For the first time, the House of Representatives approved a bill that allows the retiree benefits of distressed union multi-employer pension plans to be cut. A multi-employer pension plan is where a group of employees in the same industry join unions to provide pension coverage to retirees. Of the 1,400 multi-employer plans in the U.S., hundreds either have failed or are tail spinning into insolvency. Cutting the benefits awarded to retirees is the only way to salvage pensions in plans that are in imminent danger of running out of money.

For perspective, retirees in the Teamsters’ Central States fund are entitled to $3,000 a month or more for the rest of their lives after working 30 years. Accordingly, a 30-year employee who is not yet 50 years old is likely entitled to over $1 million plus significantly subsidized health care benefits. Central States has a staggering 5:1 ratio of retirees to employees paying into the pension fund. Obviously, this model is not sustainable. The fund has $18 billion in assets, pays out $2.8 billion annually, but only collects $700 million each year. Central States’ pension plan will run out of money in the next 10 – 15 years. Without the recent Congressional changes, the plan will fail and no retiree would receive any money. Even the Pension Benefit Guaranty Corporation (PBGC), which insures union pension funds, only guarantees $13,000 per year and it too will soon run out of money.

Some of the changes that may occur to retirees who are members of pension plans that will run out of money within the next 20 years include:

  • Benefits may be cut by as much as 60% for some retirees in some plans.
  • Retirees who are 80 and over will not have their benefits cut; those who are 75-79 will receive smaller cuts than retirees under 75 years old.
  • Retirees cannot challenge the plan’s trustee’s decisions in court even if arbitrary and capricious or contrary to the best interest of the plan participants.
  • No automatic restoration of lost benefits even if the plan’s funding status improves.
  • The insurance premiums that multi-employer plans pay to the PBGC are increased from $13 to $26 per participant per year. In contrast, premiums paid to the single-employer plan program are between $57 and $475 per participant per year. The benefits guaranteed by the single-employer program are four times the maximum benefits guaranteed by the multi-employer program.

Although these changes are supported by both employers and unions (but not retirees) they are not guaranteed to become law. The Senate may have its own ideas about how to improve the pension crisis in ways different from what the House passed. And who knows what President Obama will do if presented with a final version.