Musicians over 65: Start your Pension Before it is Reduced

This week, the trustees of the Musicians’ multi-employer pension, the AFM-EPF, announced that the fund “will likely enter ‘Critical and Declining’ Status in 2019”. A musician friend, who recently turned 65, asked me if there was anything we could do.

If the plan enters Critical and Declining status, it means that the fund is going to run out of money in 20 years or less and the plan is unable to fulfill the benefits they had planned to provide to participants. (I wrote about Critical and Declining status nearly two years ago on this site.)

Once in Critical and Declining status, the plan trustees can petition the Treasury department to allow them to cut benefits to participants to save the plan and create a more sustainable payout structure. The AFM has announced that they have already appointed a retired member to serve as the participant representative for this process, so I believe that it is inevitable that cuts will be proposed once the plan enters Critical and Declining status. In fact, if I was a trustee, I think it would be irresponsible to ignore the plan’s underfunded status and NOT consider changes to ensure its survival.

The maximum amount they can cut is to 110% of the guarantee under the Pension Benefit Guarantee Corporation. The PBGC is the Federal agency responsible for protecting pension participants. Their formula is based on the number of years of service. For a retiree with 30 years of participation in a multi-employer pension plan, the maximum benefit offered from the PBGC is $1,072.50 per month.

For the AFM-EPF, we have not seen a proposal of what kind of cuts might be proposed. However, we do know that the worst case scenario for a 30-year participant would be 110% of the PBGC guarantee, or $1,179.75 a month. So, if the AFM-EPF had promised you $2,000 a month after 30 years, it could be cut to no lower than $1,179.75. If you have fewer years than 30, this minimum threshold would be lower, and if you have more than 30 years, it would be higher. (I explain the PBGC formula here.)

If you are at least 80 years old, they cannot reduce your pension benefit at all. If you are 75-79, they can reduce your benefit on a sliding scale. And for everyone under 75, we could all be subject to the same level of benefit cuts. (Again, we do not know how the AFM-EPF will propose to reduce benefits, I am listing the worst case scenario here, of the maximum allowable cuts. The cuts do need to be sufficient to save the plan, so I expect proposals of significant reductions.)

Now, back to my 65-year old friend. He is still working, playing at the top of his game, and is an active participant in the pension plan. When can you start the Pension? Full retirement age is 65 for the AFM-EPF. Once you are 65, however, you can apply for your benefits, even if you are still working.
If you are genuinely retired before 65, you can apply for early (and reduced) benefits.

If you believe, as I do, that your benefits are inevitably going to be cut, perhaps to as little as $1,179 a month, you might as well start taking your much higher benefit today and start saving that money. This is something every 65 year old musician should consider for their individual situation. Run the numbers and compare your promised benefit and what your benefit could be at 110% of the PBGC guarantee.

Usually, I would not recommend taking benefits at 65 if you are still working for two reasons. First, your benefit would continue to increase very nicely for each year you keep working past 65. Second, if you start benefits while you are still working you could end up in a higher tax bracket and see a significant portion of your pension payment be clawed back by the IRS. (Pension payments are treated as ordinary income for tax purposes.)

However, if you have a chance to receive $3,000 a month for a year or two before the pension cuts your benefit to $2,000 or $1,500 or some unknown amount, maybe it makes sense to start right away and sock that money away. Again, we don’t know what the cuts will be or how quickly they will be proposed, approved, and implemented. According to the FAQs on the AFM-EPF site:

“If the Plan becomes critical and declining and benefit reductions are necessary to prevent the Plan’s insolvency, nothing happens immediately. The reductions would have to be designed on an equitable basis. They would also be subject to an extensive government application process, which includes appointing a retiree receiving Plan benefits to advocate for the interests of retirees, beneficiaries, and vested participants who are no longer working but haven’t begun to take benefits. Finally, even if the application were approved by the government, participants would be able to vote on any plan to reduce benefits (although, given the size of our Plan, a vote against benefit reductions could be overturned, or modified reductions could still be imposed by the government).” 

If you are over 65, but still working, consider if you want to start your benefit today. You can download the application and instructions here.

If a reduction in the AFM Pension is going to have a significant impact on your retirement, consider delaying the start of your Social Security benefits. For each year you delay past age 66 (to a maximum of 70), your Social Security benefit increases by 8%. If you compare starting Social Security at 62 versus age 70, you would see a 76% increase in monthly benefits by waiting until 70, plus any Cost of Living Adjustments. If you are concerned about longevity, holding off on Social Security is a smart move.

I would also note for planning purposes that the benefit reductions are limited by the PBGC formula, which is based on years of participation, whereas the AFM formula is based on contributions and the multiplier for those contributions. If you are under 65 and can continue to add years of participation, even by part-time or free-lance gigs, that will only serve to increase the PBGC guarantee for you personally, which could give you a higher “post-cut” benefit, even if you don’t accrue significant new plan contributions for those years.

And for younger musicians, it is never too early to start funding an Individual Retirement Account (IRA) or participating in your employer’s 403(b) or 401(k) plan. Don’t put all your eggs in the pension basket.

If you have a pension question, feel free to give me a call or send me an email. While I cannot provide individual advice to non-clients, I am happy to share what I know about the plan and your options.

What is Critical and Declining Status?

If you are a participant in the Musicians’ Union Pension, the AFM-EPF, you may have received an email this week that said that thanks to good investment performance, the plan would remain in Critical status but not move into “Critical and Declining” status. The message notes that it is still possible that the plan will become “Critical and Declining” next year or in the future. What does this mean to the future of the plan if you are an active participant or a retiree? Here’s what you need to know.

The US Department of Labor’s Employee Benefit Security Administration (EBSA) is charged with enforcing ERISA regulations regarding retirement plans, including multi-employer pension plans, such as the AFM-EPF. Under ERISA Code Section 305, multi-employer plans which are underfunded fall into three categories. Here is a simplified summary:

  1. Endangered Plans have a funded percentage under 80%. They are required to adopt a Funding Improvement Plan to increase the plan’s funded percentage.
  2. Critical Plans have a funded percentage under 65%. Plans in Critical Status (“red zone”) must implement a Rehabilitation Plan which will enable the plan to emerge from Critical Status.
  3. Critical And Declining is reserved for plans which are projected to become insolvent within 15 years (or in some situations, 20 years).

The current 2016 Rehabilitation Plan from the AFM-EPF indicates that Milliman (the plan actuaries) now projects that the plan will not emerge from Critical Status. The steps taken in 2010 will not be sufficient for the plan to remain solvent.

Once a plan is in the Critical And Declining category, the plan administrators are allowed (but not required) to reduce current and future benefits in order to try to save the plan or increase the amount of time that assets will last. They can reduce benefits to no lower than 110% of the Federally guaranteed minimum under the Pension Benefits Guarantee Corporation (PBGC) rules. Please read my previous article on how to calculate the PBGC guarantees.

As independent fiduciaries, I believe the pension administrators would legally need to consider reducing payouts, even to current retirees, if the plan was labeled as Critical and Declining. Their duty would be to try to save the plan. Needless to say, no one wants to see the pension cut payouts which were promised to participants and retirees. However, the actuaries have already said that the Rehabilitation Plan is not going to work and we should now take “reasonable measures to forestall possible insolvency.”

If you are 80 years old, you might not live to see the plan terminate. But if you are 50 years old, the plan might be taken over by the PBGC before you retire and then you may face a big cut in benefits. For active participants, you would want cuts now to try to save the plan or delay for as long as possible its insolvency. Current participants are already receiving less than 1/4 the payout, $1 versus $4.65, for every $100 contributed compared to contributions made before 2004.

For a retiree, however, having the pension renege on the payment they were promised could be financially devastating. At least the current participant has the option of working longer or getting another job. But in the end, if the plan becomes insolvent, all participants will be reduced to the PBGC payout regardless of what we had been promised or had “earned”.

Unfortunately, there is no easy solution to this mess. We are seeing the same situation in pensions around the country, not just multi-employer plans, but also municipal plans like the Dallas Fire and Police Pension, and even Social Security faces insolvency in less than 20 years. The Pension Industry made fatal mistakes in what they thought they could provide and now participants are going to be left holding the bag. There are only two choices, reduce payouts or increase contributions. But the amount of increases that would be needed to make pensions whole is unfeasible, so I believe we will be forced to accept cuts at some point in the future. The question is whether we will make these changes in a deliberate, well-planned manner, or if we are going to continue to deny the problem until the ship has sunk.