Pension cuts for some retirees allowed in new spending bill

MILWAUKEE — A provision included in the $1.1 trillion spending bill that passed in the final days of the last Congress creates the possibility that certain current and future retirees will have their pension payments reduced by 60 percent — a prospect that experts say has been virtually unheard of until now.

The provision applies only to multiemployer union pension plans — those that cover more than one company’s workers — that face a high likelihood of running out of money within the next 20 years.

Multiemployer plans were developed as part of collective bargaining agreements and typically apply to union workers in professions such as trucking, food retailing, construction and mining, among others. There are about 1,400 such pension plans, covering about 10 million people.

“I think that this kind of takes an important step back from what has always been just a bedrock principle that you can’t cut back on benefits that have already been earned,” said Gregg Dooge, an attorney at Foley & Lardner in Milwaukee who has practiced pension law for 30 years.

Known as the Multiemployer Pension Reform Act of 2014, the new law is the result of demographic and economic conditions that some say are similar to those that could eventually overtake Social Security: So many more people are collecting benefits than are paying into the system that it faces a potential collapse.

“People are outliving the actuarial tables,” said Angela Marie Hubbell, a pension law attorney who works in the

Chicago office of Milwaukee firm Quarles & Brady. “There is a smaller population trying to pay for the benefits of an aging population.”

Even so, the notion of cutting benefits that workers have already earned, and that supposedly are guaranteed by the federal government, is “a pretty significant change from what has been a 40-year principle in the law,” Dooge said.

“That’s what I find to be so noteworthy about this legislation,” he said. “It creates the possibility — in fairly limited situations — but it creates the possibility of actually reaching backward and taking away things that have already been credited to people, as opposed to simply saying, ‘ Going forward, you are going to earn at a smaller or slower rate.’”

The federal agency in charge of carrying out the new law is the Pension Benefit Guaranty Corp., which regulates two types of plans: single-employer plans and multiemployer plans.

Single-employer plans are not affected by the change. They cover nearly 31 million workers and retirees in about 22,000 pension plans.

The change was a bipartisan provision aimed at keeping multiemployer pension funds from collapsing, something the Pension Benefit Guaranty Corp. says is likely within the next 10 years.

The agency’s annual report for 2014 says the multiemployer plans’ financial position has “dramatically worsened,” with their collective deficit — the amount of their total liabilities in excess of assets — standing at $42.4 billion, the highest ever.

The agency says there is a 90 percent chance that by 2025 it will no longer have the money to pay benefits for multiemployer plans that collapse.

“When the program becomes insolvent, PBGC will be unable to provide financial assistance to pay guaranteed benefits in insolvent plans,” the agency said in the annual report.

The new law says benefits cannot be reduced for retirees and beneficiaries who are 80 or older. Retirees between 75 and 79 would face smaller benefit cuts. Plan benefits that are based on disability cannot be reduced, according to the Pension Benefit Guaranty Corp.

Everyone else in the plans faces the possibility of a benefit cut.

In some cases, the cuts could exceed 60 percent of a participant’s benefits, according to an analysis by the Society for Human Resource Management.

Plan members can vote to disallow any proposed cuts, although plan trustees can then revise the proposal and resubmit it. For large plans that are considered a “systemic” risk to the Pension Benefit Guaranty Corp, the Treasury Department may override the vote and impose benefit reductions anyway.

The Pension Benefit Guaranty Corp guarantees payment of basic pension benefits for Americans participating in private-sector, defined-benefit plans. Such plans provide a specified monthly benefit at retirement.

When pension plans become insolvent, the agency steps in and pays benefits to pensioners up to limits set by law. Sometimes those benefits stay the same and sometimes they are reduced to meet the legal limits.

The new law goes further by allowing the plans themselves to reduce benefits so they can avoid going broke.

The Democratic co-sponsor of the law was George Miller of California, who recently retired after 40 years in Congress.

In House Rules Committee testimony, Miller said something had to be done to make sure pensioners get at least some of what they earned, even if that meant benefits must be reduced.

The alternative, he said, is the plans will collapse, the Pension Benefit Guaranty Corp won’t be able to cover their obligations, and participants will get nothing.

“If nothing else, we ought to give them the opportunity,” Miller said. “How about the dignity of the worker deciding whether he, she and their coworkers save their pensions? That’s all this bill does. There is no mandate here.”

The measure had support from some unions.

“While imperfect, SEIU supports this legislation because it will help preserve and protect the multiemployer defined benefit pension system for our members and all of the system’s participants for years to come,” according to a statement from the Service Employees International Union.