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Another financial fraud is about to be perpetuated on America’s most vulnerable workers.

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Who’s Looking After the Workers?

Another financial fraud is about to be perpetuated on America’s most vulnerable workers.

With the release of the Securities and Exchange Commission report on the Bernie Madoff Ponzi scheme, regulators are trying to determine why the SEC staff, which was tipped off repeatedly, didn’t catch the fraud earlier.

Another fraud is about to be perpetuated on America’s most vulnerable workers by permitting their retirement contributions to be invested in pension schemes that are underfunded. It should be stopped.

Although many union pension funds are underfunded, unions and labor organizations are trying to sign up new workers in part through a false promise of a more secure retirement through well-funded pensions. The AFL-CIO’s website reads, “Because they have a voice at work, union workers have a ‘union advantage’ in benefits and are much more likely to have pensions — and good pensions — than nonunion workers.”

In 2006, the latest year with full data available, only 17% of union-negotiated plans were fully funded, compared to 35% of non-union plans.

No government agency seeks to protect workers by forbidding unions to advertise underfunded pension plans. The Federal Trade Commission goes after false product advertising by companies, but neither it nor the Labor Department nor any federal entity can protect labor from unions’ exaggerated or false claims about pension plans.

Under the Pension Protection Act of 2006, funds with less than 80% of required assets are in “endangered” status. In 2006, 41 percent of union funds were “endangered,” compared to 14% of non-union funds. That is a ratio of almost three to one.

Thirteen percent of union funds had less than 65% of required assets, also called “critical” status by the Labor Department, while only 1% of non-union plans were in critical shape.

The Labor Department requires plans in critical or endangered status to put together a remedial plan, either by reducing benefits or increasing contributions. However, unions are still allowed to sign up new members by promising them guaranteed and generous retirement benefits — even if the necessary funds are not in place.

Union pensions in 2006 fared worse than in 2005. Non-union pensions were half as likely to be in critical condition in 2006 as in 2005, while the 13 percent of critical union pensions were 2 points higher than 2005 union pensions. One would expect, in a year of stock market gains, as 2006 was, for pension plans to become healthier.  It is therefore distressing to see their health deteriorate, and especially to see more union plans in critical status.

It’s not as though unions don’t know how to manage pension plans. Unions have separate plans for staff and officers of national and local unions, and these pension plans are doing far better.

A sample of 30 staff pension plans among unions that sponsor the largest 46 rank-and-file plans shows that whereas multiemployer collectively-bargained plans had 70% of the funds needed to satisfy their obligations, the officers’ own plans were 93% funded. The union bigwigs take care of themselves.

The labor-sponsored Employee Free Choice Act (EFCA), pending in Congress, would worsen the situation for workers.  Its “card check” provision would take away workers’ rights to a secret ballot vote in a union representation elections; and a requirement for binding arbitration if a newly-certified union and the employer cannot agree on a contract would force the parties to abide by a contract for two years as determined by government-appointed arbitrators.

The arbitrators would have the power to force newly-unionized firms into underfunded multi-employer pension plans. That would be an easy way to pump up underfunded plans without putting a new burden on workers already covered. New workers usually pay into a pension fund for a number of years before they are vested and are legally entitled to retirement benefits.

Carl Pecoraro, president of the Teamsters Local Union 507 and chairman, Board of Trustees, Cleveland Bakers & Teamsters Health & Welfare and Pension Funds, admitted as much when he wrote in a March 9, 2009 letter, “Especially important to me as a trustee, EFCA would strengthen defined benefit plans by fueling broad-based economic growth and increased plan participation from newly-organized union members.”
 
And on May 11 a group of union pension fund investors, including representatives of the AFL-CIO and the Service Employees International Union pension plans, endorsed EFCA in a letter to two senior Democrats, Iowa Sen. Tom Harkin, cosponsor of the Employee Free Choice Act, and Chairman George Miller of the House Education and Labor Committee.  “As fiduciaries with broadly-diversified portfolios,” the signatories wrote, “we must be cognizant of these trends and their impact on our investments.”

If an arbitration panel were to require a firm to join one of the many underfunded plans, the firm could well become liable for the pensions of workers, some already retired, of other firms.  This would generate an inflow of new cash to the plan but harm the financial condition of the newly-organized firm.

Under EFCA, if a trucking company, for example, were unionized by the Teamsters and could not reach an agreement with the union, the case would go to mandatory arbitration.  Arbitrators could require the company to participate in a Teamsters pension plan, such as the Central States Pension Fund, which was 47 percent funded in 2007. This pension fund is used by United Parcel Service and other trucking companies.

And under a multiemployer pension fund such as Central States, if some employers go out of business then others have to pay their obligations.  This concept is known as “last man standing.” Only if all the companies go out of business does the Pension Benefit Guaranty Corporation, a government insurance fund, reimburse workers a maximum currently set at $12,820 a year.

At the very least, Congress should add an amendment to EFCA prohibiting arbitrators from assigning newly-organized workers to underfunded pension plans. 
 
If we learn anything from the Madoff affair, it is to stop Ponzi schemes before they start. 

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Written By

Ms. Furchtgott-Roth is a senior fellow with the Hudson Institute and the coauthor, with Andrew Brown, of â??Comparing Union-Sponsored and Private Pension Plans: How Safe Are Workersâ?? Retirements?â?ť

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