America’s public (i.e, government) and private pensions are in trouble. The difference is that the government pensions don’t go bankrupt because Uncle Sam hits taxpayers to continue funding government retirees.
Now, one of America’s biggest private pensions — the Teamsters’ Central States Pension Fund that covers more than 1,500 companies across a range of industries — is nearly bankrupt.
The fund currently pays out $3 for every $1 it takes in.
If there’s no bail out by the federal government, the Fund will run out of money in 10 years, by 2026, at which time the pensions of some 407,000 people — most of whom are truck drivers — will be reduced to virtually nothing.
The above is stated in a letter sent to Central States’ workers and retirees on May 20, 2016, by the fund’s director Thomas Nyhan.
Katie Lobosco reports for CNN Money that was precipitated the Fund’s crisis was the Treasury Department’s rejection on May 6, 2016, of a last-ditch solution proposed by the Fund which would partially reduce the pensions of 115,000 retirees and the future benefits for 155,000 current workers. Although the proposed cuts were steep, as much as 60% for some, it still wasn’t enough. The Treasury Department rejected the proposed reduction because doing so would not actually head off insolvency.
The fund could submit a new plan, but decided this week that there’s no other way to successfully save the fund and comply with the law. The cuts needed would be too severe.
One of the reasons why the Central States Pension Fund is in trouble is because a lot of the fund’s companies went bankrupt after the trucking industry was deregulated in the 1980s.
Normally, when a multi-employer fund like Central States runs out of money, a government insurance fund called the Pension Benefit Guaranty Corporation (PBGC) kicks in so that retirees still receive some kind of benefit.
But there are problems — serious problems — with a rescue by PBGC:
- What PBGC could offer the retirees is even smaller than what they would have received under the Central States reduction plan.
- PBGC would offer pensions based on the number of years a retiree worked. A retiree would receive a maximum $35.75 a month for each year worked, which means that even retirees who had worked 30 years would receive only $1,072.50 a month.
- More worrisome still, PBGC itself is underfunded and isn’t expected to be able to cover all the retirees in the Central States Pension Fund. As Nyhan put it in his letter: “The fact that the … PBGC is also running out of money means our participants may see their pension benefits ultimately reduced to virtually nothing when the fund runs out of money.”
Nyhan said the problem can be fixed only with government funding, either to the Central States Fund directly or through the PBGC. Nyhan therefore is asking Congress to come up with a solution, a request that’s echoed by Treasury Secretary Jack Lew — he of the squiggly childlike signature.
Right now there’s only one piece of legislation on the table that could help — the Keep Our Pension Promises Act (KOPPA) that was introduced by Senator Bernie Sanders last year, but never moved out of committee. KOPPA would provide more funding for the PBGC, specifically for struggling multi-employer plans like the Central States Pension Fund. According to Sanders’ website, the money would come from closing a loophole in the estate tax and a tax break on sales of expensive art and other collectibles.
Elliot Blair Smith of MarketWatch writes:
The debacle unfolding at the $16.1 billion Central States fund in Rosemont, Illinois, is a cautionary tale for all Americans dependent on their retirement savings. Unable to reverse a decades-long outflow of benefits payments over pension contributions, the professional money managers placed big bets on stocks and non-traditional investments between 2005 and 2008, with catastrophic consequences [. . . of] 42% drop in assets—and a loss of about $11.1 billion in seed capital—in just 15 months during 2008 and early 2009.
To find out if you’re saving enough for retirement (based on your age, annual income, and savings per month), go here.