A billion-dollar taxpayer bailout of failing multiemployer pensions is on the horizon.

Ten years ago, subprime mortgages went from being a little-known form of lending to the precipitating factor in the international banking crisis that led to the Great Recession. Multiemployer pensions, which have been allowed to systematically underfund plans and make unrealistic assumptions on return rates, now have the potential to cause a similar economic crisis and necessitate another taxpayer bailout.

Multiemployer pension plans are agreements between multiple employers and a union.  There are currently about 1,400 plans across an array of industries such as trucking, manufacturing, construction, and mining.  It is currently estimated that of the more than 10 million people in plans, one million participants will not receive their full promised benefits.  In total, plans face $638 billion in unfunded liabilities. 

Part of the reason for the drastic failure of multiemployer pensions involves “orphan plans” where an employer goes bankrupt or withdraws from the agreement, leaving the remaining employers to shoulder the unfunded burden.  While orphan plans are certainly to blame, the failure of the entire multiemployer pensions system involves structural and administrative issues that allowed for the risky funding requirements and retirement investments that made a bad problem even worse.  The Pension Benefit Guaranty Corporation (PBGC), in charge of insuring these pension benefits, faces a $54 billion deficit for such plans and is projected to be depleted by fiscal year 2025.  While the PBGC is currently funded by insurance premiums rather than taxpayer dollars, the deteriorating fiscal situation could force Congress to fall back on taxpayers to pay for the bailout of failing pensions.

Because the multiemployer pensions crisis is difficult and multifaceted, so too are the solutions.  In February 2018, Congress established the Joint Select Committee on Solvency of Multiemployer Pension Plans.  The Committee tasked itself with finding a viable solution to the crisis by November 30, 2018.  While the Committee helped bring more attention to a dire issue, it failed to meet its deadline, with no plan agreed to heading into the 116th Congress.

One solution that has been introduced during this session is H.R. 397, the Rehabilitation for Multiemployer Pensions Act.  This legislation is essentially the same as the Butch Lewis Act sponsored by Sen. Sherrod Brown (D-Ohio) in the 115th Congress.  Unfortunately, like the Butch Lewis Act, H.R. 397 not only fails to protect taxpayers from a bailout, it also neglects the many structural reforms needed to avoid short-term insolvency and provide long-term stability.  The Congressional Budget Office (CBO) estimates H.R. 397 will cost $64.4 billion.  The House Committees on Education and Labor and Ways and Means have already voted to advance H.R. 397.  If changes to the bill are not made to address the long-term issues associated with the PBGC and multiemployer plans, H.R. 397 will be a taxpayer-funded band-aid.

While H.R. 397 alone is not a viable solution, doing nothing to address this growing crisis is equally irresponsible.  A practical answer to such complicated and long-reaching issues should include the following principles:  

1. Taxpayers must be protected from bailouts.

- Any path to reform must rule out a standalone bailout, which would create a moral hazard and precipitate bailouts for other sectors of the economy, including state and local government pension plans.

- Any taxpayer assistance program to address the immediate crisis must include robust and enforceable safeguards.

2. Unions, employers, and employees must all contribute in a meaningful way.

- Any solutions must bring costs into line with benefits, which could entail a combination of increasing employee contributions; reducing benefits; allowing more flexibility and choice, including an employee buy-out option; and making additional reforms for new employees.

- Emulate state and local officials who have successfully reformed their public employee pension systems, such as shifting from a defined benefit to a defined contribution program.

3. Structural changes must be included to enhance transparency and accountability at the PBGC.

- Establish stronger risk management practices in order to identify problems earlier.

-Require the assumption of a reasonable return on investment.

-Hold multiemployer plans to the more rigorous standards used by single-employer plans.

The longer the funding crisis for multiemployer pension plans remains unaddressed, the greater the likelihood that taxpayers will be left to foot a massive bill. As H.R. 397 makes its way through markup and onto the House floor, Congress must reject this legislation and instead agree to a fair, viable solution that focuses on long-term reforms rather than a bailout.