What We Found
The financial stability of the Pension Benefit Guaranty Corporation’s multiemployer and single employer programs faces many structural challenges that require congressional action.
As in prior High-Risk Reports, we do not rate this high-risk area because addressing the identified issues primarily involves congressional action. The Pension Benefit Guaranty Corporation (PBGC) faces both an immediate and critical challenge with its multiemployer program and long-term risks with its single-employer program.
In a March 2013 report on PBGC’s multiemployer program, we recommended that Congress consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system.
In 2014, Congress took action to address this growing crisis by passing the Multiemployer Pension Reform Act (MPRA) that enacted several reforms responsive to our report. Specifically, MPRA provided severely underfunded plans, under certain conditions and only with the approval of federal regulators, the option to reduce the retirement benefits of current retirees to avoid plan insolvency.
The act also expanded PBGC’s ability to intervene when plans are in financial distress. In addition, MPRA more than doubled the flat-rate, or per-participant, premiums paid by multiemployer plans to PBGC’s insurance program and provided for future increases indexed to inflation.
While passage of MPRA helped the financial situation of the multiemployer program, the underlying financial issues facing the program are far from resolved. As of the end of fiscal year 2020, the multiemployer program had a net deficit of $63.7 billion (see fig. 10), and PBGC still projects a looming program insolvency. Based on fiscal year 2019 projections—the latest available—PBGC officials reported there is a 78 percent chance that the program will be insolvent by the year 2026, and insolvency will be a near certainty by the end of 2027.
According to PBGC, the enactment of the Bipartisan American Miners Act of 2019 delayed the projected insolvency of the multiemployer program, primarily by providing federal funding for the United Mine Workers Plan. This improved PBGC’s net financial position by at least $6.0 billion. PBGC’s projections of multiemployer program insolvency do not, however, include any fiscal year 2020 information reflecting the economic effects of—or the federal response to—the Coronavirus Disease 2019 (COVID-19) pandemic, which may affect the program’s estimated insolvency date.
Figure 10: Pension Benefit Guaranty Corporation’s (PBGC) Net Financial Position of the Single-Employer and Multiemployer Programs Combined, Fiscal Years 2000 through 2020
If the multiemployer program becomes insolvent, participants in insolvent pension plans that receive financial assistance from PBGC will receive a small fraction of current statutory guarantees. PBGC’s fiscal year 2019 projections show that in 2027 the program’s income from premiums would cover less than 14 percent of financial assistance.
Guaranteed benefits in the multiemployer program depend on the years of service a participant earned through qualifying work; the maximum guarantee is currently $12,870 per year for a retiring participant with 30 years of service. PBGC estimates that, under its projection, insolvency of the multiemployer program would result in most participants receiving less than $2,000 per year and in many cases, much less.
Although the net financial position of PBGC’s single-employer program has improved from its highest recorded deficit of about $29.1 billion in 2012 to a $15.5 billion surplus as of the end of fiscal year 2020, the program continues to face ongoing financial risk from the potential termination of large underfunded plans. PBGC estimates that, as of the end of fiscal year 2020, the program is exposed to $176.2 billion of future claims from underfunded plans sponsored by companies with credit ratings below investment grade, an increase of $21.5 billion from the end of fiscal year 2019.
The single employer program has not experienced many large underfunded plan terminations recently, allowing the program to build a surplus, but PBGC's experience shows that the single-employer program’s condition can change quickly and precipitously. For example, the spate of plan terminations in the airline and steel industries from 2001 through 2006 resulted in the program incurring more than $20 billion of net claims. The ongoing economic effects of COVID-19 could affect both plan sponsors’ ability to fund their plans sufficiently and to stay in business, creating risks to the single employer program for the foreseeable future.
Further, PBGC continues to face long-standing, structural challenges due to an overall decline in the defined benefit pension system. The number of single- and multiemployer plans have declined significantly over many decades. Since 1985, there has been a 78 percent decline in the number of plans insured by PBGC—from about 114,400 plans to about 24,600 plans in 2020. In addition, a smaller proportion of program participants are active employees; about 71 percent were active workers in 1985 compared to about 35 percent in 2017, the most recent year available.
The structure of PBGC’s premium rates—a key component of its funding—has long been another area of concern. Despite periodic increases in premium rates, which are set according to statute, the premiums do not align with the multiplicity of risks PBGC insures against. Under the current premium structure for its multiemployer program, PBGC collects from sponsors only a per-participant flat-rate premium; the plan’s level of funding does not affect the premium sponsors pay.
Under the current premium structure for its single-employer program, PBGC collects from sponsors a per-participant flat-rate premium and a variable-rate premium that is based on a plan’s level of underfunding. To date, no legislation has been enacted to incorporate additional risk factors, such as company financial health or plan investment mix, into PBGC’s premium structure.
PBGC’s governance structure is another area of weakness noted in several of our past reports. We have long recommended that PBGC’s board—currently composed of the Secretary of Labor, the Secretary of the Treasury, and the Secretary of Commerce—be expanded to include additional members who possess diverse knowledge and expertise useful to PBGC’s mission, such as knowledge in strategic risk assessment and management. We have long emphasized that PBGC requires strong and stable leadership to ensure it can meet its future financial challenges.
With about $147 billion in assets, PBGC’s portfolio is one of the largest of any federal government corporation. Through its single-employer and multiemployer insurance programs, PBGC insures the pension benefits of more than 34 million American workers and retirees who participate in about 24,600 private-sector defined benefit plans.
However, PBGC’s financial future remains uncertain, due in part to the collective risk of the many underfunded pension plans PBGC insures and a long-term decline in the number of traditional defined benefit plans.
According to PBGC projections, it is nearly certain that the multiemployer program does not have the needed resources to satisfy the agency's long-term obligations.
At the end of fiscal year 2020, PBGC’s net accumulated financial deficit was $48.3 billion—an improvement of $8.2 billion since the end of fiscal year 2019. The multiemployer program, composed of about 1,400 plans, accounted for a deficit of nearly $63.7 billion—an improvement of $1.4 billion since 2019. The single-employer program, composed of about 23,200 plans, accounted for a surplus of $15.5 billion, $6.8 billion more than 2019. However, PBGC estimated that this program’s exposure to potential future losses was $176.2 billion.
We designated the single-employer program as high risk in 2003 and the multiemployer program in 2009.
Concerns with PBGC’s multiemployer program are becoming increasingly urgent. Concerns also remain about PBGC’s overall funding structure and governance. Absent additional steps to improve PBGC’s finances, the long-term financial stability of the agency remains uncertain and the retirement benefits of millions of American workers and retirees could be at risk of dramatic reductions.
Congressional Actions Needed
As we have previously recommended, Congress should consider improving the long-term financial stability of both of PBGC’s insurance programs by
- enacting additional structural reforms to reinforce and stabilize the multiemployer system in a way that balances the needs and potential sacrifices of contributing employers, participants, and the federal government;
- authorizing a redesign of PBGC’s premium structure to better align premium rates with risk;
- strengthening funding requirements for plan sponsors, as appropriate given national economic conditions;
- working with PBGC to develop a strategy for funding PBGC claims over the long term; and
- adopting additional changes to PBGC’s governance structure—in particular, expanding the composition of its board of directors.