and that is not realistic. Its modeling suggests it will run out of money in 10 to 15 years — most likely around 2026, if nothing is done.

Labor officials, business groups, members of Congress and others have been quietly discussing a proposal to extend multiemployer plans’ life spans by letting them roll back even retirees’ pensions. Such plans are often found in mature sectors, in which retirees outnumber active workers and cuts affecting only the existing workers do not produce enough of a saving as a result. And once a multiemployer plan gets to that stage, officials have discovered, new companies will not join the pool, because they do not want to be stuck paying for extinct companies’ orphaned retirees.

Most troubling, the federal insurance plan that pays retirees when their plans fail is also due to run out of money in seven years. Now pressure is mounting for Congress to kick in more cash:

“Unless Congress acts — and acts very soon — many plans will fail, more than one million people will lose their pensions, and thousands of small businesses will be handed bills they can’t pay,” said Joshua Gotbaum, executive director of the Pension Benefit Guaranty Corporation, the federal insurer that pays benefits to people whose company pension plans fail.

Many plans are already doing damage control, looking for legal ways to cut benefits in order to keep the plans solvent for a while longer. Some of these may work, others will not, but either way, retirees will end up getting much less than they expected, if they receive anything at all.

This is more evidence, if any was needed, that defined-benefit plans are far, far less stable than 401-k style defined-contribution plans. Most of the private sector has already transitioned to these plans, and as this news suggests, those that haven’t are now facing serious problems. Public pensions need to follow suit.

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  • Fred Chittenden

    When, not so much if, defined pension benefit plans fail and require the gubermint to bail them out, seems like the bill for any bailout ought to be sent to anyone with, and/or receiving, the ‘benefits’ of a defined pension.

    If these marketplace insenstive defined benefit plans haven’t been collecting enough to make them solvent, the responsibility to fix those deficits generally belong to those who benefit from those sorts of plans, not the general taxpayer. Perhaps an option ought to be offered to convert the prorated actual value of any defined pension into defined contribution plan to reduce the degree of these problems?

    It should also noted that defined pension benefit plans have little skin in the game when it comes to having a check and balance against promoting politics of high tax, spend and regulations that restrict the general growth of the private sector prosperity that is essential for solvent vibrant pension plans of any sort.

    If all defined benefit pension were converted to defined contribution pensions of equal value, there would be a huge and quick shift in support from high tax, spend and regulate policies towards more balanced approaches that promote the general welfare of all, not just the special interests of one political side.

    • Boritz

      “If all defined benefit pension were converted to defined contribution pensions of equal value…”

      If the defined benefit is $10 trillion present value in the aggregate then you would have to pony up that much to do the conversion. There is no instant fix.

      • rheddles

        The party doing the ponying up could issue debt payable in the future. It’s not like nobody knows the liability is there. And rates are low.

  • Boritz


  • charlesrwilliams

    A multi-employer pension plan that has an unfunded liability or invests in risky assets in inherently unstable. The problem is not with defined benefit plans per se. Public sector plans are shaky because the liability is calculated using estimated returns on the portfolio rather than a risk-free return. Corporate defined benefit plans are in relatively good shape.

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