PBGC Running Out of Cash?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Ginger Adams Otis of the New York Daily News reports, Pension Benefit Guaranty Corporation running out of cash to cover union pension funds (h/t, Suzanne Bishopric):

The clock is ticking for 71 penniless union pension funds that rely on a federal insurance company to support their retirees — because the agency itself is also running out of cash, its director said Wednesday.

The Pension Benefit Guaranty Corporation’s limited liquidity is part of the spiraling U.S. pension crisis that threatens to wipe out the retirement savings of more than a million Americans.

The PBGC talked about its reduced circumstances Wednesday as it announced that it is now officially making pension payouts for Teamsters Local 707.

The New York union’s pension fund — covering 4,000 retired truckers across the city and Long Island — hit rock bottom in February.

The PBGC stepped in, as it has with 70 other bankrupt union pensions.

But PBGC only has about a decade’s worth of cash in its coffers, director Tom Reeder warned.

“This is a big issue for us. It’s a big issue for Local 707 and it’s a big issue for others in the same situation across the country,” Reeder said.

“We’re projected to run out of money in eight to 10 years. Many union pension plans are projected to run out in 20 years,” he explained.

“There are going to be people in plans who run out of money after we do, and there will be no water in the well.”

Right now, PBGC has $2 billion in assets built up over 42 years, Reeder said.

The company makes its money through premiums charged to unionized multi-employer pension funds — many of which are caught in an unprecedented financial crunch that’s decimated thousands of union retirees.

Last year, when PBGC was supporting 65 bankrupt plans, it paid out $113 million a month, agency officials said.

In 2017, with even more insolvent plans on its books, PBGC is shelling out even more.

Local 707 alone, with its 4,000 retirees, costs PBGC $1.7 million a month, agency officials said.

In order to keep afloat, PBGC doesn’t try to match a retiree’s union pension. The payouts are cut, often down to about one-third of what the worker is due.

Ex-truckers with Local 707 shared their new financial reality with the Daily News last week.

Ray Narvaez, 77, retired in 2003 after more than 30 years as a Teamster with a $3,400 monthly pension.

Now his monthly take home is $1,100 before taxes.

Narvaez is actually one of the luckier ones in 707.

According to PBGC officials, the average 707 retiree was getting $1,313 a month from the union pension fund.

Now that the fund is broke and dependent on PBGC’s insurance payouts, the average monthly take home is $570, agency officials said.

But that’s nothing compared to the cuts that would hit union retirees if the PBGC went under, said Reeder.

If that were to happen, PBGC would have to rely solely on what it earned from incoming premium payments.

Retirees could expect to see their benefits slashed by 80% . In other words, less than one-eighth of the $570 average check PBGC is able to give Local 707 retirees now.

“The amounts would be negligible. Their retirement payouts would be very low,” a PBGC official said.

The disaster that’s struck Local 707 is looming for several other, much larger Teamster pension funds.

Retirees in construction, mining and the retail and service industries have been hard-hit too.

All of the critically underfunded pensions are multi-employers plans — meaning they were created by various companies that all employed union workers across the same industry. The Teamsters, predominantly a trucking union, has seen its pension funds devastated by stock market crashes and a shrinking employer base.

Two of the largest union pension funds teetering on the brink of insolvency — the Central States Pension Fund and the New York State Teamsters Pension Fund in the Albany region — cover Teamsters.

If the Central States Pension fund goes broke, it could swamp PBGC — if it hasn’t gone broke first.

The majority of union multi-employer pension funds are doing well, as are single-employer union pension funds, Reeder said.

“It’s a minority, but a significant minority, of the multi-employer plans that are in trouble,” he said.

Reeder and many of the union pension funds are pinning their hopes on Congress.

The PBGC is looking for an increase in the premiums it can charge the union funds, which requires Congressional approval.

“It won’t be painless” to shore up the insurance fund, Reeder said.

But it will be far cheaper to do it now than to wait until the last minute, he said.

“We are fairly confident that we will be insolvent on the multi-employer side by 2022 or 2028 barring a legislative change,” he said.

For Edward Hernandez, 67, a retired Local 707 trucker whose monthly pension just got slashed $2,422 to $902 before taxes, the time to sound the alarm was nearly two decades ago.

“I was saying back then to Local 707, ‘Why don’t we do something about it now, let’s go to Washington,’” he said. “Even 15 years ago we were getting letters that our fund was becoming insolvent. Why couldn’t anyone find a way to fix this then?”

Edward Hernandez is right, the time to have done something about this was 20 years ago or even before then, now it’s too late, these Teamsters pensions are hanging on by a thread.

And so is the Pension Benefit Guaranty Corporation (PBGC), the federal agency tasked to backstop these pensions should they become insolvent. Its director, Tom Reeder, is sounding the alarm, unless the agency gets Congressional approval to raise the premiums ii charges union pension funds, it will be insolvent on the multi-employer side, which effectively means pension payout will be slashed even more than they already have been.

I have long warned of the risks of the PBGC so none of this surprises me in the least. I’ve also warned of how the PBGC was making increasingly riskier investments in illiquid alternatives to meet its soaring obligations.

In my last comment, I covered America’s crumbling pension future, explaining in detail why these multi-employer pension plans were designed to fail. Their governance was all wrong to begin with, leaving them exposed to the sharks on Wall Street who raked them on fees while they invested them in stocks and other more illiquid and riskier assets.

And now that catastrophe has struck and there is not enough money to cover even reduced payouts, people are sounding the alarm.

Here is something else to ponder. The PBGC backstops private pension plans, not state, local and city public pensions plans. What happens when they become insolvent? And don’t kid yourselves, many of them are also hanging on by a thread.

What will politicians do then? Emit more pension obligation bonds? Increase property taxes more than they’ve already have? Good luck with both those strategies, it’s like placing a Band-Aid over a metastasized tumor.

The time has come for the United States of America to come to grips with its pension crisis once and for all, to bolster the governance at state pension funds following the Canadian governance model and more importantly, to reform and enhance Social Security and base it on the Canada Pension Plan and the Canada Pension Plan Investment Board which successfully manages the money on behalf of Canadians, investing it across public and private markets all over the world.

As I stated in my last comment, the ongoing pension crisis is deflationary, it’s not good for the economy over the long run because all these millions of Americans will end up retiring penniless, which effectively means less spending from them and less sales and personal income taxes for all governments (too many people underestimate the benefits of defined-benefit plans).

So, if you ask me, part of me wants the PBGC to go broke because only then will it force Congress to implement the radical changes that the country needs to effectively deal with the ongoing pension crisis.

The problem is behind every pension lies a person, someone who contributed to it thinking they would one day be able to retire in dignity ad security. That is what it’s all about folks, keeping a pension promise to hard working people looking to retire with a modest pension. And when that promise is broken, it’s the worst form of betrayal of the social contract.

It also sends the signal to everyone that you cannot rely on your pension to retire so keep saving more and more if you want to avoid pension poverty. More saving means less money spent on goods and services, ie. more deflationary headwinds.

Do you get it? I hope US politicians reading this get it because it’s much bigger than the PBGC going broke, the pension crisis threatens the US economy over the long run and unless it’s dealt with appropriately, it will get worse, and only ensure more inequality and long-term economic stagnation.

Update: After reading this comment, Bernard Dussault, Canada’s former Chief Actuary, shared this with me:

Amidst my crusade for the protection of Defined Benefit (DB) pension plans, I opine that contingency funds are more harmful than helpful for both plan members and sponsors because:

  1. they unduly increase the pension expenditures of all concerned DB plans with the objective of safeguarding the pensions accrued through only the small proportion of plan sponsors eventually going bankrupt;
  2. not only do contingency funds protect the concerned plans against a risk that improperly relates to business (i.e. bankruptcy) as opposed to pension (i.e. mainly insufficient investment returns),
  3. but human nature being what it is, I surmise that the protection provided by a contingency fund might, in order to contain current estimates of pension costs and liabilities, induce the concerned:
  • valuation actuaries, colluding or not with their plan sponsors, to be complacent about the soundness of valuation assumptions, e.g. by assuming an aggressive (i.e. too liberal) rate of return on investments;
  • investment officers, colluding or not with the plan sponsor, to take undue risks in the selection of investments.

This does not mean that I do not care about the protection of pensions lost pursuant to a bankruptcy. Indeed, as stated in my attached proposed financing policy for DB plans, in such cases:

  1. DB plan members shall have priority over secured creditors to amounts covered by a deemed trust, no matter when the security was granted to the lender;
  2. The outstanding investment fund shall be maintained of rather than used to buy annuities because:
  • the cost of future benefit payments if less expensive if paid from the pension fund;
  • after the sponsor’s bankruptcy, the market value of the deficient fund would normally improve.

I thank Bernard for sharing his wise insights with my blog readers.

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