Sunday, April 13, 2014

More Trouble for Defined Pension Plans

Or, as a subtitle, you eventually run out of other people's money. From the American Interest, an article on the problems facing multi-employer pension plans:
Multi-employer pension plans, in which multiple companies pool their pensions together so that other employers can pick up the slack if one company goes under, were long considered some of the safest in the business. And because the plans are also covered by federal insurance plans, the idea that workers would fail to receive their benefits seemed exceedingly unlikely. Yet that’s exactly what’s happening: over the past few years, many of these plans have already failed, and those that haven’t are headed for disaster unless something changes. 
The problems are the same as those that are devastating other pension plans. A larger share of company workers are retiring, increasing the amount of benefits the plans need to pay out even as less money is coming in.
The article notes as an example, based on a New York Times article, that the Central States Plan pays out yearly benefits of $2.8 billion, but only takes in $700 million from employers. To make up the difference from investments, it would have to see a rate of return of 12% every single year just to stay even. Current estimates place the plan as running out of money by 2026 unless something is done. Unfortunately, as older companies have gone under, newer companies have refused to join the plan because it would leave the newer companies subsidizing the retirements of workers from now-defunct companies.
To top matters off, "the federal insurance plan that pays retirees when their plans fail is also due to run out of money in seven years."  

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