Tuesday, December 16, 2014

Public Sector Pension Plan Participants Should Beware .... Your Promised Benefits Could Be in Serious Jeopardy

We have commented recently about the necessity for individual participants in 401(k) plans to learn how to save and invest for their retirement needs.

And now there are even more reasons to do so. Congressional action has just been taken which may remove the widely believed to be hard and fast inviolability of pension plan promises made to plan members. The just passed spending bill calls for pension benefit reductions in seriously underfunded private sector multiemployer plans.

Although the potential 'spillover' effect is not certain, of course, this congressional action could signal a huge move away from fulfilling the promises and protecting the benefits of underfunded and unaffordable pension benefits for public sector employees. It definitely looks like potentially a precedent setting move.

Pension Change Seen as Setting a Precedent is subtitled 'Measure Allowing Multiemployer Plans to Trim Benefits Could Open Door to Broader Changes:'

"A measure included in Congress’s mammoth spending bill permits benefit cuts for retirees in one kind of pension plan, a big shift that lawmakers and others believe could set a precedent for other troubled retirement programs.

The legislation is aimed at defusing a potentially explosive problem—the deteriorating condition of what are known as multiemployer plans, jointly run by unions and employers. The bill cleared by the Senate late Saturday would allow troubled funds to cut benefits for current retirees in some circumstances. That is an exception to a long-standing federal rule against cutbacks in private-pension benefits.

Lawmakers and experts, while divided over the merits of the change, largely agreed that it could well be the first of many. . . .

The bill could encourage similar cutbacks in troubled state and local pension plans, and possibly even Social Security and Medicare . . . .

The bill’s chief backers said last week they were seeking only to address the specific problems of multiemployer plans and weren’t aiming to influence broader debates over other retirement programs.

“There is a unique crisis facing millions of people with multiemployer pensions that are threatened by numerous plans’ imminent bankruptcy, and we worked together to design the best bipartisan solution available to protect the retirement benefits of this very specific group of workers,” Reps. John Kline (R., Minn.) and George Miller (D., Calif.) said in a statement.

Other lawmakers say the new legislation could encourage policy makers to consider cutbacks in benefits in a variety of underfunded retirement programs.

“We have a [retirement funding] problem out there, there’s no question, and it has to be dealt with,” said Sen. Ben Cardin (D., Md.), who has helped draft other major pension-law changes in recent years. Mr. Cardin said he sees “a lot of merit” in the multiemployer legislation. But there will be “great fear that this will be a precedent” for dealing with those problems, he added. . . .

Multiemployer plans are jointly run by unions and employers, and they are common in trucking, retail, construction and some other industries. There are about 1,400 in all, covering about 10 million people. Because of declining ratios of active workers to retirees, and loose funding standards, some of the larger plans, such as the Teamsters’ Central States fund, are in dire financial condition.

The failure of just a few of these plans would quickly bankrupt the federal pension safety net. The safety-net agency, the Pension Benefit Guaranty Corp., recently raised its projected long-term deficit for multiemployer plans to $42 billion.

Many states and local governments already have started taking steps to shore up underfunded pension plans. Changes include rollbacks of promised future benefit increases and bigger contributions and work requirements for employees. Only a handful of governments have reduced benefit payments so far.

As of fiscal year 2013, public-employee funds faced long-term deficits of more than $1 trillion, with liabilities of about $3.8 trillion and assets of about $2.73 trillion, and an average funding level of 72%, according to the National Association of State Retirement Administrators. Funding levels have been declining fairly steadily. . . .

“It’s almost certain that other situations where plans are distressed from a funding standpoint are going to be viewed from the prism that it’s now possible to” cut benefits, said Brian Graff, chief executive of the American Society of Pension Professionals & Actuaries, a trade group. “There are other situations where plans are similarly funded at extremely low levels where you could see this possibly coming up.”"

Summing Up

Although this specific legislation relates to multiemployer plans in the private sector, the issue of underfunding and unaffordability very much remains a huge unanswered question in search of a solution for the public sector pension plans.

The sponsors, aka the elected representatives of the taxpayers, are between that taxpayer rock and the hard place occupied by the public sector employees.

On the one hand, pension benefits for many public sector employees have been promised by government officials (representing the taxpayers) to millions of public sector employee groups.

Yet on the other hand, these same government officials conveniently 'forgot' to mention to the taxpayers that their taxes would have to be increased dramatically to honor these commitments.

As a result, something has to give, and so it will.

Compromise will happen but how much in the form of forgone benefits by individual retirees and how much in the form of increased taxes by individual taxpayers is the operative problem in search of a solution. Accordingly, in the end nobody will win this one.

Stay tuned.

Thanks. Bob.

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