Early this morning, the White House announced that $36 billion was being allocated from the US bailout (i.e. the 2021 coronavirus relief package) to shore up the Teamster Central States Pension Plan . The reason given was that failure to do so would jeopardize the plan and its 350,000 members. The proposed estimates indicated that without the bailout, benefits would have to be reduced by an average of 60%. The Chicago Tribune reported that the plan was scheduled to tip into insolvency by 2026, but with an injection of $36 billion in federal money, the plan should be solvent until 2051.
This is called multi-employer pension funds. The premise is that the employer relies on the union to supply the workforce. The union and the employer using union labor are supposed to set aside money to pay the pensions of retired union members. Several years ago, we represented an employer who made contributions to this type of fund. While working on the value of his business, the client pointed out that his particular multi-employer fund was fraught with challenges due to inadequate regulation and underfunding. The client produced a copy of the annual report linked to the plan, but felt that within the industry there was a general opinion that the plan was seriously underfunded and it was unclear from where. additional funding would come from. We forwarded this information to our company’s labor department. The response was that there were indeed major problems on the horizon for many of these plans.
In a sense, today’s news only confirms what the client and our labor law group have suggested. What was shocking was the scale of the problem. If you go to the Central States Pension Fund website, you are told that the plan was formed in 1955 and since that date has paid out $80 billion in benefits. Thus, the “bullet in the arm” announced today is equal to 45% of all benefits paid over the past 67 years. In theory, this inoculation should solve the problems of underfunding for another 30 years, but how did we get to this situation and how do we ensure that it does not happen again?
We wrote about this crisis and this Teamster’s pension plan in May 2016. At the time, the plan was paying $3.50 in benefits for every dollar donated. 8% annual return. Ironically, if you look at where the S&P 500 was in March 2016 and where it is today, the S&P 500 is down from 2,100 to 3,972 today. In short, it almost doubled, but the Teamster plan still lack.
If there’s good news, it’s for the Teamsters. They get a bailout. To be fair, a lot of companies have been bailed out in the last 30 months and some of those companies really didn’t need bailout money. But it was at least money to pull a collapsing economy out of an unforeseen financial crisis.
The new issue is that there are likely more bailouts to come as many pension funds, including state and local funds, were struggling before the financial crisis. And a lot of those funds can’t go to Congress for help because they’re creatures of state and local government. Some might suggest that this problem is partly related to the weakness in the stock market this year. Indeed, the market is down 17% in 2023. But it is up 15% from where it was when the pandemic hit. So blaming the market does not work.
The larger issue is that the public has been hitting on Uncle Sam for some pretty serious allowances. Since March 2020, the Treasury has borrowed $6 trillion to support the economy and finance the government. The $36 billion announced today is probably that $6,000,000,000 figure. The current administration wants to tackle the student debt crisis. Outstanding federal student loans amount to another $1.6 trillion. Then there are the private sector unfunded pension plans + those of state and local governments.
It is premature to say that the crisis is here. But the wagons are turning in circles as many players in the U.S. economy take heed that their funds for retirement might not be there. And, to the extent that we look to the public good for bailouts, the economic ship of state begins to spoil in frightening ways. If you plan to live on one of these pension plans in retirement, you need to be careful.
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