Research Report: Pension Bailouts Lead to Risky Behavior

The federal bailout of multiemployer pensions plans under the American Rescue Plan Act of 2021 has increased their incentives to take greater risks, according to a research paper published by the University at Buffalo School of Management.

The research compared investment allocations and pension administration of multiemployer pension plans with those of collectively bargained single-employer pension plans, which do not receive bailout funding.

The paper examined how multiemployer plans responded to cash bailouts after the American Rescue Plan was signed into law in 2021. It found that the plans’ managers are increasing administrative fees, future benefit payments to participants and investment allocations to riskier assets, compared with single-employer pension plans.

During fiscal 2023, the Pension Benefit Guaranty Corporation, which oversees the ARP’s Special Financial Assistance Program, provided approximately $45.6 billion to multiemployer plans through the Special Financial Assistance Program, tacking on an additional $176 million in “traditional financial assistance” to 100 multiemployer plans.

“We find that the pension bailout increased plans’ incentives to engage in risk-taking, opportunistic and self-serving behaviors,” Michael Dambra, associate professor of accounting and law at the University at Buffalo School of Management, said in a release. “It shifts the consequences of increased risk-taking away from the companies sponsoring these underfunded pension plans and onto taxpayers.”

Collaborating with Dambra on the study were Phillip Quinn, an associate professor of accounting at the University of Washington’s Foster School of Business, and John Wertz, assistant professor of accounting at Indiana University’s Kelley School of Business.

“Our results indicate that the ARP resulted in multiple outcomes consistent with increased moral hazard,” the paper stated, adding that multiemployer plans have increased their exposure to riskier assets such as stock, registered investment funds and private equity by $32.5 billion since the ARP was passed, while decreasing their holdings in cash, government debt and corporate debt.

The paper suggests that cash bailouts temporarily relieve underfunding issues for affected plans but are not likely to solve the structural underfunding issues in both private and public sector pension plans, and they may even worsen the issue over time.

“Although government bailouts can serve as a proper response to a systemic crisis, such interventions can distort optimal resource allocation and exacerbate moral hazard issues,” according to the paper.

The PBGC’s Multiemployer Insurance Program, which covers approximately 11 million participants in 1,360 insured plans, had assets of $4 billion and liabilities of $2.5 billion as of September 30, according to its fiscal 2023 annual report. According to the PBGC, the net financial position of the Multiemployer Insurance Program improved during the fiscal year to a positive net position of $1.5 billion, up from $1.1 billion in fiscal 2022.

Meanwhile, the PBGC’s Single-Employer Program, which covers nearly 21 million workers and retirees in approximately 23,500 insured pension plans, had $130.9 billion in assets and $86.3 billion in liabilities as of September 30. That resulted in a positive net position of $44.6 billion, up from $36.6 billion one year earlier.

Despite the researchers’ warnings of increased risks as a result of the ARP, the PBGC’s estimates from its “Fiscal Year 2022 Projections Report” indicated its Multiemployer Insurance Program is likely to remain solvent for more than 40 years, which it attributes primarily to the enactment of the ARP’s Special Financial Assistance Program.