Unlike non-union plans, collectively bargained pensions are often underfunded, lack portability and cannot respond quickly to market forces, according to the authors of a new study.
Although labor unions often promote defined benefits plans for recruiting purposes, many of these plans are under severe financial pressure and place workers at a disadvantage, according to Diana Furchtgott-Roth, a senior fellow with the Hudson Institute and her colleague Andrew Brown.
“One possible reason for the disparity is that collectively-bargained pension plans are not usually renewed annually,” Furchtgott-Roth said. “As a result, annual contributions by employers may not respond quickly to market downturns or other unexpected drops in pension funding ratios. Furthermore, when a union must negotiate with several different employers, this problem may be exacerbated.”
Unions typically favor defined-benefit plans where an amount guaranteed in advance is paid to retirees’ for their lifetime. The pension amount is usually calculated by averaging a worker’s three or five highest-paid years, then guaranteeing a percentage of that figure. Workers must remain in unionized jobs.
By contrast, defined-contribution plans, such as 401k’s, allow workers to contribute part of each paycheck to their own account with an employer match. Workers have a legal claim over the money and can take the funds with them as they change jobs.
“That’s one reason why unions are opposed to defined contribution plans,” Furchtgott-Roth said. “They enable workers to leave a union job for a non-union job where they frequently get higher pay and bonuses. With the collectively bargained plans, you might have to stay for a long time before getting any benefits and there are big penalties for leaving early. They prevent workers from being upwardly mobile.”
The report, “Comparing Union-Sponsored and Private Pension Plans: How Safe are Workers’ Retirements?” is based on an analysis of annual reports filed by unions with the Department of Labor that record the ratio of assets to liabilities for pension plans. The most complete data set available goes back to 2006, since there is a lag in reporting.
Pensions with less than 80 percent of the assets needed to cover present and projected liabilities are considered “endangered,” while those that fall below a 65 percent threshold are classified as “critical” under the Pension Protection Act of 2006. The report found that the union-negotiated plans have consistently underperformed in comparison to their non-union counterparts.
Among large plans, plans with 100 or more participants, 35 percent of non-union plans were fully funded, compared to 17 percent of fully funded union plans, according to the report. While 86 percent of non-union funds had 80 percent or more funds needed to pay expected costs, only 59 percent of union funds met the funding threshold, the report also showed.
Smaller pension plans with fewer than 100 workers yielded similar results with 15 percent of union plans identified as being in critical condition. That’s more than twice the ratio of non-union plans.
Another factor that might explain the poor performance of collectively bargained plans concerns the incentives union officers have in their negotiations, Furchtgott-Roth said. Instead of pushing employers to ensure that their plans are well-funded, officers focus on current wage increases and other benefits, she said.
“Union leaders are more concerned with trumpeting what they can get in the paycheck now, instead of what they can get in the future,” Furchtgott-Roth said. “There’s no incentive for delayed economic gratification, that’s what we call a high discount rate. You value more what you get today, than what you get in the future. Leaning on employers to ensure the pension is well-funded takes much work for little visible effect.”