Kline-Miller Cromnibus Amendment: The Coming Death of Defined-Benefit Pensions

Surprisingly there is not much news this morning. The last Umbrella Movement encampment was taken down and Japanese Prime Minister Shinzo Abe's Liberal Democratic Party won 291 of the 475 seats in the lower house of parliament (meaning that the nuclear power industry can rest easy).

There is an excellent post by Naked Capitalism's Lambert Strether. In "Cromnibus Pension Provisions Gut Forty Years of Policy, Allow Existing Pensions to Be Slashed" Strether analyzes the impact of the Kline-Miller amendment that was part of the budget bill that cleared the Senate this past Saturday. Strether notes that most liberals have been focused on the amendment that allows big banks to once again engage in the derivatives trade. This amendment sparked a great deal of outrage, and rightly so, because it was the derivatives trade conducted by behemoth banks like Citigroup that contributed to the Great Recession of 2007-2008.

But Strether does us a service to shine a light on the pension-overhaul amendment because it will in short order adversely affect the lives of millions or regular working Americans:

Oddly, or not, “progressive” and Democratic loyalist commentary on the Cromnibus bill has — with occasional honorable exceptions –  focused almost exclusively on Elizabeth Warren’s fight against a derivatives provision that might benefit big banks, as we saw yesterday, and has been silent about a provision that could do far worse and far more immediate harm to working people who made their retirement plans based on the belief that their pension rights were secure and backed by legislation, and the idea that a contract was a contract. Oldthink, I know! 

So in this post I want to rectify that mysterious silence, and take a look at the truly nauseating Kline-Miller amendment, passed by the House, and part of the Senate bill forwarded to Obama for his signature. David Dayen summarizes: 

"Under the bill, trustees would be enabled to cut pension benefits to current retirees, reversing a 40-year bond with workers who earned their retirement packages."

Michael Hilzick: 

"Under ERISA, the 1974 law governing pensions in the private sector, benefits already earned by a worker can’t be cut." 

Now they can. That’s right. Even if you’re retired and vested in a private pension plan, your benefits could be cut. Congress retraded the deal (if I have the finance jargon right). That’s nauseating even for today’s official Washington. And the bill was passed in a thoroughly bipartisan fashion: Kline is a Minnesota Republican, and Miller is a “liberal” California Democrat. [Reach me that bucket, wouldja?]

As Strether notes, the amendment is co-authored by liberal lion George Miller, Democratic U.S. Representative from California. This means that pension overhaul was put forward with the approval of organized labor. But why? Because multiemployer pension plans are top-heavy with graying participants; there are not enough active workers to maintain all the retirees.

I speak from experience because my union multiemployer pension plan went through an overhaul at the beginning of the Great Recession (see "Why This Pervasive Sense of Doom?"). The plan was placed in "red" or crtitical status by the Pension Benefit Guaranty Corporation (PBGC). Part of being in the red means that the plan's trustees must put forward a proposal to return the plan to the black, usually a combination of benefit cuts and employer surcharges. From what I can tell the Kline-Miller amendment allows multiemployer pension plans to implement these changes without going into critical status and without being placed under PBGC stewardship. Basically, it is the unions trying to get out front of a looming crisis by trimming benefits now.

Strether provides a valuable counterargument. Why admit defeat? Why not make an effort to fully fund all the contractual benefits?

What Were the Alternatives to Kline-Miller? 

First, there are options available, even accepting that legislation needed to be passed this sesson. Reuters: 

"[Randy DeFrehn of the National Coordinating Committee for Multiemployer Plans], AARP and other advocates reject the idea that solvency problems 10 to 15 years away require such severe measures. They have pushed alternative approaches to the problem; one that is included in the deal, DeFrehn says, is an increase in PBGC premiums paid by sponsors, from $13 to $26 per year. Advocates also have called for other new revenue sources, such as low-interest loans to PRGC by the once-bailed-out big banks and investment firms." 

So why not have the sponsors pay the full freight? The workers already did! (Though I have to say that getting a loan strikes me as… .Well, let’s call it weak tea. Or weak TINA.)
Second and more radically, unions could and should have been strengthened. Read between the lines of this bland Wall Street Journal article: 

"Multiemployer plans are administered by unions and are funded by multiple employers in a given industry, typically in fields such as trucking, retail and construction. There are about 1,400 plans in all, covering roughly 10 million people. Because of declining ratios of active workers to retirees, and loose funding standards, some of the larger [Multiemployer plans], such as the Teamsters’ Central States fund, are in dire financial condition."

Yeah, those “declining ratios” just happened naturally, right? Leaving aside the issues of financial mismanagement by trustees and the Great Financial crash, the problem is an actuarial one, right? In These Times: 

"The national trend of de-unionization coupled with job losses from the recession have meant that fewer and fewer workers are paying into funds as more and more retirees are starting to receive benefits." 

So, if the ratio between active workers and retirees has gone out of whack, why not strengthen unions so that there are more “active workers” signed up? Especially since the problem is 10 or 15 years away? Is there some reason a “liberal” California Democrat wouldn’t consider that? (Note above we show why Kline-Miller makes union membership less attractive, so it’s sending union pension actuarial conditions in exactly the wrong direction.) 

Third, the think tank behind Kline-Miller is the National Coordinating Committee for Multiemployer Plans. Here’s their report. It’s titled: 

“Solutions not Bailouts” 

But what would be so very wrong with — work with me, here — just bailing the pension plans out? I can’t see why bailing out workers isn’t a solution. It certainly was for the banksters! International Business Times: 

"While Congress responded to the 2008 financial crisis by rescuing the banking industry with an $700 billion bailout [and that’s only TARP!], there’s no rescue on the way for retirees. Lawmakers are offering no bailout to close multiemployer plans’ aggregate $42 billion deficit." 

$42 billion? Spread out over decades? That’s chicken feed! What’s wrong with these people?

Yes, considering Congress just approved $64 billion for military campaigns abroad.

When Boeing successfully broke the will of the Machinists Local 751 at the beginning of this year and forced a two-tiered pension on its workers -- new hires get a 401(k)-type defined-contribution plan, while the Machinists who have been with the company for a set amount of years get to keep their defined-benefit pension -- the future was plain to see. No longer was a robust pension going to be a benefit synonymous with union membership. Recently, the large, privately-held utility, Puget Sound Energy, was able to force the same change on the Electrical Workers union.

Ten-to-20 years from now defined-benefit pensions will be effectively phased out. Only the 1% will still enjoy their benefits.