Will Congress Make You Pay for a Multi-Trillion Dollar Bailout?
A billion here, a billion there, and pretty soon you're talking about real money.
The late Senator Everett Dirksen reportedly made this comment in the 1960s, when Congress considered a billion dollars a lot of money. Today, though, $1 billion is a drop in the ocean of federal spending. In 2019, projected federal spending will come in at around $4.5 trillion, with a deficit of $1.1 trillion.
I know it’s old-fashioned to think about deficits, much less worry about them. Even the most fiscally conservative Republicans in Congress have embraced deficit spending to the tune of trillions of dollars annually. What’s more, Congress is poised to enact a law that will ultimately put taxpayers on the hook for a $638 billion bailout and set a precedent for one whose cost could exceed $6 trillion.
There’s a long tradition of Congress using your hard-earned dollars to get its politically connected friends out of financial distress. The first Congressional bailout I remember was in 1979 when after decades of mismanagement, Chrysler Corp. went crawling to Congress asking for a $1.5 billion loan. Fearing the loss of 360,000 jobs if the company went bankrupt, Congress authorized a loan guarantee for the entire amount.
Then in the 2008 financial crisis, Chrysler asked for another bailout – and got $10.7 billion more. The following year, it declared bankruptcy and stuck taxpayers with the bill (although all but $1.2 billion was eventually paid off).
That’s chump change, though, compared to what taxpayers ponied up to bail out Wall Street in 2008. Congress voted to authorize the Treasury Department to dole out $700 billion to the likes of Goldman Sachs and Citigroup. A considerable portion of that money, incidentally, went to paying multi-million-dollar bonuses to the corporate fat cats whose irresponsible conduct fueled the crisis.
Now Congress is considering a bill called the “Rehabilitation for Multiemployer Pensions Act” (RMPA). The RMPA will put taxpayers on the hook for up to $638 billion in private pension liabilities. It passed the House of Representatives in July and is before the Senate.
There’s no question that there’s a pension plan crisis in America. About 1,400 multi-employer pension plans exist, covering more than 10 million workers and retirees. But most of these plans are woefully underfunded. Indeed, 96% of these workers participate in plans that are less than 60% funded. More than 40% are in plans that are less than 40% funded. And even the best-funded plans will need to double or triple their contributions to meet the benefits promised to participants. All told, according to the Pension Benefit Guaranty Corporation (PBGC), the total current unfunded liabilities in these plans come to about $638 billion.
The RMPA would provide two separate taxpayer bailouts to these plans.
It would lend taxpayer money to plans that are either “insolvent” or “critical and declining.” Naturally, the loans would be forgiven if they’re not repaid.
It would also funnel billions more into underfunded plans to make it more likely they can repay these loans. The plans will supposedly use these funds to purchase stocks that generate high returns to pay back the taxpayer loans.
This is insanity. As the Heritage Foundation puts it:
If this were a sound strategy, the federal government should issue $10 trillion in debt and invest it in the stock market in hopes of paying off the national debt over 30 years.
This legislation continues the Congressional tradition of rewarding failure that started with the Chrysler bailout. It’s like requiring a loan applicant to prove that they’re unemployed to qualify. A case in point is the pension plan for the United Mine Workers of America (UMWA). That plan is so badly underfunded that each working participant must support 27 retirees. How likely do you think a loan issued to the UMWA’s pension plan will be repaid through savvy stock investments?
The Congressional Budget Office (CBO) estimates the RMPA will cost taxpayers “only” $48.5 billion over the next 10 years. That’s because the bailout will be limited to plans that are already in crisis. But the Act would also allow private employers to continue making promises to their employees that they can’t keep. Taxpayers could wind up paying much more.
Since most of even the best-funded plans aren’t funded well enough to pay out promised benefits, Congress will likely be asked to bail them out too. Taxpayers could wind up paying for the entire $638 billion in multi-employer plans that are underfunded. And that amount is growing by billions of dollars every month.
But the precedent the RMPA sets is an even greater danger. That’s because as bad as the crisis in private pension plans is, plans for state and local government workers are in worse condition. Between 2005 and 2017, the unfunded liabilities reported by state, county, and municipal pension systems nearly quadrupled – from $339 billion to $1.28 trillion. That’s $1.28 trillion in pension payments that governments are legally obligated to make but have no money to pay. New Jersey, for instance, only has 35.8 cents available for every $1 of pension obligations.
This liability is based on official estimates of how high a return these plans can generate from their investments. And get this: these plans project returns of 7% or more per year. In the 1970s and 1980s when the funding mechanisms for these plans were established, that was a realistic return. Even Treasury bills were yielding 8% or more. But in today’s era of faltering economic growth and ultra-low interest rates, few plans are generating anything close to the anticipated returns.
By comparison, private multi-employer plans must set aside sufficient assets to accommodate a rate of return based on the supposedly risk-free long-term US Treasury obligations – currently around 2.5%. If government pension plans were obligated to fund future obligations based on the “risk-free” 2.5% projected return rate, they would be $6 trillion or more short of full funding. That’s more than five times the official shortfall.
There are only two ways to meet this $6 trillion shortfall: raise taxes or reduce services. Both are political suicide, so in the next few years, Congress will find itself under pressure to bail out these plans as well. And the RMPA will set the precedent to do just that.
Senator Dirksen had it right when he made his famous statement, but he was thinking too small. A more accurate statement would have been, “a trillion here, a trillion there….”
Maybe it’s time to start thinking about your own Plan B.
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