Union pensions: the next government bailout?

A recent Weekly Standard (WS) article chronicles a coming financial and economic crisis in union pension plans with gloomy implications for Utah’s (and the nation’s) economy. In short, the article describes a scenario in which these plans may become the next sector of the economy seeking a government bailout due to their own recklessness.

The WS article begins by describing how the Newspaper Guild of New York successfully defeated a proposal from The New York Times to increase the workweek from 35 hours to 40 hours. Yes, you read that right.  Evidently, the physical/emotional toil of an average workweek is just too much to ask of those hard-working journalists at The New York Times.

Next, the WS article shifts to a discussion of the Times’ pension plans, which are only 77 percent funded. For context, a pension plan that is below 80 percent funded is considered “endangered” by the federal government rules. Amazingly, the Times’ pension plans are actually among the better funded pension plans in the nation. 

Thanks to new accounting requirements on pension plans, Credit Suisse was recently able to analyze 93 percent of the country’s multi-employer pension plans: plans that include several companies’ employees. The company reported that these plans are only 52 percent funded, with a collective shortfall of $369 billion – an amount almost four times the size of the entire Utah economy in 2011. Not only is that shortfall astounding, but as the WS article notes, federal rules label a pension plan below 65 percent funded in “critical status,” which means it is unlikely to ever be able to recover to meet its financial obligations. This is not only terrible news for people in these pension plans, but has implications for the rest of society as well.

Each of these pension plans is connected with multiple employers, so correcting these plans’ underfunding problem (or likely failure) could bankrupt thousands of businesses. The result would likely be job losses affecting tens of thousands, perhaps millions, of employees and their families. Further, because these multi-employer pension plans are concentrated in basic industries that drive other economic areas – construction, transportation, supermarkets and mining – the impact of failed pensions will likely drag down the entire economy.

The likely source of a bailout if such a scenario materialized would be a federally backed “backstop” for failed pension plans known as the Pension Benefit Guaranty Corporation (PBGC), which was established by federal law in 1974. As of 2010, the PBGC had financial obligations of over $100 billion, with assets of about $80 billion.  In other words, the government-backed PBGC is in no condition to cover these pension plans if/when they fail, without a bailout from taxpayers, via the federal government. When these pension plans fail due to funding gaps too large for either employees or employers to cover, you can expect both labor unions and employers to call for a bailout to protect the country from dire economic consequences that their financial mismanagement created, just like banks did in 2008.

Who knows how this scenario will play itself out when the day of reckoning for union pension plans finally arrives, or how bad the impact on Utah’s economy will be. But it might be prudent for Utah policymakers to start preparing for this coming pension crisis. Enacting a government spending amendment that limits state spending growth in good economic years in order to save up tax funds for emergencies and bad economic years would be a good place to start.