Politics

An $86 Billion Moral Hazard

Nestled in the $1.9 trillion emergency spending bill passed in March was a bailout for unions' private pension funds.

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The $1.9 trillion emergency spending bill Congress passed in early March was full of items that had little to do with the COVID-19 pandemic, the ostensible justification for the package. Perhaps the most indefensible provision was an $86 billion bailout for unions' private pension funds. This unprecedented handout could pave the way for a much more expensive bailout of public-sector pensions.

The American Rescue Plan Act creates a new federal grant program to support multiemployer pension funds. There are more than 1,400 of these retirement plans, which are jointly funded by unions and the private companies that contract with them through collective bargaining agreements. All told, this arrangement serves more than 10 million current and retired workers. Most of the funds are doing fine, but 124 of them are in "critical" financial condition, according to the Pension Benefit Guaranty Corporation (PBGC), a federal entity created in the 1970s as a financial guarantor for multiemployer pension plans, which is itself on pace to be insolvent by 2027.

Unlike COVID-19, this crisis didn't suddenly pop into existence. Democrats in Congress have been seeking federal aid for these retirement plans for years, while Republicans have been pushing for reforms in exchange for new loan or grant programs to prop up the pension system. The American Rescue Plan granted aid with no strings attached.

"It's a very expensive way to not solve a problem," says Gordon Gray, director of fiscal policy for the American Action Forum, a free market think tank. While the troubled multiemployer pension funds now have enough cash to pay full benefits through 2051, he says, "congressional Democrats have decided to forgo a lasting solution to the challenge and simply write these plans a check to cover their costs for the next 30 years."

Anyone who has followed the slow-burning public-sector pension crisis will recognize the fundamental problem plaguing the multiemployer pension funds. Both systems overestimate future investment returns even as they underperform their past projections.

A 2017 study by the Government Accountability Office found that the Central States Pension Fund, one of the largest and most deeply indebted private multiemployer funds, would have 91 percent of the assets necessary to cover future costs if it had achieved its target annual financial return of 7.4 percent every year since 2000. Instead, the fund has earned an average of less than 5 percent annually and was on pace to run out of money by 2025.

Democrats who championed this year's bailout, such as Sen. Sherrod Brown (D–Ohio), say federal funding is necessary to prevent painful cuts to retirees' income. Brown is right that workers are not to blame for the pension funds' fiscal problems. But a federal bailout won't encourage troubled plans like Central States, which provides retirement benefits for truck drivers, to invest more wisely.

The American Rescue Plan "is likely to breed what economists call 'moral hazard' as plan managers and sponsors realize there are no consequences to underfunding and overpromising," Sen. Chuck Grassley (R–Iowa), former chairman of the Senate Finance Committee, said on March 5 during the Senate's floor debate over the bill. A "no-strings bailout" of the pension funds, he added, means "the American taxpayer will be left footing the bill for a private-sector retirement system."

Grassley, who had been working with Senate Democrats on a rescue plan for the multiemployer pensions, proposed amending the bailout to include stricter capitalization rules and more oversight by the PBGC. Grassley's amendment was defeated in a party-line vote. The American Rescue Act passed both chambers of Congress without a single Republican vote for it.

That moral hazard also could manifest in other ways. Critics of the bailout worry that congressional Democrats are telegraphing their intent to put federal taxpayers on the hook for underfunded public-sector pension plans. "If politicians will bail out truckers' and coal miners' pensions, why would they turn away from teachers and firefighters?" asked Andrew Biggs, a resident scholar at the conservative American Enterprise Institute, in a Wall Street Journal op-ed.

The price tag of such an effort would make this year's pension bailout look small by comparison. America's various state and city pension plans are an estimated $4 trillion in the red.

NEXT: Brickbat: Tough Lesson

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  1. Thanks Joe…./sarc

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  2. At what point do politicians start spending money responsibly?

    At what point do citizens demand that?

    1. As soon as they accept a sword of damaclese arrangement

    2. There are more people taking more from the pot than what they are putting in. We have crossed the path of no return.

    3. As soon as people stop wanting free stuff.

    4. As soon as they run out of other people’s money.

  3. Just thankyous to unions for getting out the vote, and campaign contributions.

  4. But, but, the unions built Chicago! They provide a “living wage” in a system built on nepotism, cronyism, and corruption. Why wouldn’t the rest of us want them to have a comfortable retirement?
    Laborer in Denver. $15-$20 an hour.
    Union Laborer in Chicago. $40-$50 an hour.

    1. When I did trade shows in Chicago, we used to have to call for a union electrician to plug items in our booths into a standard electrical outlet. It’s not just the pay scale that’s the issue.

      1. It’s all about your safety. You did have hundreds of hours or training necessary to plug in dangerous lamps or computers in standard electric sockets.

      2. Same thing when I was doing trade shows in Vegas some years ago. Couldn’t even move boxes from one side of the booth to the other without a union laborer to wheel the dolly.

        And they were no in a hurry. We could have been out of there in 20 minutes instead of two hours on more than one show. Setting up was impossible to plan, you never knew when the “electrician” was coming or when you were going to get labor to unpack your skid.

    2. It’s partly why you can’t build a small public bathroom in NYC for under 2.3 million.

      The left seems not to understand the more you pay, the more it costs, the more it becomes prohibitive for poor people. A community should be able to raise funds for public bathroom in their community. Poor communities in NYC can’t afford 2.3 million.

      Same with housing. People what affordable housing, but you can’t build affordable housing that way.

      Same with transportation. NYC is trying to do congested pricing which will impact the lowest income earners the most.

      1. It really is next level stupid.

        Housing is the easy and obvious fix. Instead of subsidizing cheap housing, get over your fear of the wealthy and remove all controls on expensive housing. And very short order those million-dollar efficiency apartments will be competing with 3,000 ft², brand new high-rise developments. And very quickly those million-dollar efficiency apartments will be $300,000 efficiency apartments. And then after a few more years of development of expensive stuff, they will be $50,000 efficiency apartments. The problem of low-cost housing is not solved by restricting the building of high-cost housing. Quite the opposite.

  5. Both systems overestimate future investment returns even as they underperform their past projections.

    “Hope springs eternal!”

    1. We’ll get it right this time!
      Put it all on black!

  6. That union bailout is ‘nestled’ in there, whereas the state pension fund bailout for CA, IL, NY, is the entire upper crust of both this pot pie and the previous one.

  7. “congressional Democrats have decided to forgo a lasting solution to the challenge and simply write these plans a check to cover their costs for the next 30 years.”

    And there is Congressional financial theory in one sentence.

  8. Grassley, who had been working with Senate Democrats on a rescue plan for the multiemployer pensions, proposed amending the bailout to include stricter capitalization rules and more oversight by the PBGC.

    And right there you have it why Republicans are such losers and why socialism keeps making progress.

  9. Once again robbing Americans at gunpoint to bail out crooked and corrupt unions.
    The government has NO business forcing the rest of the American people to bail out unions. That’s their problem, not mine, not anybody else’s. They created their own problems and the unions are responsible for their own people not me.

    Socialism has been a miserable failure wherever it’s been tried. Not one single country that has adopted socialism and succeeded. Not one.
    Only by free enterprise and free market capitalism along with liberty, freedom and an informed public can America survive.
    Not with BLM, ANTIFA or any other liberal/ progressive/socialist rubbish. Not with Critical Race theory, Not with woke identity progressive politics but with freedom and liberty.
    Beware of socialism. It is a trap.

  10. I am a retired UPS teamster who benefited from this bailout. I would much rather see the lying scumbags who mismanaged the fund ( Central States) go to prison for a long time than receive fake money while they celebrate their bribery of corrupt govt. officials.

  11. You idiots that thought that rude tweets and sophomoric name-calling were an existential threat to the republic have done well. If it were just the one bill, this would be the most corrupt administration in history by an order of magnitude or more. But that isn’t even a rounding error on where they are going.

    Pork used to come in million dollar chunks. Now we have tens of billions flowing hither and yon. White a 6 trillion dollar budget and what… Another 6 or 10 trillion in off budget spending?

    You guys called AOC crazy for wanting to spend 11 trillion per year with her green New deal. You said it was impossible…. Yet here we are barely more than a year later and 11 trillion seems quaint.

    Well done. You drank the cool aid, believed the lies that you repeated…. And you may have ruined us all. Nice going.

  12. Crony Socialism Strikes Again!!!!!!!!!!!!

  13. years ago. Couldn’t even move boxes from one side of the booth to the other without a union laborer to wheel the dolly.

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