Biden’s pension ‘guarantee’ stretches the law to bail out unions

Last Wednesday, President Biden said that the American Rescue Plan would provide a $90 billion bailout to multiemployer unions, “guaranteed” to keep eligible pension plans solvent until 2051. 

Forcing taxpayers with losses in their own retirement plans to selectively bailout severely mismanaged union plans is bad enough. But the Pension Benefit Guaranty Corporation (PBGC) rule finalized changing the statutory interest rate to increase the taxpayer funds plans receive is completely without statutory authority.  

The Supreme Court has recently been reigning in the administrative state, but PBGC’s regulation changing a rate required by statute is without any legal basis no matter the standard for agency discretion or judicial review. The rule does not pass the laugh test under the Chevron v Natural Resources Defense Council, et al ruling’s first prong, but the administration may be betting that no one will have the standing to challenge PBGC in court.

Limiting the pension bailout’s cost was politically necessary for enactment. The provisions permitting discretion for some assumptions used for calculating each plan’s bailout amount caused skepticism about the real cost. In contrast, the law clearly prohibits any changes to the interest rate, which would have increased the Congressional Budget Office’s $86 billion score. 

PBGC’s interim rule last July acknowledged the executive branch “does not have authority to provide a different rate or bifurcate the statutorily mandated interest rate.”

But Democrats led by Majority Leader Charles Schumer (NY) demanded the administration lower the interest rate, which the senators claimed, “is illogical and inconsistent … and has failure baked in the cake and repeats the very mistakes that have undermined pensions for decades.”  

The senators are correct on each of these counts. Basing the bailout amount on a high-interest rate makes it very unlikely the plans will last through 2051. And assuming even higher interest rates in order to promise pensions without adequately funding them for decades is the main reason multiemployer — and public — pension plans are so severely underfunded in the first place. 

However, the American Rescue Plan requires this interest rate, as PBGC initially admitted, because Democrats wanted to claim credit for a bailout lasting through 2051 without actually providing sufficient taxpayer funds to do so. 

Democrats refused to provide a long-term solution or impose any reforms, including the investment return assumption they acknowledge is severely problematic, thus providing every incentive for even more reckless plan governance in the expectation of future bailouts. Instead of terminating failed plans and having Treasury pay retirees, the American Rescue Plan built a house of cards under which PBGC gives plans a one-time injection of taxpayer funds to keep them solvent through 2051 — if all assumptions are met. At that point, the plans would owe retirees billions, thus requiring benefits to be virtually eliminated or another bailout. And, as Schumer noted, the house of cards is itself an illusion based on smoke and mirrors because Democrats based the bailout on unrealistic assumptions so that plans will almost certainly fail far earlier than 2051. 

Buckling to intense political pressure, the final rule lowers the statutory interest rate to funnel billions more to the plans on the justification that this is needed to give plans a chance of lasting until 2051, as if this itself provides lawful authority to do so.  

“PBGC has, after this further review of the statute, additional consultation with its Board agencies [Treasury, DOL, and, Commerce], consideration of comments, and extensive actuarial modeling, determined that an alternative interpretation… is reasonable and more likely to result in the [taxpayer funds] an eligible plan receives being sufficient for the plan to pay full benefits through 2051.” 

There is no limiting principle on the spending of taxpayer money if agencies can disregard the law with the hope no one has the standing to obtain judicial review. PBGC’s rationale that the American Rescue Plan’s goal to keep plans going through 2051 justifies overriding the statute to change the interest rate would also justify illegally pumping additional billions into plans if they run out of money before 2051, which is exactly what President Biden “guaranteed” on Wednesday. The bailout will cover only a small fraction of the $757 billion of underfunding in the plans. More than 95 percent of the system’s 11 million participants are in plans less than 60 percent funded. Why not also ignore the law’s eligibility criteria and bailout other plans?

Using a similar rationale, why couldn’t a Republican Treasury issue a regulation to lower the top tax rate from 37 percent to 35 percent on the grounds that the Tax Cuts and Jobs Act is intended to cut taxes?  

As Congress considers another reconciliation bill, its cost is a key consideration. Any Congressional Budget Office score of the bill would be meaningless if the Biden administration can later issue regulations changing the law to spend untold trillions in order to accomplish their policy objectives.

Aharon Friedman is a former senior advisor for tax policy at the U.S. Treasury and former senior tax counsel at the Committee on Ways & Means.