The news ran a fuzzy story claiming many large American corps, such as the big three (Ford, etc.) owing more than their worth to those collecting a pension. What does this mean? I can only assume it is referring to stock? If they all cash in at once? And/or, the retirees own more than 51% of the stock??? It can’t be referring to the money they pay out to those collecting a pension…or these corporations would be broke RIGHT NOW.
Perhaps someone heard a better explanation about this…?
You’re confusing a moment in time with a long process.
The companies owe umpteen billion in pensions to their retirees, over the next 40 years. Meanwhile, their income per quarter is much samller than that. And the size of their market capitalization (ie the current share price times all the number of shares outstanding) is another unrelated number, meaningful only for an instant.
To say they’re broke right now becasue their pensions are large is the same as saying you’re broke right now because you don’t have enough savings or income to pay off your mortgage today.
Having said that, there is the problem that pensions cost money. And that will be a cost that those companies must pay every month, which other, younger companies that either don’t have retirees, or promised them nothing, will not have to bear.
So over the long haul, companies with large pensions (or any pensions at all really) will tend to underperform companies that simply abandon their workers once they’re old and worn out.
It does make sense to talk about those future pension entitlements as liabilities or debts of the companies in question. As LSLGuy said, a company owing those future payments to its employees is in a worse position than it would be if it did not owe those future payments. You would need to do some calculations, iscounting future payments for inflation, and working out the life expectancy of those employees, but you could work out the net present value (NPV) of them. That NPV would be roughly what it would cost to transfer those liabilities to another company, e.g., if the company was taken over, or if it wanted to buy some kind of insurance policy that would cover the liability.
If you don’t consider their value, then it’s possible that a company will continue trading when its net assets (with all estimated liabilities taken out) are worth less than nothing, and it’s also possible that it will be paying its shareholders dividends out of imaginary profits.
GAO: Underfunded Corporate Pensions ‘Severe and Widespread’
The Straight Dope from the GAO (pdf):Private Pensions: Recent Experiences of Large Defined Benefit Plans Illustrate Weaknesses in Funding Rules
Not at all. It’s not a future debt, it’s money that was collected for a specific purpose and spent for something else. Legally, it may not be fraud, but ethically it’s hard to defend. Consider the retirees at United Airlines, who spent a lifetime working and now find that their pensions simply have disappeared. That’s not some imaginary future debt that UAL can’t pay, it’s a $6.6 billion default on day one.
Not necessarily. It’s never put aside on a 1:1 basis. It may not even be put aside. There are federal laws governing funding (since they insure), but a stock market crash can wipe that all out in a second. I’m only pointing this out because it’s NOT a case of the CEO deciding to loan himself money out of the pension fund for a new mansion – that’s more of how social security works.
But that’s the whole point. The money isn’t put aside on a 1:1 basis because the law doesn’t require that. Now, especially in light of the United default, we’re seeing why that’s a huge problem. Pension plans are facing the same stress as the Social Secuirty system because more people are collecting, and if a corporate pension is dramatically underfunded, it’s at risk of defaulting.
Sure, when a pension fund invests in the stick market, the money is at risk. But that’s not what’s happening here. The CEO may not be building a new mansion, but these companies are definitely taking employee contributions and diverting them for other uses. Currently, the laws allow that if the company’s pay it back, but more and more often, these major corporations just can’t afford to repay the money they took. The bigger problem is that the payout grows dramatically, especially with the current bubble of retirees.
Not only is this practice ethically questionable, it doesn’t make good business sense. Companies that have “borrowed” from their pension funds are at risk of going bankrupt (General Motors, for example) because they can’t repay.
Unfortunately many folks in the business world IME are not thinking beyond the next bonus. This results in people making poor business decisions that better serve their personal financial interests in the short run while hurting the company in the long run.
A better question IMHO is how do you build incentive plans that encourage long term growth and penalize short term jerking around of a companies finances while still allowing the flexibility needed to deal with our ever changing economy.
There are no “employee contributions” to a defined benefit pension plan, so there’s nothing to divert.
Rather, a company which offers a “defined benefit” plan is required to set aside a certain amount of money every year to invest, so that it will be able to pay the promised benefits.
Whether the investment turns out to be adequate depends upon:
(a) how well the investment performs;
(b) how long each current employee remains with the company, and how many raises they get before they retire (which affects benefit levels);
(c) how long each employee lives and collects benefits after they retire.
There are laws concerning how much a company must set aside each year, based on assumptions concerning (a), (b), and (c) and previous fund performance. Recent experience suggests these laws may be inadequate.
Companies are not allowed to borrow against defined benefit pension funds. If a pension becomes overfunded, as often happened during the 1990’s bull market, a company can legally cash out the surplus. This has become a problem because overfuned plans have a way of becoming underfunded when investment returns decline, and cashing out IMO shouldn’t be allowed.
You’re right. I didn’t see that the GAO was talking about defined benefit plans. My comments were refering to defined controbution plans, in which employees make regular contributions.
I see where we were confused, and I was referring to GM specifically, which is not a defined contribution plan. I won’t bother re-explaining what everyone else said above.
I have a question. Many moons ago the big problem with pensions was that the unions were mishandling the funds caused in part by the influence of the Mafia. Besides the fact that this is a case of history repeating itself with a different twist, it makes me wonder what are we talking about regarding GM, Ford, etc.Doesn’t the auto workers union handle the rank and file pension plans? Does that mean that the pension plans being discussed apply only to management? If so, what is the status of the rank and file pension plans? Is this problem possibly bigger than it seems?
No. You’re thinking of Taft-Hartley multi-employer pension funds, which are jointly run by unions and management. They’re most common for workers like truckers or plumbers who work as independent contractors or have a large number of potential employers. The one run by the Teamsters has been infamous for “investing” in Mafia enterprises.
I don’t believe the auto workers ever had such an arrangement; their pensions are run by the big auto companies for both union and salaried employees.
The union plan is paid for entirely by the company. The exempt plan is paid for by the company, too, although there is an optional, contributory portion that makes pension payments bigger. Exempt also have self-directed 401(k)'s, and company matching up to a certain percentage that could be invested only in company stock, depending on the company. The companies have a cash reserve for pensions – this is usally a broad spectrum of investments including the stock market, and is often the same types of investments that the company makes with surplus funds. When the stock market collapsed, this hurt the industries that were most unionized, because like communism and big government, the point of a union is assume no one can take care of themself and therefore the exploiters ought to foot the bill. (And that’s not outside the realm of GQ, it’s the truth, and I just choose not to word it flowerly.)
Actually, in my opinion, it IS outside of the realm of GQ, unless you can give some unbiased cites.
Got any?
samclem GQ moderator
Oh, boy, do I ever! Start at the top, samclem. When you’ve exhausted their very own dogma, I can give you many, many more links.
Not to be snarkyl, but have you never studied history? Or am I wrong in assuming that knowledge of unions isn’t generally familiar in the US as it seems from a Michigan perspective?
And just to be snarky (really!), your opinion, strictly speaking… well, never mind. 
I’m just glad to be of service.
And how exactly is a union’s political philosophy relevant to underfunded corporate pension plans over which unions have no control?
Okay, I’m going to step back until samclem comes back. I didn’t mention politics, though. I said that when the markets declined, it was the heavily unionized industries that suffered the most. No politics. I stooped to mentioning communism, but only because we all know that’s bad – it’s GQ safe :).
Balthisar. Thanks for being careful how you post in GQ. I really appreciate it.
I’m the moderator of this forum. I’m allowed to have an opinion on whether you posted something that doesn’t fit the tone of the thread. I expressed it.
Originally Posted by Balthisar
If you had wished to discuss the purpose of unions, communism, and big government, in your opinion, then you should have opened a separate thread in Great Debates. It’s the truth as you see it.
Actually, I asked for some cites to prove what you said in your above quoted assertions. I’m at a loss to understand how the UAW homepage articles show that “the point of a union is to assume no one can take care of themself and therefor the exploiters ought to foot the bill.”
I’m a chemistry/math major, but I’ve had some history. I"ve been married to two history Ph.D’s. My specialties from living with them are pre-1930 Russian History and Early European.
Is a knowledge of union history greater in Michigan than in Ohio? Are you in Michigan?
Again, if you have a gripe about the philosophy of unions, communism, and big government, and how they are all entwined in some master plot, feel free to open another thread. Just not here.