Multi Employer Pensions Part 3: The Pension Benefit Guarantee Corporation (PBGC)

*Note: This is part 3 of a mini series on multi employer pensions*

In case you missed part 1 or part 2 of this mini series, you can find the links below.

Be sure to read the previous posts to gain some perspective as to why this post is important:

Multi employer pensions part 1

Multi employer pensions part 2

Bear with me here; this post will be a weighty one. Not only are multi employer pensions different but the topic of this post is deep and often difficult to explain. As such, it may deliver the double whammy: being a long post AND complicated in nature. I will do my best to be clear and concise.

I have been talking among other things the government’s role regarding the financial woes many pension plans are experiencing, and they are warranted; the government has played a prominent role indeed. However, in the first two posts the government’s role was more oversight (or, if you prefer, they occupied an authoritarian role with dire consequences as evident by the state of many pensions today). In this post I would like to discuss another role the government plays: that of insurance. Yes, the government is indeed in the insurance game, and I don’t mean GEICO, as outlined below.

If you have never heard of the Pension Benefit Guarantee Corporation you are not alone; I bet most people haven’t. Then again, most people have never really investigated just how pensions work or the regulations which govern them. For most, all they know is they were promised money in retirement; the intricacies are of little importance to them.

No matter; while I am not a fiduciary on any funds I have spent years talking with some on pension funds, researching the differences between single employer pension and multi employer pensions, read many articles regarding pension reform, and watched trustees grow older from their inability to address systemic issues.

I would like to talk about the Pension Benefit Guarantee Corporation (PBGC), what it is, what it does, why it exists, and discuss it’s uncertain future.

The Pension Benefit Guarantee Corporation, or PBGC as I will refer to it hereafter, is a government insurance company at its core. Pension plans pay insurance premiums to the PBGC as a result of, you got it, government regulation.

The PBGC was created in 1974 as a result of the Employee Retirement Income Security Act (hereafter referred to as ERISA). The intention was to ensure pension plans had some security – hence the name. The government wanted to implement some measures which ensured companies didn’t just drop pension plans. Other notable pension reform laws worth nothing include:

• Multi Employer Pension Plan Amendments Act of 1980
• Pension Protection Act of 2006
• Kline-Miller Multi Employer Pension Reform Act of 2014

Right out the gate I need to make a couple distinctions which are very important:

First, the PBGC has two separate insurance plans: one for single employer pension plans and another for multi employer pension plans.

The PBGC doesn’t receive funding from tax dollars either; rather, the funding comes from the pension plans which pay insurance premiums. This is important to note for later.

Second, the very reason pension plans pay insurance to the PBGC is so that if/when pension plans can’t pay out benefits (that is, they go into a default status) those who draw from that very pension can still receive benefits, although reduced. Those reduced benefits are paid by the PBGC.

The amount of money they pay out is figured by a complicated formula which you can find on their website (link at the end of the post). It’s important to note, though, the money a retiree receives is dramatically reduced when the PBGC takes over paying their pension. I cannot stress that enough.

The PBGC, then, continues to pay out pension benefits to those who would otherwise receive nothing. Their source of funding? Premiums from pension plans, defaulting and stable ones alike.

In theory, it sounds like a great idea. Even though the benefits are reduced at least there is something. No one wants reduced benefits but whether it’s a choice of receiving reduced benefits or nothing at all it’s not a difficult one. If it were that simple things would be okay but rarely are things simple. Life is messy and the pension system in the United States is in rough shape.

You see, the idea of the PBGC and even the practice of it is useful and good. The trouble, however, manifests itself from two major points. First, there are too many plans going into default status, overwhelming the PBGC and it’s limited resources. Second, and even more fundamental, is the government didn’t anticipate nor expect a decades long trend: the move from defined benefit to defined contribution retirement plans. The PBGC was set up with the thought pensions would have staying power. Indeed, if this point were not true the first wouldn’t be.

Having laid a little bit of groundwork, let me clarify one last thing and we’ll get into some deeper waters. As stated earlier, the PBGC has two different insurance plans; a single employer plan and a multi employer one. While the vast majority of plans covered by the PBGC are single employer ones (28 million pensioners in over 22,000 plans) I will not focus on them. That side of the PBGC is doing well; so well in fact it’s expected to emerge from deficit operating status by FY 2022.

This article will focus on the multi employer pension plan side of the house. Most skilled trades guys I know fall into this category and this information affects them greatly. So without further delay, let’s see what we can learn.

According to the PBGC:

• Roughly 37 million people’s pensions are insured by the PBGC
• Only about 10 million are in multi employer pensions
• There are about 1400 multi employer pension plans covered by the PBGC
• Roughly 100 of those multi employer pension plans are in “critical and declining” status
• Around 1.2 million pensioners are in those “critical and declining” pension plans

What does this mean for those in the critical and declining status? What about the others covered? What’s going to happen?

While we can’t say for sure, there are several indications that, if problems aren’t addressed, the PBGC is headed for insolvency and this might be sooner than you think.

Why this is important

If you are one of the 1.2 million who are affected by a critical and declining status pension, you definitely care. If you don’t, then you should, because you are directly affected. Perhaps you reached this article searching for answers to this. To you I say welcome.

You might be tempted to think “my plan isn’t in danger so I don’t really care.” In a way you’re right; your pension plan might not be directly affected. It most certainly is indirectly affected, though, and that you should care about.

You see, the PBGC is running out of money. The pensions picked up by the PBGC are greatly reduced already; now, according to their projections they will be unable to pay out benefits promised (by the PBGC, not the pension plan; they are reduced already) by 2026.

Have I got your attention yet? Good.

What that means is if funding problems are not addressed, by 2026 the multi employer pensioners will receive reduced benefits.

Their benefits were already reduced when the PBGC took over! Now, according to their funding projections, those reduced payments will be reduced again!

Consider these statements, taken directly from their website: (links to websites at the end of the post)

From a May 31, 2018 press release:

“The likelihood the program will remain solvent after FY 2026 is now less than 1 percent.”

“If the multi employer program were to run out of money, PBGC current law would require PBGC to decrease guarantees to the amount that can be paid from premium income, which would result in reducing guarantees to a fraction of current values.” (Bolding mine)

For FY 2018, the PBGC multi employer plan had a net deficit of $53.9 billion. The current projected deficit by FY 2026? $89.5 billion. That’s an increase of $35.6 billion which is a very large amount of money.

Basically, the PBGC is, by law, taking on defaulted pension plans and some of them are very large. This is forcing the PBGC to pay out more benefits (reduced from their original pension formulas) than premiums and running a deficit (which, as an agency of the federal government they can do). And, as they project, they will be insolvent by FY 2026. EVEN STEEPER CUTS then are going to be implemented. What’s a pensioner to do?

Even worse, and though I digress with this a bit, it isn’t just happening to the PBGC.

Reread the bolded section from above: “…current law would require PBGC to decrease guarantees to the amount that can be paid from premium income…”

Does that sound familiar? Perhaps not to some reading this. Let’s compare it to what’s written below:

“Under the Trustee’s intermediate assumptions, OASDI cost is projected to exceed total income starting in 2020, and the dollar level of the hypothetical combined trust fund reserves declines until reserves become depleted in 2035.”

And consider this: “The OASI Trust Fund reserves are projected to become depleted in 2034, at which time OASI income would be sufficient to pay 77 percent of OASI benefits.”

This is taken directly from the 2019 annual report of the board of trustees of the federal old-age and survivors insurance and federal disability insurance trust funds AKA SOCIAL SECURITY. How about that?!

The short falls of the PBGC and social security are the same: too much going out and not enough coming in. When the surpluses they have built up over the years are gone, they rely solely on cash coming in to pay benefits. The cash coming in isn’t enough to pay the promised benefits going out. The results: reduced benefits for recipients. A 23% cut in Social Security benefits and for the PBGC: pennies on the dollar. A double hit for retirees.

Now, neither plan will go broke, per se, since the majority of the funding comes from either premiums (PBGC) or payroll taxes (Social Security) but the surpluses they respectively had will disappear. And when they do, the rate at which they pay out will decrease dramatically.

Essentially, then, IF there are no structural changes to help, the PBGC will only pay out what it has the money to – despite what they have guaranteed – and the same goes for social security.

Oh, and even with the single employer plan’s projected surplus, the two funds are distinct and separate; the PBGC cannot, under current law, take money from one plan to shore up another.

That, in a nutshell, is what the PBGC’s multi employer pension plan is facing: income shortage and a deficit projected to be a staggering $89.9 billion for FY 2026. Do you know what this means?

STEEP cuts and austerity measures. There is a slight possibility of correcting the ship for Social Security (doubtful, though, because the political will isn’t there. Everyone’s aware but no one wants to be sacrificed on the altar because they are addressing something that desperately needs it.) but the PBGC’s chances of stabilizing the multi employer pension plan side is almost nil.

The one option that is on the table for trustees is the Kline-Miller Multi Employer Pension Reform Act of 2014. Essentially this allows trustees to initiate cuts to retirees currently receiving benefits. This legislation was a break from the norm which allows trustees to initiate cuts to ALL RETIREES – whether young and contributing or old and receiving. There are scores of hoops to jump through to enact this and in many ways it can be deemed not worthy. But, I would be remiss were I not to mention the possibility of this happening. I believe there are 5 plans which currently have enacted this, attempting to salvage their pension.

The prospects for pensioners doesn’t look good and continually worsens as time goes by. Promises made doesn’t flesh out to be promises kept and as such we have what’s coming on the horizon.

So what can we expect? I mean, I did just paint a grim picture of the retirement prospects for millions of Americans.

I would love to say the government will pass legislation, shoring up the PBGC for those Americans receiving reduced pensions. But I’m not optimistic about that possibility, though. The skeptic in me believes austere measures will be implemented instead. The political will doesn’t exist to deal with problems in both the PBGC and the much larger social security, especially when measures would be less drastic. Instead, it’s as if they are charging full speed towards a financial cliff. When you are NOT dealing with $22 trillion in national debt it doesn’t merely go away; an ostrich it is not. This huge variable is what I think will demand attention in the very near future and all else will take a back seat – which will include the PBGC.

I wish I had the answers; really I do. I have suggestions, ideas, thoughts on projections, etc., but the answers to what’s going to transpire I don’t have. I see hard times ahead, unfortunately, and if you are nearing retirement during the years when insolvency seems certain it will be especially difficult for you.

If you happen to have time before you retire I advise you to SAVE, SAVE, and SAVE. SAVE til it hurts. SAVE for your future. SAVE for retirement – because as the data reveals, the promised money likely won’t be there; at least, not in the scope of what has been promised. The money you save and invest, however, is yours – you’ve already earned it.

I hate to bring down the mood but I want to be honest and transparent. In the end, I’d like to see people being smart with their money. The clearer the picture the more informed the decision.

*Note: This is part 3 of a mini series on multi employer pensions*

Below are some links for you to check out and read. Research, educate yourselves, and make decisions best for you and yours (within the bounds of the law, of course).

• The PBGC’s main site:
• https://www.pbgc.gov/
• The link below will navigate you to all things multi employer pension plans:
• https://www.pbgc.gov/prac/multiemployer/introduction-to-multiemployer-plans
• Check this link out if you want to see how the PBGC calculates your reduced pension payment:
• https://www.pbgc.gov/about/factsheets/page/multi-facts
• This link is a hub of wealthy information:
• https://www.pbgc.gov/prac/multiemployer
• FY 2017 projection report:
• https://www.pbgc.gov/sites/default/files/fy-2017-projections-report.pdf
• PBGC press conference projecting insolvency FY2025:
• https://www.pbgc.gov/news/press/releases/pr18-02