This is the policy equivalent of seeing an actual unicorn. In Cleveland, the Iron Workers Local 17 union has approved cuts to their pension plan to avoid having it become insolvent. The cuts will affect different workers by varying amounts depending on their individual circumstances, but everyone will be feeling the pinch. (Washington Post)

A pension fund in Cleveland became the first plan to approve benefit cuts for current retirees — even though it is still years away from running out of cash. The move, some critics say, could open the door for other troubled pension plans to follow suit.

The financially-strapped Iron Workers Local 17 Pension fund proposed a plan for extending its lifespan by reducing benefits for workers and retirees. Now that the plan has received final approval, roughly half of the 2,000 participants will see their pension benefits shrink on Feb. 1. Benefits will be cut by 20 percent on average, but some retirees are expecting their monthly payments to be slashed by as much as 60 percent.

The unprecedented move comes after a 2014 law made it possible for troubled pension plans to reduce benefits to retirees if it would improve the financial health of the fund. The legislation dealt a major blow to federal protections that for nearly 40 years guarded the financial promises made to retirees.

The first thing to remember is that we’re talking about a private sector labor union, not one for government workers. The effects on retirees are going to be serious to be sure, but what are the other options? The union made promises to the workers which it wasn’t able to keep. This is a system which is much like any sort of general entitlement program in that it always requires growth, or at least stability. You have to have more people paying into the system than drawing out of it and if the numbers contract, the math immediately ceases working. (It’s the old question of how many people can ride in the cart as opposed to the number who are pulling it.)

I pointed out the private sector aspect of this because the premise of the government guaranteeing these pension funds was always dubious at best. How is it that the taxpayers are on the hook for these shortfalls when the system becomes insolvent? I realize that’s not a solution, but the problem wasn’t created by the government in the first place and the taxpayers had no seat at the table when the deals were originally negotiated. But that’s not stopping Ohio Senator Sherrod Brown, who is still pushing for a federal bailout of the plan.

The problem gets even more complex when we look at state pension plans which are hung around the necks of taxpayers. This report from Forbes last year spells out the doomsday scenario facing most of these funds.

A survey published Jan. 15 by Moody’s says that state pension funds are $1.3 trillion underwater, a number up slightly from the year before. The bond raters don’t have a complete picture of municipal pensions, but they do have a 2013 total for 50 large cities: $435 billion missing from the till.

The scary thing about the Moody’s state report is that its numbers are for the 2014 fiscal year, meaning a valuation date of June 30, 2014 for most states. Over the preceding 12 months, pension portfolios averaged a 16% return. You’d expect that with such gains the deficit would shrink. It didn’t. Rising obligations swamped that bull market.

Many of these underfunded programs are looking at complete collapse in the near future without changes being made. Unfortunately the political will to make tough calls such as the reductions voluntarily made in Ohio rarely exists. The only long range cure is a vigorous economy and growth in employment which returns us to a situation where there are more workers and fewer retirees, but that’s a lot to hope for. And even if we manage it, we’ll need to learn some lessons from what’s happening now in order to avoid repeating these mistakes in the future.