PENSION CRISIS AT METRO
The defined benefit pension system that many workers depend on to provide an adequate retirement is under attack. All across the country these plans are being closed to new members. In some cases, retirement benefits have been cut because the plans do not have sufficient funds to pay promised benefits.
The labor movement must fight against the attacks on pension systems. Here at Metro, we must take the pending attack seriously and develop militant leadership to stop management schemes to attack our pensions.
At WMATA, the Transit Employees Retirement Plan (TERP) that provides retirement benefits to Local 689 members is under attack. In the current round of contract negotiations, Metro has advanced outrageous proposals to close the TERP to new employees, stop accruals for current employees, and modify the post-retirement cost-of-living adjustments.
Metro’s argument for making these changes is that the TERP has become too expensive to maintain and that if current trends continue, required contributions will exceed 30% of payroll. Instead they propose setting up a 401(k) defined contribution system where the investment risk in the casino called the stock market falls on participants rather than the employer. Metro’s contribution is set at approximately 3-4%, far below what it currently provides under TERP.
What is causing the current crisis?
When the TERP was first established in 1945, it was decided that the money collected for it would be invested primarily in risk-free federal government bonds. Since returns on these investments were generally stable, it was easy to determine the rate of return on the TERP’s investments and so the required contributions by the employer and the participants were also stable for any particular level of benefits.
In the early 1980’s, the union and management agreed on a new investment strategy. The new investment profile allocated 70% of the investments to equities (stocks) and the rest to government bonds. At the same time, WMATA agreed to pay the full cost of the TERP and the participants agreed to a one-year wage freeze.
WMATA management thought that, with this new investment strategy, returns would be greater and the cost of the TERP would decrease. From 1983 forward the stock market had a good run. Each year Metro’s required contribution decreased until in 1997 it went to zero.
From 1997 to 2005, Metro made no contributions to the TERP. In the 2004 contract negotiations, the union made the argument that the unusual run of high market returns would eventually end and the Plan need a new funding method to take this into account. Management agreed and contributions resumed in 2006.
In 2009, the stock market bubble which had been building for over 20 years burst and there was a major financial crisis. The union leadership, in response to Metro’s threats to end the pension system, backed away from insisting that the contributions required to fund the Plan should be made, and agreed to amortize the losses over a 30 year period (this meant the fund would not reach full funding for 30 years). This allowed Metro to reduce its required contribution to the TERP by approximately $47.7 million per year. Then in 2012, the union agreed to management’s request to further reduce Metro’s contribution by requiring the participants to pay 3% of their wages into the Plan.
These two backwards steps by our union leadership gave Metro an appetite for more cuts in pension costs. The crisis is real and can only be solved by the TERP becoming less reliant on the stock market and by WMATA contributing additional funds to the Plan.
The current assumptions that our Plan will return 7.75% returns on investments is completely unrealistic. Almost all pension economists expect such plans to earn at best between 4% and 5% on these investments in the coming decades. With management’s current unrealistic assumptions, the TERP is forecasted to gain about $230 million per year from investments of the $3 billion it currently holds. In reality, we can expect to gain only about $150 million. Each year, the TERP will come up short by about $80 million.
The TERP amortizes these losses and Metro’s required contribution grows each year as it becomes less-fully funded. If new employees are cut out from TERP and forced into a 401(k) plan, the situation gets even worse. For new workers, the 401(k) is a crap shoot whose benefits will never compare to the defined benefits we have negotiated over the years with Metro. And since the TERP is not fully funded, money that is put in by current employees supposedly to pay active members in the future is used instead to pay current retirees their full benefits. In this scenario, we soon reach the situation where there are relatively few active members in the Plan and thousands of retirees. At that point retirement benefits would be severely cut. This is the scenario that has happened with the Central States Teamster Fund, where pensions have been cut severely because there are only 50,000 active employees and 200,000 retirees.
The only sensible solution to this death spiral of the pension fund is for Metro to keep all workers in TERP, to contribute more money to the Plan, and to reduce reliance on stock market returns. The money to do this must come from the federal government, the developers and the businesses for the services we provide them.
The fight to achieve this will not be easy. We must unite with the riding public to demand better service, lower fares and a dedicated funding source that captures the extra profits the businesses and developers make from the service we provide.
As a union we must make ourselves strike ready to let the local government and the Metro Board of Directors know that we are serious about protecting our pension system. Many of us have dedicated the best years of our lives to Metro. We expect and deserve a decent retirement income.
