Saturday, April 13, 2013

Unions, Pension Funds and Taxpayer "Backstops"

The guarantees are made by government, but those same guarantees are made good by taxpayers. The taxpayer is always the backstop for filling in the holes created by government guarantees.

Medicare and Social Security are perhaps the two best examples of government guarantees, but they're not the only ones. There are lots of others.

Thus, the more certainty introduced by government into our daily lives, the greater the uncertainty for taxpayers generally about what the final bill will be.

The enormous and largely unfunded liability of city and state public sector pension plans is in the news big time these days, and deservedly so. But they're not the only plans with the potential for taxpayers being required to come to the rescue.

Take union sponsored pension plans in general, and the Jimmy Hoffa originated Teamsters' Central States Funds in particular. Taxpayers beware.

How many of us taxpayers realize that we're ultimately on the hook for underfunded private pension plans and that shortages incurred by the government's Pension Benefit Guaranty Corporation (PBGC) will be backstopped in part by taxpayer guarantees? Because that's the way it's worked since the PBGC was created in 1974.

Fears on Teamsters Pension says this about the ultimate funding responsibility falling on unsuspecting taxpayers:

"Some companies are pushing to withdraw their workers from a giant Teamsters pension plan that faces a deep funding shortfall and questions about its long-term viability.
Investment losses during the financial crisis and hard times for trucking companies that pay into the Teamsters' Central States Funds have sapped the fund of money it uses to pay promised benefits.

With just 60 cents of assets for every $1 in obligations, the Teamsters pension fund is considered in "critical" status by the Pension Benefit Guaranty Corp., the federal agency that backstops failed pensions.
Central States has about $18 billion in assets, ranking it the nation's second-largest multiemployer pension plan. Such funds get contributions from numerous companies.

The Teamsters pension fund pools money from about 1,900 companies, and its investments have been overseen by advisers jointly approved by representatives for union and management.

Recent efforts by Republic Services Inc. to pull out about 800 sanitation workers from Central States show the uphill battle facing a pension plan founded by the late Teamsters President Jimmy Hoffa.

Last week, Republic Services finalized deals with three local Teamster unions in Michigan to move out of Central States to a better-funded Teamster-run plan. Food service distributor Sysco Corp. removed its last Teamster unit from Central States in January.

"There is a reasonable possibility that this plan could run out of money in about a dozen years," Central States Executive Director Thomas Nyhan said in an interview.
More companies leaving the fund "accelerates insolvency," Mr. Nyhan said.

Central States illustrates a potential nightmare scenario for workers across the U.S.: a pension plan that is at risk of running out of money, leading to possible benefit cuts and putting strain on the federal agency that would assume the pension's liabilities. . . .

For decades, U.S. companies have shut down their traditional pension plans and moved workers to less generous 401(k) retirement accounts. In some cities, Republic has proposed replacing traditional pensions provided by Central States with 401(k) accounts.

The union's pension plan was founded by Jimmy Hoffa. Above, Hoffa in 1964.

"Pensions are a huge selling point for a union," says Ken Paff, national organizer of Teamsters for a Democratic Union, a group that opposes the Teamsters' leadership.
"If you take that away, you hurt the union's ability to organize workers," he said.

The price for exiting from the fund is steep. Republic estimates it must pay a "withdrawal liability" of as much as $146 million to cover the company's share of Central States' unfunded liability.

This amount could go up if the company stays in the plan and the funding level deteriorates.

Mr. Nyhan said he offered Republic protections that would eliminate future increases in the company's withdrawal liability. Other companies in the fund have adopted such measures, he said, but Republic rejected them.

Ms. Ellingsen said Republic's "employees only stand to gain in benefits by getting out of a pension fund that is going insolvent."

After investments losses from the tech bust in 2002, Central States cut retirement benefits and increased contributions from employers to shore up its funding level.

Heading into the financial crisis, Central States' had just received $6.1 billion that United Parcel Service Inc. paid in exchange for letting the company's employees out of the fund. . . .

Since the recession, Central States' assets have dipped to $18 billion, from $27 billion in late 2007.

The pension plan pays about $2.8 billion in benefits a year but takes in only about $700 million in employer contributions. "You have to make up the rest with investment returns,'' said Mr. Nyhan, which he thinks is unlikely over the long term.

The recession also hurt some of the fund's largest companies, which meant smaller contributions into Central States. . . .

If Central States can't afford to pay out benefits and the Pension Benefit Guaranty Corp. has to step in, some Teamster pensions would be slashed.

Under that scenario, Dave Scheidt, a retired dock loader from Kansas City, Kan., estimates his pension check would go from about $3,000 to $1,100 a month, based on federal guarantee rules."

Summing Up

The union leader speaks the truth. Promising the benefits of pension plans to employees is a great "selling point" for unions to organize workers and get dues.

Unfortunately, these promises often end up becoming the responsibility of unsuspecting taxpayers when the union's promises later become empty ones.

Many union run pension plans are in trouble. That means taxpayers beware.

Many municipal run pension funds are in trouble. That means taxpayers beware.

Many individual state pension funds are in trouble. That means taxpayers beware.

Meanwhile, Social Security and Medicare are in trouble. That means taxpayers beware.

And ObamaCare hasn't even begun to show its true costs. That too means taxpayers beware.

Government makes guarantees and taxpayers make good on those guarantees. Maybe the government needs to make fewer guarantees.

Isn't it about time we all got serious about seeing all this "government created certainty" which results in "taxpayer uncertainty" for what it really is --- a future unlimited taxpayer backstop for careless actions by various people who can then look to the government to make things right?

Isn't it also about time that we begin to look away from faux government guaranteed solutions and toward the 401(k)s as the only viable solution to our nation's retirement funding woes?

And isn't it also time that we begin to acknowledge that we need more people working, and that they're working smarter, harder and for many more years before entering retirement as well.

We simply  can't afford to do otherwise.

That's my take.

Thanks. Bob.

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