Why Millions of Retirees Facing Benefit Cuts Can Now Breathe a Sigh of Relief

When you’re on a fixed income, safe and steady is what you want. Unfortunately, it’s not always what you get.

Millions of Americans have been in danger of facing retirement benefit cuts in the relatively near future. But that threat has been addressed. Here’s why those retirees can now breathe a huge sigh of relief.

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A looming crisis

The Pension Benefit Guaranty Corporation (PBGC) was established nearly 50 years ago by the Employee Retirement Income Security Act of 1974. Its purpose is to protect the retirement incomes of more than 33 million Americans who are part of defined-benefit pension plans offered by private-sector employers.

Around 10.9 million of those individuals have private multiemployer, union-connected pension plans. Until recently, the PBGC’s program targeting these plans was on track to become insolvent in 2026.

This projected insolvency was the byproduct of a bigger problem. More than 200 multiemployer pension plans were headed toward being unable to fund all benefits in the near term. Between 2 million and 3 million Americans would have received lower benefits than they earned.

The crisis has been brewing for a while. In 2014, the Multiemployer Pension Reform Act of 2014 (MPRA) was passed to give options to keep severely underfunded multiemployer plans from becoming insolvent. However, as a result of MPRA, over 80,000 Americans had their benefits reduced.

Coming to the rescue

There’s now a solution to the insolvency problem. President Joe Biden signed the $1.9 trillion American Rescue Plan of 2021 into law on March 11, 2021. Parts of this legislation quickly affected millions of Americans, especially the $1,400 direct payments made to anyone earning up to $75,000 per year.

The Special Financial Assistance Program was a less publicized component of the American Rescue Plan. This program was established to help better protect multiemployer pension plans. But it didn’t truly kick into gear until last week, when the PBGC issued its final rule implementing changes.

Now, no multiemployer plan will have to choose between cutting benefits or going insolvent. All of these plans are expected to remain solvent at least through 2051. In addition, the 80,000-plus individuals previously affected by benefit cuts will be eligible to have all of their benefits fully reinstated.

The PBGC is being strengthened as well. Its multiemployer insurance program will now remain solvent through 2055 instead of becoming insolvent in 2026.

More work to be done

Another crisis could be on the way that affects many more Americans. Social Security benefits could be reduced beginning in 2035. To be sure, the federal program isn’t in danger of becoming insolvent at that point. However, the latest report from the Social Security Trustees was painfully clear that benefit cuts could be in store unless changes are made.

There are ways to address Social Security’s issues. One alternative that’s been proposed is to raise the retirement age. It’s something that has been done in the past with an increase from 65 to 67.

Another option is to increase payroll taxes. Currently, employers and employees each pay 6.2% on all wages up to $147,000 per year.

Yet another potential fix is to change the maximum threshold for Social Security payroll taxes. For example, Rep. John Larson of Connecticut has proposed reimposing the taxes on any annual income of more than $400,000.

It’s possible that a combination of these solutions will ultimately be enacted to prevent significant Social Security benefit cuts. At least for now, though, the future of Social Security payments isn’t nearly as safe and steady as retirees and soon-to-be retirees would prefer.

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