Pension Benefit Guarantee Corporation
PENSION BENEFIT GUARANTEE CORPORATION
PROVIDING LIMITED PROTECTION AGAINST PENSION FUND FAILURE
For years, union organizers have been promising workers that by joining a union, they were guaranteed a secure pension, that their pension plans were financially sound and healthy and in the highly unlikely event that a new member’s pension plan was to fail, they were insured by the federal government.
In 1974, the Employee Retirement Income Security Act created the Pension Benefit Guarantee Corporation (PBGC), a federal insurance corporation that is funded by insurance premiums of member plans, investment income and recoveries from failed plan sponsors. Many multiemployer plans are insured by the PBGC which, in turn, will provide some protection to their participants if the plan fails. However, this does not guarantee that a retiree will receive their promised pension.
The PBGC’s current maximum guarantee is 100% of the first $11 of the plan’s monthly benefit rate plus 75% of the next $33 of the plans monthly benefit rate (combined potential maximum of $35.75) multiplied by the participant’s years of service (which also may be subject to a maximum limit). Further, a retiree’s plan does not have to fail to incur these limitations. If a plan does not have enough assets to pay the plan benefits, it is allowed to suspend payment of that portion of the payment that exceeds the PBGC guarantee level. For the typical worker, this could mean a loss of up to 20% of their monthly pension benefit.
Since most union pension plan benefit rates are fixed rates, unaffected by annual or semi-annual pay increases, and since most plans do not have a cost of living or inflation adjustment for retirees, any additional reduction in benefits could have drastic effects on fixed-income retirees, who having worked their entire lives, are no longer in a position to effectively make up the difference by returning to the workforce.
The fact that the PBGC itself exists does not guarantee any specific level of benefit. From 1980 to 2002, the PBGC has operated with a net positive balance. However, since 2003 the PBGC has reported a negative balance of hundreds of millions of dollars each year. In 2007, the difference between its assets and its liabilities was almost a billion dollars. The PBGC has been underfunded each year since 2000 and 2006 it only had 2/3rds of the assets needed to cover its liabilities. In the last three years, the number of multiemployer plans requiring financial assistance from the PBGC increased by 45%. The total amount of financial assistance given during each of the last three years was between 6-18 times over the levels experienced during the preceding five years.
Also alarming is that the percentage of active participants in PBGC-insured multiemployer plans has dropped from 75.9% in 1980 to 45.3% in 2006, while the percentage of retired participants has almost doubled. Where there used to be more than four active workers for each retiree, today that ratio has dropped to less than 1½. This means that the burden for covering benefits for retirees has changed drastically. In prior years, only 20% of the contribution for each individual worker would go to covering benefits for active retirees. The balance could be used for investments and covering administrative expenses. Today, that figure has jumped to 75%, which, after expenses, leaves less than 1/4th of contributions for active workers to invest for their ultimate retirement.