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.