In the past two years, President Biden has led the taxpayers’ bailout of several employers’ retirement plans and announced a bailout for the government student loan program, two deeply flawed programs. Neither bailout package proposed structural reforms, and both programs will almost certainly fail again, which is likely to lead to calls for more bailouts. That is a grim public policy.
The multi-employer pension scheme, an organization of organized workers, covers union workers who carry out tasks under a collective agreement with more than one employer. Truckers who belong to the Teamster union and transport food to more than one food chain are a good example. In 2018, there were 2,472 plans for multiple employers with 15.5 million participants and beneficiaries.
These plans are managed by boards of trustees, which represent management and employees equally. This is a formula to increase benefits but not finance them. In the 1990s, many of these plans saw significant wealth growth, but instead of using these assets to maintain ongoing benefits over time, they opted to increase benefits, leading to underfunding as surpluses disappeared over the next decade.
In addition, many of the plans involved problematic industries, where employers went out of business and employees were laid off, which resulted in fewer employers and employees making contributions and an increase in the number of recipients of payments. Their evenly distributed bodies made it impossible to agree on increasing contributions or reducing benefits.
Because of their high levels of benefits and their faulty administrative structures, many of these plans were insolvent and had deficits of $757 billion, according to Pension Benefit Guaranty Corporation forecasts for 2020. The PBGC, which was supposed to guarantee the plan benefits, reported a deficit of 63.7 billion US dollars in its multi-employer fund itself for fiscal year 2020.
The American Rescue Plan, adopted in early 2021, saved plans for multiple employers by agreeing to pay them enough to pay for all benefits by the end of 2051, which cost the taxpayer $86 billion, according to the Congressional Budget Office. No attempt was made to make any reform, including fixing the faulty board structures, reducing benefits, or increasing contributions to these plans. Significantly, before the bailout package, the PBGC estimated that its multi-employer insurance program would be insolvent by 2026 — i.e. in four years. According to the American Rescue Plan, the PBGC estimated that the program would default in 2055 — four years after the rescue package ended. If the Democrats are in power in 2051, you should be on the lookout for another bailout package.
The state-guaranteed student loan program, an inheritance from the Johnson government, also had serious flaws from the outset. It guaranteed easy-to-obtain loans that were issued with little or no lending. The proceeds went to universities, which had no consequences in the event of a default on the loans. Powered by this easy-to-earn money, universities built buildings, hired armies of administrative staff and raised tuition fees, all of which was financed by ever-increasing student loans. As loan volumes increased, borrowers were increasingly unable to make their loan payments, and defaults skyrocketed. Of the roughly 1.6 trillion US dollars in student loans in 2021, some estimated losses amount to up to 500 billion US dollars. This vicious cycle is likely to continue as long as universities have no incentive to keep costs in check.
President Biden’s bailout package for the student loan program had two aspects.
He initially chose to continue halting interest rates on student loans and deferring payments for student loans, which had been introduced as COVID relief measures. These measures are still in force today, although the COVID crisis has largely subsided. In January, the Wall Street Journal estimated the cost of these moratoriums up to that point at $100 billion, with running costs at $4 billion to $5 billion a month until payments and interest provisions are resumed.
He then introduced a loan forgiveness program that included up to $10,000 per borrower and up to $20,000 for people with Pell scholarships. The Congressional Budget Office estimated that this would cost an additional $400 billion. President Biden’s loan forgiveness plan, which was introduced without action from Congress, was challenged in court.
Whether President Biden’s measures are confirmed or not, his lending program is instructive, as it once again managed without proposals for structural reforms. Numerous authors have proposed reforms to the student loan system, often requiring universities to cover some of the cost of defaulted loans, giving them incentives to keep their costs low. Because President Biden’s credit relief applies to both those who have defaulted on their loans and those who have defaulted on their loans, it is likely that most defaulted student loans will remain in default and loans will continue to be issued under conditions where future defaults are inevitable. Without reform, taxpayers will almost certainly be asked again in the future to save this failed credit program.
It should go without saying that no taxpayer bailout should ever be implemented without supporting structural reforms to the failed program. In the past, reforms were almost always accompanied by a bailout package. The Dodd-Frank Act, which imposed massive structural reforms on the financial sector, is a good example. Unfortunately, President Biden doesn’t seem to be aware of all this.
Howard B. Adler is a lawyer, former Deputy Deputy Secretary of Treasury for the Financial Stability Oversight Council and co-author of the newly published book “Surprised Again! — The COVID crisis and the new market bubble.”