Options for the Pension Committee to Consider

Jun 18, 2018 | Other Spending

As we recently explained, proposals from the Joint Select Committee on Solvency of Multiemployer Plans could include considerable costs. The Joint Select Committee’s recommendations should keep costs as low as possible while accomplishing their mission of addressing the funding challenges facing multiemployer pensions. While some costs may be inevitable, any costs should be fully paid for rather than added to the already unsustainable national debt. Fortunately, many offsets and pay-fors remain available.

Below we discuss two types of proposals: those that improve the solvency of the Pension Benefit Guaranty Corporation (PBGC) and those that offset any transfer of funds either into PBGC or directly toward multi-employer pensions.

Closing PBGC's Shortfall

PBGC's multiemployer program is projected to run out of reserves in 2025, at which point it will only be able to insure its multiemployer claims with the premiums it takes in. While closing that shortfall only requires about $10 billion over the next decade, the PBGC faces a cash shortfall of close to $40 billion over 20 years. Under accrual accounting, which measures the net obligations made rather than simply cash accounting, that shortfall totals about $60 billion over two decades. Accounting for risk, PBGC's Fair-Value shortfall is about $100 billion over 20 years.

Estimated Shortfall of PBGC's Multiemployer Program

  Cash Basis Accrual Basis (20-Years)
  10-Years 20-Years 'Credit Reform' 'Fair-Value'
CBO $10 billion $40 billion $60 billion $100 billion
PBGC N/A N/A $65 billion N/A

Sources: CBO's 10-year cash projection comes from their April 2018 baseline and their accrual projections come from their 2016 report on the multiemployer program. 20-year cash projection is a CRFB estimate based on CBO data. PBGC projection comes from their FY 2017 Annual Report. All numbers are rounded.

Shoring up the solvency of the PBGC should be a priority of lawmakers on the Joint Select Committee.

One option is to increase premiums. For example, raising the current $28 per person (indexed) premium to $132 would generate about $40 billion over two decades, enough to fund PBGC for the next twenty years. On a fair-value accrual basis, that option would save $20 billion and close 20% of the program's funding gap. The Congressional Budget Office (CBO) identified several other premium increase options in its 2016 report.

President Trump's budget also proposes raising PBGC premiums and specifically recommends introducing a variable rate premium and an "exit premium" to ensure risky plans are paying closer to their share of risk. Similarly, President Obama proposed allowing the PBGC to raise multiemployer plan premiums to ensure solvency.

Options for Closing the PBGC Multiemployer Program's Shortfall

Policy 20-Year Cash Savings 20-Year FVA Savings Trust Fund Exhaustion
PBGC Shortfall $40 billion $100 billion 2025
Increase PBGC Premiums (currently $28 per participant)      
Introduce a variable rate premium and exit premium (President's FY 2019 budget) $40 billion* no estimate After 2038
Allow the PBGC to increase multiemployer plan premiums to ensure solvency (President's FY 2017 budget) $40 billion no estimate After 2038
Increase premiums to $39 $5 billion $1 billion 2025
Increase premiums to $132 $40 billion $20 billion After 2038
Increase premiums to $241 $80 billion $40 billion After 2038
Increase premiums to $297 $95 billion $50 billion After 2038
Modify PBGC Benefits      
Reduce the maximum benefit amount PBGC guarantees by one-quarter (covering 45% of an average plan instead of 60%) $10 billion $25 billion 2026
Allow PBGC to adjust retirement age for insolvent plans no estimate no estimate no estimate
Allow PBGC to terminate a plan no estimate no estimate no estimate
Allow PBGC to reduce benefits at time of plan termination rather than waiting for insolvency no estimate no estimate no estimate
Allow PBGC to partition underfunded plans regardless of resources $10 billion $15 billion Before 2025
Allow PBGC to partition underfunded plans while raising premiums to $90 $25 billion $35 billion After 2030
Require Plans To Improve Funding      
Require underfunded pensions to increase plan contributions by 20% $10 billion $30 billion 2025
Restrict risky investments by well-funded plans $5 billion $30 billion 2025
Require pension plans to measure funding with more conservative discount rates no estimate no estimate no estimate

Source: CRFB estimates based on Congressional Budget Office
Note: Estimates represent reduction in PBGC's shortfall rather than federal budget deficit effect.

Another option is to adjust PBGC's benefits. Lawmakers can reduce the maximum benefit the PBGC guarantees, adjust the retirement age for insolvent plans, allow the PBGC to terminate plans (and thus prevent them from offering new benefits), allow the PBGC to reduce benefits when a plan is terminated rather than waiting until insolvency, and/or allow the PBGC to partition some of a plan's liabilities (though this policy could include upfront costs). Most of these options would generate too few upfront savings to prevent insolvency, but could significantly improve the long-term financial state of PBGC.

Finally, PBGC's finances would be improved if pension plans themselves were better funded. Policies to accomplish this goal include requiring underfunded pension plans to increase their contributions, restricting the ability of well-funded plans to make risky investments, or requiring pension plans to use more conservative discount rates when determining the necessary contribution and benefit levels. These changes would be unlikely to extend the solvency of PBGC significantly, but could improve its long-term viability and strengthen the financial state of pensions themselves.

Importantly, each option would have its own trade-offs worth considering. Likely, some combination of options would be needed to balance these trade-offs.

Offsetting New Costs

While making PBGC solvent should be a priority, policymakers are also likely to propose new spending, loans, or tax breaks to help multi-employer pensions directly. In addition, they may propose a direct or indirect transfer of funds into PBGC. These changes will come with a cost that should be offset through other policies changes.

While offsets can come from any part of the budget or tax code, one natural place to look for pay-fors (though certainly not the only one) would be other policies related to pensions or retirement programs.

On the tax side, for example, policymakers could modify tax rules surrounding pensions, which currently can distribute benefits tax-free up to $220,000 (indexed) per year. They could also consolidate or limit contributions to defined contribution retirement accounts like IRAs or 401ks (though any "Rothification" gimmicks that aren't actual offsets should be avoided). Social Security could be treated more like private pensions regarding income taxes by taxing Social Security benefits that exceed employee payroll taxes.

On the spending side, any of a number of changes could be made to federal employee or military retirement benefits. Contributions could be increased, benefit formulas could be changed, or COLAs could be reduced. Policymakers could also end excess retirement subsidies offered through the G-Fund.

Options for Retirement-Related Budget Offsets

Policy Ten-Year Savings
Modify Federal Employee Retirement Benefits  
Increase federal employee retirement contributions $20 to $110 billion
Calculate civilian and military benefits based on workers' top 5 years of earnings instead of top 3 $5 billion
Eliminate the Special Retirement Supplement $5 billion
Reduce COLAs for military and civilian retirement $15 to $60 billion
Reduce the G-Fund interest rate $10 billion to $30 billion
Replace federal defined benefit pension with larger defined contribution retirement accounts $60 to $80 billion
Modify Tax Treatment of Retirement Savings and Benefits  
Tax Social Security and Railroad Retirement benefits the same as pension benefits $450 billion
Freeze or reduce contribution limits for tax-preferred retirement accounts $50 to $100 billion
Freeze or reduce limits on defined benefit pension contributions no estimate
Modify 'pick up rules' for contributions to defined benefit pensions $5 billion
Limit total accrual of tax-favored retirement benefits to approximate DB pension limits $5 billion
Require non-spouse heirs of IRA owners to take inheritance over no more than 5 years $5 billion

Source: CBO, OMB, JCT, CRFB calculations. All numbers are approximate and rounded.

Given population aging, growing life expectancy, and declining labor force growth, policymakers could also consider increasing various retirement ages across federal policy. This would of course include adjustments to the Social Security and Medicare ages but also to retirement ages faced by federal employees, incorporated into the tax code (retirement account withdrawals, the Earned Income Tax Credit, and the special standard deduction, for example), and embedded in private sector regulations.

Such adjustments would not only generate money that could be used to strengthen private pensions and public programs, but could also improve retirement security and promote economic growth through "productive aging." While some may view this as outside the scope of the Joint Select Committee, the truth is that working longer may be one of the keys to guaranteeing a sound retirement system.


With so many options available, the Joint Select Committee on Solvency of Multiemployer Plans should have no problem identifying sufficient funds to close PBGC's shortfall and offset any other costs that come from its recommendations. Without such offsets, any plan to rescue multi-employer plans today wouldn't really be saving these pensions - it would simply be shifting their costs onto future generations.