There appears a commentary in the latest P&I daily (8/9) by W. Gordon Hamlin Jr., titled, “Getting Retirement Solutions Right is a Matter of National Defense”. I saw the headline and got excited because we’ve written about the likely profound social and economic consequences of our failure to provide an adequate retirement for our workers. As I began to read the article I couldn’t help but agree with him that there are three separate but intertwined retirement issues that need to be addressed, and each one is going to be challenging.
Hamlin cites “the impending meltdown in multiemployer pension plans; the roughly 50% of private-sector workers not in a workplace retirement plan; and the enormous unfunded liabilities associated with public pension plans.” These are the primary issues in a nutshell. However, that is basically where our enthusiastic support came to a halt.
I’ve been engaged with a team of amazing industry professionals in helping to craft and present the legislation for the Butch Lewis Act, designed to preserve and protect the pension benefits for participants in “critical and declining” status multiemployer pension systems. Without major assistance from the U.S. Treasury through a low-interest rate loan program, these plans will become insolvent in the next 5-15 years. The actuaries from Cheiron have modeled each of the 114 plans to make sure that the loan could be repaid and the PBGC protected. Only 3 of the 114 plans will need additional assistance from the PBGC, but for a total sum that is about 1/3 what the insurer of last resort would pay if each of these plans defaulted.
Unfortunately, Mr. Hamlin states, “needless to say, the loans won’t solve many, if any, of the existing problems with each existing plan. Given the existing trouble, how many employers and plans will be able to repay the loans?” Really? How can you make this claim when you haven’t modeled the plans?
One of the biggest challenges facing these multiemployer plans is the significant cash flow payout that is needed in the near-term to meet the promised benefits of an aging population. The Butch Lewis Act calls for all of the loan proceeds to be used to defease the retired lives. By doing so, the cash flow needs are met. The existing assets and annual required contributions will then be used to meet future plan liabilities, annual interest payments, and the loan repayment in year 30. Again, all but three of these plans can meet these obligations and do so at an annual return on asset assumption (ROA) of ONLY 6.5%. That is right! The required annual ROA used to ensure that these plans meet their obligations is dramatically lower than the ROA currently used by each of these plans.
Without the loan program these plans will fail, the PBGC’s insurance program will be overwhelmed and collapse, the promised benefits to the participants will not be paid, and in its place, the PBGC will make benefit payments that are roughly 1/8 what was promised. Guess what? These participants will likely fall on to the social safety net, and instead of securing these plans and extending the solvency for decades, we now initiate a pay as you go system for millions of plan participants. Seems like that cost would far exceed anything that the loan program might ultimately cost taxpayers.
I’d say that the loan program solves all the problems facing these critical and declining funds by improving cash flow to meet near-term benefits, by extending the life of these plans by at least 30 years, by extending the investment horizon for the “risky” assets to capture the liquidity premium, while saving the PBGC in the process. Not bad for one piece of legislation! Congress needs to act and act now. These participants did nothing wrong and they shouldn’t be harmed in this process.