New Pension Bill Adds Too Much to the Debt

The House Ways and Means Committee is considering pension reform legislation that CBO estimates will add $64 billion to deficits over the next ten years and could ultimately cost substantially more because of a relatively gimmicky loan approach that allows pensions to pay back only interest for the next 29 years and requires a massive balloon payment in year 30.

With many pensions at risk of insolvency, lawmakers should act to shore up both the Pension Benefit Guarantee Corporation (PBGC) and the pensions themselves. But rather than spending $65 billion without payfors and relying on this exotic lending approach, lawmakers should amend the Rehabilitation for Multiemployer Pension Act of 2019 to more transparently provide any needed grants and loans and should offset the cost so as not to add to today's record high debt levels.

Multiemployer pension plans are created through a collective bargaining agreement between multiple employers (usually in the same industry) and a union. There are currently roughly 1,400 multiemployer plans and over 10 million plan participants. An important feature of multiemployer plans is that if an employer goes out of business or leaves the plan, the remaining employers inherit responsibility for financing the workers' benefits of the employer who left.

Unfortunately, many multiemployer plans have large funding shortfalls, and approximately 100 plans covering around one million participants are "critical and declining" and report they are unable to avoid insolvency within the next 20 years, facing large benefit cuts in the pensions they would be able to provide. Without some sort of financial assistance, the most underfunded plans would need to reduce benefits by as much as 80 percent, according to CBO.

For plans with this designation, the bill would offer two forms of financial assistance: grants and loans. The loans would be provided almost immediately, but borrowers would only be required to pay the interest on those loans for the first 29 years of the loan. In year 30, the legislation requires pensions to pay back the entire principal. In reality, it is likely that future legislators would modify those terms before this "balloon payment" occurred, perhaps even by forgiving the debt altogether.

Budgetary Effect of H. R. 397

^{Source: Congressional Budget Office estimate of the pre-markup bill draft. The version approved by the Ways & Means Committee differs slightly from the one estimated by CBO. The revised bill could score differently.}

If future policymakers do forgive or modify the terms of these loans, it could ultimately cost substantially more. Even if they do not, CBO estimates the legislation will cost $64 billion – with roughly half that money coming from the "subsidy cost" of the loan. Under current scoring rules, that subsidy cost is based on the present value of the loan and expected repayments, taking into account interest payments and default rates. Under a measure known as fair-value accounting, where other risks associated with these loans are also accounted for, the cost would be much higher.

On the other hand, it is possible the bill could cost somewhat less if grants in the bill can be used to pay back the loans. In that case (depending on scoring methodology), the total cost of the bill would fall to $38 billion. This estimate, like the $64 billion figure, does not account for the cost associated with risk nor the likelihood that future lawmakers might modify loan terms.

Any multiemployer pension solution should not increase the deficit over the decade or the long term, and should not use gimmicks that make a deficit increase likely in the future. Lawmakers should offset the full cost of the bill and ensure the bill’s structure offers transparent grants and loans that are structured to be reasonably paid back over time where intended. 

Fortunately, there are many ways the Ways & Means Committee could choose to pay for the legislation.  When last year's Joint Select Committee on Solvency of Multiemployer Plans was reportedly considering similar legislation, we proposed Options for the Pension Committee to Consider, listing about a dozen options to restore solvency to the PBGC by raising premiums, reducing benefits, or requiring the component plans to improve the organization's funding. We listed another dozen options that affect retirement security more broadly. If policymakers wanted options that don't take savings from the retirement space, our recent plan to offset increases in the discretionary caps included over 60 offset ideas with the potential for bipartisan support, many of them drawn from ideas proposed by both President Obama and President Trump.

Without offsets, the bill would worsen an already unsustainable national debt outlook.

For more background on the issue, see our longer summary of an earlier version of the bill at Multiemployer Pensions: The Next Source of Budget-Busting Legislation?. That earlier version had been estimated to cost over $100 billion.

Update 7/11/19: This blog was updated after publication to clarify that the version of the bill that was approved by the Ways and Means Committee differs from the initial draft that CBO estimated.