With record stock market numbers and a robust economic growth trend, Americans feel a new and much needed optimism about the future. But there is a looming risk that could bring financial disaster if Congress and the administration do not act to head off the financial setback. Defined Benefit Pensions and especially Multi-Employer Plans were once a popular retirement option for millions of Americans.
The looming disaster is that many of these plans are now on the brink of failure. They carry over $600 billion of unfunded liabilities and are dangerously close to failing. We're not talking about a financial problem decades in the future — we're talking about seriously harmful complexities on the near horizon.
When these plans go belly-up, it won’t just be the retirees of the plans who suffer. Because of the magnitude of the problem, it endangers the entire economy and could send shock waves through the nation like the home mortgage financial collapse of 2008. And it could be far worse. When this financial and political disaster hits the proverbial fan, the American taxpayer will almost certainly be on the hook for the solution. So not only will the economy be shaken to its core, the American taxpayer will be asked to foot the bill.
Given these realities, we need a solution now that ensures continued economic growth and protects the American taxpayer from being forced to fund another massive bailout.
Congress and the administration will need to act to prevent the disaster. We need to hasten our shift away from defined benefit plans and move to defined contribution plans. But for the existing defined benefit plans that have current legal obligations, we need to find solutions which will put the endangered retirement plans back on a firm financial footing.
Over time, these pension plans can pay out their current obligations; with the passage of time they can be phased out. Moreover, we need to ensure that taxpayers are not called upon to pay for huge bailouts. And finally, we need to head off this disaster so that our economy remains strong. Doing nothing or doing little, ensures both an economic disaster and another costly taxpayer bailout. A workable and permanent solution will include a number of important components.
First, reform the affected pension plans by requiring them to meet new, more rigorous and realistic actuarial standards. Private pension plans should lose the special treatment that many plans receive.
Second, a workable solution must engage the stakeholders to share in the costs. Retirees must accept modestly reduced benefits — limiting those reductions by statute to something manageable, say 20 percent during a time period required to make the plan actuarily sound. Once the crisis has passed, retirement benefits can return to levels that reasonable actuarily standards permit.
Third, Congress should authorize loan guarantees to help only those pension plans that make the needed and required reforms. This will allow them to get through their short term cash crunch. Without going into all the details, pension plans have a current cash payout problem, but overtime, they can get back on a firm actuarial footing. These loans would be relatively small and only help cover their current shortages. Then within between five and 15 years, they would be back on a firm actuarial basis and would be self-sustaining. Then, they could pay off the relatively modest loans.
Fourth, Congress should also reform the Pension Benefit Guarantee Corporation (PBGC) to make it function as a real insurer where risks and costs balance out. If nothing is done, the PBGC will be bankrupt within the next seven years — leaving taxpayers to make good on its promises. That will cost hundreds of billions.
As a life-long conservative, I understand the impulse to let the market just deal with this looming problem. I wholeheartedly agree that too often government makes things worse. But in this case, many of the problems we see are the result of poorly conceived government actions in the past. Thus, we must fix those errors before they become irreparable and catastrophic. We cannot allow past mistakes to go uncorrected and create another financial collapse.
If Congress does nothing, the direct economic costs would exceed $600 billion and the economic shockwaves could be far more devastating as we saw in 2008. The total cost of these loans would be roughly $25 billion and would be repaid. This reduces the risk to American taxpayers and to everyone who hopes to see a strong economy with robust job growth and salary increases. Acting slowly or doing nothing endangers far too much.
George Landrith is the President and CEO of Frontiers of Freedom, a public policy think tank devoted to promoting a strong national defense, free markets, individual liberty, and constitutionally limited government. To learn more about Frontiers of Freedom, visit www.ff.org. To read more of his reports — Click Here Now.
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