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The Inevitable Future Arrives

Back in 2010, I wrote that promising a child a pony to calm her down is unethical unless a pony is forthcoming. Today, members of the ironworkers’ union in Cleveland are discovering that the stable is empty.

The Iron Workers Local 17 Pension Fund is the first multiemployer pension plan to win the Treasury Department’s approval for proposed benefit cuts that will affect retired workers, on the condition that a majority of participants would also have to approve the plan. In late January the vote passed, setting the stage for pension cuts of up to 60 percent in the most extreme cases.

Why did 600 members of the pension plan actively agree to the cuts, against 300 opposed? Because they thought the alternative was even worse. The ironworkers’ fund said it would run out of assets entirely by 2024 under current conditions. For some plan participants, especially younger ones, even 40 percent of your pension is still better than nothing.

Of course, in theory, even if the program became insolvent, payments wouldn’t immediately cut off. The Pension Benefit Guaranty Corp. is a federal program designed as a safety net for private pensions like the Cleveland ironworkers’ struggling fund. Unfortunately, that safety net is full of holes. A government report released last November said the PBGC fund is $58.8 billion short to cover benefits for the pensions expected to run out of money within the next decade, and that it will run out of money entirely by 2025 if Congress does not rescue it.

The Cleveland vote also likely passed due a divide between workers – that is, active participants in the plan – and retirees already drawing benefits. The divide was probably not entirely clean, however. Some beneficiaries, such as retirees age 80 and over and those who receive disability pensions, are shielded from cuts under federal law. They have every incentive to extend the life of the pension fund by whatever means necessary. Meanwhile, about half of the participants will see some level of cuts to their benefit amounts, and about 18 percent of plan participants face cuts of 30 to 60 percent. The majority of this group is younger retirees.

Nearly half of eligible voters simply did not vote, according to The Washington Post. The voting process was stacked in favor of passing the measure, because those who did not vote were counted as affirmative votes for the cuts. Opponents thus faced an uphill battle.

But perhaps more daunting was the reality that there was no assurance that waiting would yield any sort of workable plan. Ironworkers who opposed the cuts argued that a legislative solution would arrive before 2024; the plan simply needed more time. But the states entered the “era of broken promises” years ago, and the federal government’s funding shortfalls for Medicare and Social Security are well-known. Lawmakers have not been able to fix public pensions. Private-sector employees have little grounds for optimism that a legislative fix will bail them out either.

I have written in this space that the inevitable always happens, especially when it comes to public pensions and the impossible-to-keep promises they’ve made to workers and taxpayers alike. The same principle holds true in the private sector, where defined-benefit pensions have gone from commonplace to vanishingly rare over the past few decades. Until 2014, struggling pension funds could only cut benefits for current workers, not payments to existing retirees; it is unsurprising that the number of workers who could expect defined benefits at all shrank dramatically.

The Cleveland ironworkers’ pension may be the first multiemployer plan to approve benefit cuts for current retirees, but it certainly will not be the last. The Treasury is currently reviewing a variety of other applications and will doubtless approve those it finds realistic. Workers believed pension promises in good faith, and it is unfortunate that many of them face such a harsh blow to their income. But in the end, no one can give you a pony he doesn’t have.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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