Is the glass half full or half empty? When it comes to retirement policy, in Washington it’s a little of both, according to government representatives who spoke at an Oct. 23 general session at ASPPA’s Annual Conference.
“It’s not all bad news,” said Pension Benefit Guaranty Corporation (PBGC) Director Thomas Reeder of his agency’s activity and insurance programs. He noted the sharp disparity between the state of the PBGC’s single-employer insurance program and the one that serves multiemployer plans. He and American Retirement Association CEO Brian Graff attributed the respective status of these programs to a variety of factors, including the stock market, the Pension Protection Act, interest rates and premiums.
The relative success story is the PBGC’s single-employer insurance plan, which Reeder reported in 2017 had assets of $106 billion and obligations of $117 billion, for a deficit of $11 billion. “It’s possible to earn your way out of this deficit,” he said.
But it is possible, Reeder said, that the single-employer plan could become flush with money at the same time that its multiemployer counterpart could run out of money. “The multiemployer insurance program is in dire straits,” he said. The program has $2 billion in assets but $67 billion in liabilities, for a whopping deficit of $65 billion. Unlike the single-employer plan, Reeder said, “it is not possible to earn your way out of this deficit.” He added, “It’s a critical crossroads we’re going to have to cross over very soon.”
PBGC coverage, Reeder reminded attendees, is “not like regular insurance.” He remarked that the connection between coverage and premiums is not comparable to that for conventional insurance. “Just paying the premiums doesn’t get you covered,” Reeder said. It “has nothing to do with coverage. You can’t opt in to coverage simply by paying premiums.”
So who is covered? “Look to the statutes,” Reeder said. But, he also noted, the statutes themselves are not that clear. There are people who are covered who don’t know it, Reeder said, and others who think they are but are not. The PBGC will help dispel the fog, Reeder said; it is possible to ask the agency for a determination regarding coverage. And PBGC insurance does not cover state and local plans. “If we did, our deficits would be a lot greater than they are,” Reeder remarked.
Another major challenge facing the defined benefit world is missing participants, and Reeder said that his agency has “been very successful in finding missing participants,” although he did note that the PBGC is more constrained than the private sector in how it goes about that. One of the situations that helps create the situation, he noted, is that when a company changes its status, merges, changes its name or makes other such changes, one of the consequences can be that former participants and be lost.
One possible way to help address the situation, Reeder suggested, would be to have necessary information “all in one place.” And he added that there is legislation that would create a centralized clearinghouse of information to help in finding missing participants.
The Time Is Now
The crisis facing the multiemployer insurance program is “a problem that is now,” Reeder said. “If you put it off, it’s worse,” he said. The consequences of insolvency will be “catastrophic,” he warned, adding, “I can’t emphasize it enough.” Kara Getz, Senior Counsel for the House Ways and Means Committee Minority Staff, also expressed the gravity of the situation, noting that there are many plans that are in trouble now, and that “unfortunately, if these plans go under, the PBGC goes under as well.”
Plans that are in bad shape, and the consequences of that, are not necessarily the fault of an employer, Getz noted. For instance, a plan may do everything correctly but be in an industry that is changing, which can affect its solvency. Similarly, individuals may follow the rules but experience a drop in the amount their pension yields through no fault of their own.
Reeder emphasized that in his view, legislation is needed to correct the situation. And he struck a hopeful note, saying that “this is something that people in Congress are sitting up and taking notice of,” and noted that there is a special committee on Capitol Hill examining the situation and working to address it.
Getz said that there is range of solutions under consideration, including a program by which a troubled plan could apply for a federal loan, cash infusions for troubled plans on a very limited basis, adjusting interest rates, and increasing the multiemployer plan program guarantee and premiums.
“Now is the time when we have to make decisions,” said Getz.
On the Hill
Getz noted there is pending legislation in the current session of Congress, but that sentiment is such that the prospects are good for progress and even reconsideration of those measures if they are not enacted in the next few months.
For instance, she said, “There’s a lot of interest in getting RESA [the Retirement Enhancement and Savings Act] over the finish line.” But she added that if it does not pass in the current Congress, it could in the next. And regardless of its ultimate fate, she said, “there is still an opportunity to work on this.” And she added for good measure, “the great thing about RESA is that it was a bipartisan mark-up.”
Getz struck an additional hopeful note in her observation that Rep. Richard Neal (D-MA), who may become chairman of House Ways & Means Committee if the House shifts from Republican to Democratic control as a result of the upcoming November elections, considers retirement to be one of his biggest priorities. “On the Hill, it’s not always a top-tier issue,” she said, “But it is for Neal.”
In addition, Getz noted, Neal is a proponent of the employer-based system of providing retirement coverage. Neal “believes in the employer system,” Getz said, adding that he thinks that system “is working really well, and he wants to improve on it.”
The Long View
Reeder offered an historical perspective that helped put the current state of things in better perspective. “There has never been a ‘Golden Age’ of defined benefit plans,” he remarked. While there has been some decline for DB plans, he balanced that with the observation that “We actually have more defined benefit plans than we did last year.” In fact, Reeder said that he “would not be surprised if defined benefit plans didn’t grow” as part of the means of providing retirement security.
Not only that, Reeder reassured attendees that DB plans more than still have their place. We are “still very dependent on private savings for retirement security,” he said. Reeder asserted that DB plans “are still vital,” and said that “The defined benefit world is still a very powerful leg in the retirement security stool.”