As America grapples with the economic toll of the COVID-19 pandemic, the federal government is responding with unprecedented stimulus measures to help businesses and families avert near-term financial ruin. But the current environment is also threatening an already unstable pension system that millions of citizens are counting on being there when they retire.
Congress has had several opportunities in recent times to reform troubled Multiemployer Pension Plans (MEPPs), which provide more than 10 million American workers in industries such as construction, food services and trucking with the ability to accrue pension benefits. Although addressing the cracks in the model may seem like a back-burner issue right now, the impact of COVID-19 on our economy and markets has only underscored the urgent need for a legislative solution to what is a full blown MEPP crisis.
MEPPs were widely popular among working-class Americans historically for several key reasons: they are managed jointly by employer sponsors and union representatives, typically covering workers in a common union, industry or geographic region; they offer transferability that enables a worker to keep his or her pension when moving from one employer within the plan to another, so long as that new employer is also in the plan; and they are “supposed” to provide a guaranteed level of retirement income.
Regrettably, the model designed and passed into law in 1980 was not built to withstand the impact of deregulation across industries, the rise of defined contribution plans and the several bear markets in recent decades. The aggregate impact of these headwinds has set in today, with MEPPs now dramatically underfunded by $638 billion.
When an employer “exits” a plan, meaning its employees will no longer participate, the business pays a withdrawal penalty calculated to theoretically cover its share of the MEPP’s unfunded pension obligations. But as a growing number of participating businesses either went bankrupt or exited over the last 40 years in ways that resulted in them paying less than their respective shares (combined with spotty investment returns), the burden to provide unfunded retirement benefits fell on remaining employers. These remaining employers have continued to pay more than their fair shares, but the structural flaws in the model are now requiring them to bear truly unsustainable costs.
There are now roughly 130 MEPPs — covering more than 5,000 businesses — that are in either a “critical” or “critical and declining” state. While this may appear like a relatively small problem for a country with a gross domestic product of more than $20 trillion, it’s important to recognize that MEPP participants are responsible for roughly $2 trillion per year in economic activity.
To make matters more difficult, the national pension insurance system operated by the Pension Benefit Guaranty Corporation (PBGC) — which is on track to be insolvent in the coming years — recently reported a $65 billion deficit in its multi-employer program.
The primary focus of a legislative solution should be keeping MEPPs solvent. Congress can do this by providing aid to troubled MEPPs and allowing for a “partition” of pension costs for those people who never worked for surviving employers.
The PBGC can take on “orphan” liabilities. Under this type of solution, employers currently contributing to MEPPs will not be threatened by rate increases and withdrawal liabilities connected to employers that either went out of business or exited without paying the full amount of their promised obligations.
Additionally, Congress can require MEPPs that receive assistance to cease offering a defined benefit plan and transition to a variable plan or a defined contribution plan for future service. This would help initiate a structural reform that benefits companies and workers, while preventing a situation where taxpayers are on the hook for even larger MEPP bailouts in the future.
If Congress fails to act, there will be profound consequences. Many employers with plan liabilities will be endangered and millions of hard-working Americans could be unemployed as a result. Employers left standing after COVID-19 subsidies stand to face a much larger share of the liabilities in a MEPP, meaning they will be looking at ever-increasing bills linked to participants orphaned by the pandemic. These surviving employers will be at heightened risk as they work to stabilize themselves and the broader economy.
For all these reasons, companies like mine support an immediate bipartisan solution. We believe there is a legislative remedy that can balance the needs of our many stakeholders, including our associates (who participate in these plans), our labor union partners and our shareholders.
It should be clear that the cost to the economy will be far less if Congress addresses this problem now rather than allowing millions of Americans, many of whom are on the frontlines battling the pandemic right now, to lose their jobs and retirement savings once we return to our “new normal.”
Jill Sutton is chief legal officer, general counsel and corporate secretary at United Natural Foods (UNFI).
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