Many once-great companies have been ruined by their pension plans. Sears seems to be the next one to be dragged into the grave by this. Then when the company goes under, taxpayers get stuck making up the shortfall. Why should we have to pay for promises some crooked CEO made and knew he couldn’t keep? Pensions for former government workers are a huge part of most budgets for towns, counties, and states. With the shape a lot of our country is in it seems like there are better investments to be made than “Paychecks for people who don’t work here anymore”.
Nope. Crooked CEOs and politicians are a crippling drain on the economy.
What may or may not be a crippling drain on the economy is the dependency ratio - the number of people who produce no goods or services, versus the number of people who do. The former, obviously, survive only if they consume goods and services produced by the latter.
Pensions from employment are just one mechanism for transferring goods and services from the producers to the non-producers. You could substitute a different mechanism - social security, private savings - but you haven’t really changed anything fundamental. The only ways to reduce the burden of dependency are (a) to have fewer dependents, or (b) to feed, clothe, house etc your dependents to a lower standard.
Complicating the issue is the realisation on the part of most current producers that (all going well) one day they, too, will be dependents. So how they treat dependents now creates a precedent, establishes a pattern, or what you will - it has implications for how they themselves will be treated when the time comes.
Treating employment-related pensions as a special kind of promise that you are allowed to welch on is tricky. I promise A that if he works for me, I will pay compensation on stated terms, including deferred compensation in the form of a pension. I promise B that if he provides me with loan capital and will pay interest and repay the principal on stated terms. I promise C that if he provides me with share capital I will pay him a dividend on stated terms. If I welch on my promise to A, shouldn’t B and C feel a bit nervous?
The answer is yes, they should. We have a mechanism for dealing with the situation that arises when enterprises make financial commitments that they are unable to honour; it’s called insolvency. If a corporation can’t honour the financial commitments it has made to its workers, it’s insolvent. Why should we deny the fact? And if we’re going to pick a group of creditors and say that an enterprise can default on its obligations to this group, why would we pick the former workers? They are perhaps in the weakest position. They have already honoured their side of the bargain and cannot retaliate, or recoup their losses, or whatever, in ways that suppliers, lenders, etc can.
Tell that to Greece.
I think they know now.
Of course not. Pensions are paid by employees over the course of their working lifetimes.
Actually the “pension” system most worry about is Social Security–as the Baby Boomers increasingly retire and retirees live longer.
Yes. But corporate pension plans and social security are alternative (or complementary) mechanisms for doing the same thing - transferring goods and services to non-producing retirees. The cost of doing this doesn’t depend greatly on what mechanism you use (and, FWIW, social security is one of the lower-cost mechanisms). Ultimately, the only way to reduce the cost of providing goods and services to retirees is to provide fewer goods and services to retirees.
Which, btw, Social Security is doing by raising the standard retirement age for successive generations of workers.
Makes sense to me, at least for workers in fields that don’t involve hard physical labor or something of the sort. If when I’m 65 I’m in better health than retirees of previous generations were, and have a longer life expectancy than they did, I don’t see why I shouldn’t go on working an extra few years before retiring. There’s nothing magic about the number 65 that says a person is either obligated or entitled to stop working.
There are plenty of ways to keep Social Security from crippling the economy. There is no way to do anything about the past pension scams. These pensions were just unsecured promissory notes that the issuers could run out on whenever they felt like it, while lining their own pockets instead of preparing to cover the costs of paying out.
Probably the largest single factor in the growth (and projected further growth) is the huge growth in live expectancy at age 65 since the US introduced the social security retirement pension in 1935. In 1940, life expectancy at age 65 was 12.7 years for men and 14.7 years for women. By 2010 it has risen to 17.7 years for men, and 20.1 for women. That has a huge impact on the cost of providing retirement pensions, even if the number of people qualifying for retirement pensions did not go up (which, of course, it did).
So, yeah, having a high dependency ratio is in large part the result of success in improving livings standards and health standards. And it means that a fixed retirement age of 65 makes less and less sense. (Indeed, the traditional notion of “retirement” as a rapid transition from full-time work to no work at all makes less and less sense.)
Doesn’t the US require corporate pension plans to be funded and actuarially assessed? Genuine question.
Yeah, pretty much. In big cities like New York and Chicago, more police officers are living on benefits than are working. Meanwhile the exist funds are underfunded, as the city government for decades required low contributions from working police officers while promising them ever better benefits. No matter how hard politicians work to fudge the numbers, that sort of situation can’t be sustained for very long. The city is responding to the crisis by raising taxes, even though its taxes are already quite high. Would you believe that taxpayers are fleeing Chicago? The mayor has suggested that bankruptcy may be looming in the near future.
So yeah, pensions suck. For politicians, it’s easy to buy votes from government employees by promising them a gold-plated pension with very little contribution. To do so puts city governments on an unsustainable financial path, but the politicians figure they’ll be out of office by the time the bill comes due.
Yeah, about that.
For both government employee pension funds and corporate funds, there are laws. The problem is what the laws say. It is legal for the actuarial assessments to tell lies, pretty much. Not to tell any lie they want, but to lie in certain specific ways.
Each pension fund has a certain amount of money socked away in investments. The actuaries must predict how much that investment money will earn over time, which plays a large role in determining whether the whole pension fund is rated as financially sound or not. The problem is that it is legal to “predict” wildly unrealistic rates of return, and most large pension funds do exactly that. This allows them to hurtle towards bankruptcy, even while on paper it looks like their financial situation is solid.
The raw rate of return is not important. What matters is the gap between the rate of return assumed on investments, and the rate at which it is assumed liabilities will grow (which will be some combination of the assumed rate of salary growth, and the assume rate of price inflation). The WSJ article gives examples of high assumed rates of investment return, but without knowing the other assumptions its not possible to say whether they threaten the solvency of the funds concerned. Assuming a 7% or 8% return is not in itself a problem if the fund is correspondingly maximalist in its assumptions about wage and price inflation.
Regardless, none of this would make pensions a “crippling drain” on the economy. It might be destabilising to the individual enterprise to make a pension promise but not arrange matters so that it can honour the promise when it falls due, but this doesn’t “destablise the economy” any more than companies that make poor judgments about the price to pay for their raw materials, or the price to sell their goods at. Make enough mistakes of this kind, and the companies concerned destabilise themselves, but not the national economy. Likewise an insolvent municipality destablises itself, but not the national economy.
The cost of providing $1 of pension is, unsurprisingly, $1. This doesn’t vary according to whether you provide it through a well-funded pension plan, a poorly-funded pension plan, a wholly unfunded pension plan or a taxpayer-funded plan. I agree, given the short-term focus which the electoral system encourages politicians to adopt, that there’s a strong case for saying that state and local governments shouldn’t be allowed to promise pensions which are not funded as they accrue through an actuarially robust mechanism, and from what you say this isn’t currently the case. But I remain to be persuaded that the problem presents any threat of becoming a “crippling drain” on the economy at the national level.
None of this is a surprise which makes it so maddening.
Both industry and government had incentives to make their current position look better by underfunding pensions and kicking the problem down the road. I cashed out my pension when I was offered the opportunity, and invested it myself. Maybe my company would have the money when I’m 90, but I ain’t betting that way.
However I think we should worry even more about all the people my age who have $50K in their retirement accounts. When they run out of money and try to live on Social Security alone, that is going to be a big drain.
Well, it will increase political pressures to raise social security payment rates, but there’ll only be a drain if the decision is taken actually to raise them. Which of course will be a decision for which the politicians of the day will be accountable to the voters of the day - including workers/taxpayers.
(Mind you, I think there’s a good bet that voters will accept such decisions. “Would you like to pay an extra 0.5% in social security?” invites a certain answer, but in reality the question is more nuanced. “Would you prefer to pay an extra 0.5% in social security or have Great Aunt Agatha come and live with you?”)
Very well and succinctly stated. Yet NO policy makers seem willing to admit as much, and NO ONE in private business (labor OR management) seems interested in formulating or funding practices with this in mind.
Public and private institutions focus on their short term profits/budgets, and essentially ignore longterm obligations/implications. I truly respect teachers, police officers, firemen, etc. but I don’t think we can afford to continue paying the types of pensions we currently pay able bodied people in their 50s and 60s after they max out after 20-30 years of service.
I think we really need to rethink our ideas of retirement. Ought people expect a 20-30 year paid vacation at the end of their lives? If so, then we have to make the current sacrifices to pay for it.
Of course, the least able - those who are most dependent on Social Security, are likely to be those with the least savings, and the fewest employment options. Social Security is not a retirement savings plan - it is a wealth redistribution tax. Plain and simple. Can be easily revised - well, easy technically - not politically. Increase the withholding cap, increase age limits, and add means testing. Problem solved.
It truly burns me when companies are allowed to reorganize in a manner that allows them to escape pension obligations - while top management lands in clover (or takes proportionately far less of a hit.) If the company is foolish enough to enter into longterm obligations they cannot meet, then the company ought to fail. I think pension obligations ought to be among the highest priority obligations. Make the folk who enter into unsustainable contracts realize there will be implications.
Or we can stay at our jobs until we drop & let the young (middle aged) whippersnappers wait for promotion.