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The Next Pension Crisis

Union plans are taking on water fast.

May 7, 2012, Vol. 17, No. 32 • By MARK HEMINGWAY
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The big catch is that multi-employer pension plans operate under “last man standing” accounting rules. If five unionized companies are in a multi-employer plan and four of them go out of business, the fifth company is on the hook to pay the pensions of the employees from the four other companies. For this reason, UPS stunned observers when it paid $6 billion​—​40 percent more than analysts had pegged its liabilities​—​to buy its way out of its multi-employer plan, rather than run the risk of being on the hook for the entire Teamsters union pension.

David Zion, one of the authors of the Credit Suisse report, is somewhat sanguine about the eye-popping numbers, noting that analysts on Wall Street have been anticipating this. “It’s been out there. I would expect that people that followed [industries such as] transportation and supermarkets knew that it was a risk. But what they’re able to do now is to start putting some numbers around it,” he says.

Still, Zion notes that there’s significant potential for this new information to impact public perception and markets more broadly. “To the extent that it shines a light on a claim that wasn’t really well factored in previously, that could have a negative impact on some stock prices.”

Brett McMahon, a longtime union critic and vice president at Miller & Long Construction, is much more blunt about the effects of multi-employer pension transparency: “This puts a concrete price on unionization. .  .  . If it doesn’t affect the public perception, it should.”

The sizable price tag also won’t help reverse the decline in private sector unions. Employers will fight harder than ever to keep workers from forming a new union​—​which can then force management into joining a multi-employer plan that may already be well on its way to failing.

The political ramifications of this are not trivial. In 2010, when Democrats still had control of Congress, unions tried to push Democrats, who received $400 million in campaign cash from organized labor in 2008, to pass something called the “Create Jobs and Save Benefits Act.” The actual text of the legislation would have made the massive multi-employer pension liabilities “obligations of the United States.” A $369 billion pension bailout that would only benefit 7 percent of the workforce wasn’t popular enough to pass then, and it’s definitely off the table with a GOP majority in the House.

However, this doesn’t mean the problem is going away. Multi-employer transparency is likely to accelerate the demise of union pension plans. If nothing else, this will swamp the Pension Benefit Guaranty Corporation (PBGC), the taxpayer-funded backstop for failed pension plans. As of 2010, the PBGC had a total of $102.5 billion in obligations and $79.5 billion in assets, and it has been steadily accruing new liabilities. Further, the PBGC has a maximum annual multi-employer plan benefit of $12,870 per person. That’s not much to retire on, and given the outsize political influence of unions, there will be tremendous pressure on Congress to do something more for the victims of failed union pension plans.

Aside from alerting investors and employers, the perilous state of multi-employer pension plans should also be a wake-up call to Congress. The failure of many of these pensions is a matter of when and not if. It would be advantageous for Congress to have a plan in place to address the failure of union pensions before political pressures dictate they concoct one in a hurry. By the time they read about it in the New York Times, it will probably be too late.

Mark Hemingway is a senior writer at The Weekly Standard.

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