Bailout.

Tax dollars at work.

What follows was written by Mary Williams Walsh, who covered pensions, public debt, bankruptcy and insurance as a reporter for The New York Times. We asked her to look at the bail-out of the Central State Teamsters Fund. This is her report: 

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Last week, it was reported that the Teamsters Central States pension fund got a $36 billion taxpayer bailout, hailed by President Biden as “the largest-ever award of federal support” for pensions.

In fact, the big Teamster fund was granted the money last August, to little fanfare. Announcing it in December, a week after the president intervened to prevent a railroad strike, seemed a way to remind organized labor that in spite of what had just happened, the president was still their friend.

Indeed, the bailout doesn’t just cover the Teamsters, but dozens of other union pension funds, for a total $82 billion. And it deserves a closer look for a couple of reasons.

For one thing, the legality of the aid calculations is now being questioned by a federal watchdog.

Nicholas J. Novak, Inspector General to the Pension Benefit Guaranty Corporation, has said that the government may be making “improper payments” to some of the failing pension funds.

“Improper payments represent a risk to PBGC’s reputation for fiscal responsibility, technical competency, and integrity,” Mr. Novak wrote in a risk advisory in September that got virtually no attention.

Second, there’s the question of probity in the use of money from the taxpayers, precious few of whom have guaranteed pensions themselves. A typical bailout involves a reckoning: Policymakers determine what caused the disaster, then demand reforms in exchange for the money. The idea is to prevent more bailouts in the future.

But this bailout doesn’t do that.

“It’s unique, in that it doesn’t really have any meaningful strings attached,” said James Naughton, an actuary who advised pension plans in the past but now teaches at the University of Virginia’s Darden School of Business. “There are no changes at all to the pension plans, so it’s hard to believe that now that they’ve got this big influx of money, it’s going to be managed in a way so that there aren’t going to be problems again.”

He added that by reform, he didn’t mean cutting vulnerable retirees’ benefits. “Nobody wants that,” he said.

Rather, he said, it would make sense to remove the trustees of the failing plans, and to freeze pension accruals for all active workers who are still building up their future benefits. That would keep current workers from having to pay into plans so broke they can’t pay their own retirees what they’re due—from participating, in effect, in a legal ponzi scheme.

Earlier in the bailout debate, Mr. Naughton testified that if the failing pension plans had had effective funding and investment rules all along, no bailout would be necessary.

Despite last week’s news, the bailout was in fact enacted by Congress in March 2021, as a part of a $1.9 trillion fiscal stimulus act to tide the U.S. economy through the later stages of the pandemic. The pandemic was not what drove the pension funds to the brink, but the federal response to it provided a suitable vehicle for the bailout’s enactment, after previous efforts had failed.

Last-minute efforts to include some reforms in the legislation were stymied by congressional procedural advisors, who said it was too late.

The failing plans are all multi-employer plans, a type that provides portable pensions for unionized workers who move from job to job. Construction workers often earn multi-employer pensions, as do unionized actors and musicians, some journalists, miners, and others. (Donald Trump gets a multi-employer pension through the Screen Actors Guild, thanks to his years on The Apprentice. But his plan is not failing or seeking a bailout.)

For the failing plans, the troubles date back years. A big one is funding. Multiemployer plans follow different funding practices from their single-employer cousins, though both are insured by the PBGC. Single-employer pension funding is set by law, and the law has grown tougher over the years. Multiemployer funding, by contrast, is set in collective bargaining, where both sides have a reason to lowball the contribution rate: The companies want to save money for business operations, and the unions want more cash for their members’ paychecks.

That can lead to chronic underfunding, where all it takes is one big shock to put a plan over the edge. For some, the shock has been an industry shakeout—think of union coal mining, or the print media. Other plans have been felled by stock crashes. Multi-employer pension plans often invest heavily in stocks, in the hope that high investment returns will reduce the need to contribute more money.

For the Teamsters, the death blow came with the deregulation of trucking, which bankrupted many employers. There was also the 2007 decision by UPS to leave the pension plan. Until then, UPS had been the Central States’ largest contributing employer by far, and after it left, the plan’s funding fell off a cliff. But the retirees were still there, counting on their pension checks as before.

That left Central States bleeding money. It now has roughly three times as many retirees as active workers, and pays pensions worth nearly $3 billion per year. Employers in the plan today contribute around $650 million per year—not enough to replace what’s being paid out in benefits. Investment income can’t fill the gap. The plan was less than 20 percent funded at last count, and was set to run out of money by 2025.

By law, Central States could then turn to the PBGC for help, but in practice the PBGC does not have the means to rescue its roughly 160,000 retirees. If it tried, its multi-employer insurance program would go broke, leaving thousands of other retirees in the lurch.

“It’s not going to happen,” President Biden said in his news conference last week. Vulnerable pensioners had no reason to fear drastic benefit cuts.

The bailout calls for qualifying pension plans to calculate how much money they will need to pay all retirees their benefits for the next 30 years, or until 2051. The calculations are what prompted Mr. Novak, the inspector general, to warn of possible “improper payments.”

All pension math involves assumptions about the future, and Mr. Novak noted that the statute called on the plans to assume high interest rates and drew a line they couldn’t go below. But the PBGC wrote the bailout rules, and it said they could assume lower interest rates. That would give them more money.

Mr. Novak said it appeared that the change would add an extra $5 billion or so to the cost of the bailout. He asked the Government Accountability Office, the PBGC’s auditor, to give an opinion about how this squared with congressional intent.

He’s still waiting. But last week, on the day of the president’s news conference, the PBGC  responded, saying that its staff had “worked diligently,” and the rules for the bailout were “appropriately constructed.”

And there was another noteworthy change. Initially, the pension plans that got bailout money were required to put it into investment-grade bonds, so as not to lose precious taxpayer dollars on the high-risk stock investments that have already taken such a toll.

But after hearing public comments, the PBGC softened the investment rule, and let the plans put up to a third of the rescue money into “return-seeking assets,” essentially U.S. stocks.

The inspector general didn’t say anything about that, but Mr. Naughton did.

 “It’s just giving the gambling addict more chips to go back to the table,” he said. “It isn’t appropriate.”