Statement of Teresa Ghilarducci
Before the Subcommittee on Employer-Employee Relations
“Understanding the Economic Possibilities of Multiemployer Plans”
April 29, 2004
Mr. Chairman and members of the Committee, thank you for this opportunity to meet with you and discuss ways to improve America’s defined benefit pension system.
We all know pension policy is stymied by our failure to extend pension coverage to workers who change jobs frequently, work for smallish employers, and whose employer changes because of mergers and acquisitions. Yet some workers in this category have secure portable, defined benefit pensions; approximately twenty two percent of DB covered participants are in multiemployer plans which are risk-pooling, cost effective, and efficient ways to deliver a secure portable pension. But they do much more because they solve a number of important labor market problems.
Economic Logic of Multiemployer Plans
Employers want trained workers but can’t often afford the pensions, health, and training programs that produce the necessary skills especially if their competitors don’t also pay for the same kinds of programs. No one employer is better off if they provide these programs alone, they are all better off if they cooperate and share in the cost. This classic public good or collective action problem is solved by multiemployer plans; all employers facing unstable product demand (and thus engage in frequent layoffs and re-hiring) benefit by having a ready supply of skilled workers and all employers pay their fair share. This (availability of skilled workers) adds to the productive capacity of an industry. Such employers exist in the building and construction, retail food, trucking, health care and entertainment industries. This economic logic of multiemployer plans is under appreciated. Furthermore, these plans are part of a process by which secondary and third tier jobs are transformed into middle class jobs.
This transformative capacity bears appreciation. Construction workers in every other developed democracy occupy the bottom of the labor food chain, whereas many of America’s construction workers are skilled middle class workers. Multiemployer apprenticeship, health, and pension plans are partly responsible. (The laborer without the multiemployer portable pensions has no incentive to stay connected to an occupation’s skill and would very well float from construction, to retail, etc. with economic fluctuations.)
Employers benefit from the portability aspects in other ways. Take for example, UPS, a firm that provides good, but physically tough, work. A UPS worker who can’t take the strain is more willing to move easily to a companion employer because they don’t lose pension credits. This helps UPS maintain high performance standards.
A chief and brilliant feature of multiemployer plans are that employers’ needs for predictable contributions and workers’ need for predictable benefits are both represented in the joint governance structure of the trust. The PBGC does not bailout multiemployer plans and the insured levels are a maximum $13,000 compared to the $44,000 maximum in the single employer plan. As the GAO notes this structure puts much more financial risk on the multiemployer programs so the employers and participants have much more incentives to find collaborative solutions to financial difficulties. (Multiemployer plans are hybrids – contains the best of both worlds -- they act like defined contribution plans for employers and defined benefit plans for workers and retirees.)
If So Multis are So Good Why Don’t More Employers Have Them?
If multiemployer pensions are so good why don’t more employers have them and why do some want to get out. In industries characterized by large numbers of small to medium sized employers and/or a mobile workforce employers can’t seem to be able to cooperate enough to create and maintain these plans without a coordinating agent, that role is played by the union and the jointly trusteed plan. (The largest pension plan is the multiple employer plan – TIAA – CREF and it was initiated by a grant from the Carnegie Foundation.) Maintenance of long term agreements requires disciplined contributions, long term commitments, and a flexible structure that can weather business cycles.
The general rules governing an employer’s withdrawal from a multiemployer plan require that an employer who ceases to participate in a fund that has unfunded vested benefits, be assessed its proportionate share of those unfunded vested benefits. Letting employers opt out of withdrawal liabilities would have unintended consequences since the whole system is based on long term structure.
Tax deductibility of pension contributions surely incents pensions but they also invite tax avoidance. Congress imposed full funding limitations so that large employers couldn’t use the pensions to shelter profits from tax. That is not an issue with multiemployer plans. Since multiemployer plans bear a lot of their own financial risk and thus aim to smooth benefits and employer contributions Congress should help the funds’ accumulate a contingency reserve in good times to offset the bad times when steep and prolonged declines in the investment markets and employment deplete funds. Multiemployer plans should be excluded from the maximum deductible limits.
Blue Sky Ideas
But the abundance of investment returns is not our problem now. The fad toward short term employment contracts and 401(k) type pensions – with outrageously high retail fees -- shrink the number of employers wiling to be in single and multiemployer DB plans and the number of workers with pension coverage.
Given the high performance aspects of multiemployer plans here are some blue sky ideas to consider:
Encourage consortiums of employers to enter into trust agreements with a trade association or other groups of workers, in addition to encouraging the traditional route to multiemployer plans, through the collective bargaining agreement.
Encourage more non-profit-like multiple - employer DC plans (like my university faculty TIAA-CREF plan). There must be some way cooperative efforts can reduce the high costs workers face to manage their DC accounts and convert lump sums into annuities.
Investigate the consulting industries codes of conduct to find out why prudent experts aren’t; incentivize defined benefit plans to change their investment strategies not to be dependent on stock equity in order to reduce the risk of underfunding volatility.
Thank you very much. I welcome any questions you may have.