Pension Debts: The Next Financial Crisis

Book review: While America Aged by Roger Lowenstein

Where were you while America aged? I’ve been following the issues in this book written by Roger Lowenstein for over 20 years. As an actuary (but not a pension actuary) and a financial analyst, I have written about the issues involved since 1992.

Roger Lowenstein motivates the issues surrounding pensions by telling three stories, those of General Motors, the New York City Subway, and the City of San Diego. He captures the essence of why we have pension problems in a way that anyone can appreciate. I sum it up this way: promises today, payments far in the future. Get through the present difficulty, at the price of mortgaging the future.

If you repeat that recipe often enough, you get into a tough spot, as GM is in today. Give GM credit though, a lesser firm would have declared bankruptcy long before now, and shed its pension liabilities to the Pension Benefit Guaranty Corporation [PBGC].

Given the softness of funding requirements for pension liabilities, the easy road for corporations and municipalities has been to skimp on funding pensions, leaving a bigger problem for others to solve 10+ years later. As for municipalities, review my recent post here.

Now, why didn’t the US Government insist on stricter funding standards for pension plans? Because of pushback from corporations and municipalities. The US Government hoped that their funding methods for corporations would encourage the creation of pension plans, and that corporations would be good corporate citizens, and not play it to the edge.

As for municipalities, which are not subject to ERISA, as corporations are, the government assumed that they would act in their best long-term interests. Alas, but governments are run by men, not angels.

I found each of the three stories in the book to be interesting and instructive. They are tales of people aiming at short-term results, while letting the future suffer. In the case of the NYC Subways, the plan sponsors finally fought back. With GM, they accomodated until they were nearly dead. With San Diego, they compromised until it cost them their bond rating, and many people involved got sent to jail.

As any good author would, the book offers a few solutions at the end, but it recognizes as I do, that we are pretty late in this game — there are no “good” solutions. There are solutions that may aid future generations. An example is making municipalities subject to the funding requirements of ERISA. I agree, and add that we should apply that to Federal DB [defined benefit] plans, and Social Security too. This could be our own Sovereign wealth fund, investing overseas for the good of US retirees. (What, there is no money available to do that? What a shock.)

I would also add that the funding requirements specified in ERISA are weak. The standards for life insurance reserving are stronger. The weak standards were there to encourage the creation of DB plans. Well, you can encourage creation, but maintenance is another thing.

A certain level of overfunding is need in good times, hopefully, with discipline not to increase benefits. That overfunding is hard to achieve, because the IRS discouraged overfunding above a certain level, because it did not want companies to shelter income from taxation by contributing to the DB pension plans.

Now, I have also reviewed the book Pension Dumping. Which one is better? For the average reader, While America Aged motivates the topic better, but if you want to dig into some of the deeper issues, Pension Dumping does more.

Full disclosure: If you enter Amazon through one of the links above and buy something, I get a small commission. This is my version of the “tip jar.” Thanks to all who support me.

PS — In some ways, the actuarial profession comes out with a black eye in books like this, and I would say that it is deserved. I don’t believe in professions, per se. Self-regulating guilds/industries are a fool’s bargain. There are no guilds/industries where if you can’t explain it to a bunch of average folks, there should be no cause for discipline from society at large.

What stinks to me, is that there is no hint of discipline to any of the actuaries, and other third party consultants from the actions that they took to support the actions of politicians and corporations where they bent and broke pension funding rules. The ABCD? What a joke.

Comments

[mkreisel:]

This is a very good book. Hopefully it will scare all those potential retirees enough so they plan to work 5 years longer.

2008 Jun 01 01:01 PM

[jackh:]

Unfortunately.... 90%+ of retirees and potential retirees don't think they personally are going to be affected by any pension shortfalls.

The old "head in the sand" principal is alive and well.

2008 Jun 01 01:29 PM

[Reinko:]

I thank the author for the detail of PBGC, it is not as big as Freddie Mac that is leveraged over 50 times when you look at stock value to so called 'assets'.

But from the PBGC mission statement we have, quote:

The Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of nearly 44 million American workers in 30,330 private-sector defined benefit pension plans.

Unquote.

It is a pity that nothing is told how exactly the retirement incomes are protected. Same stuff as those so called Social Securities funds?
Only US goverment bonds in it with the money already spend?

Who knows...

2008 Jun 01 06:28 PM

[locke:]

Pensions? I've never been offered a pension for any job I had. I sure as hell don't think I should be guaranteeing anyone else's pension if I don't get one of my own.

2008 Jun 01 07:25 PM

[HinesBrad:]

Why has the boomer generation done everything it possibly could to screw their children into the future? War debt, pension debt, Social security, Medicare, Medicaid and corporations profit while we pick up the tab time after time. Why is it such a radical idea that the boomer-echo generation needs to do something with their own money - like, Oh - eat?

2008 Jun 01 11:26 PM

[Eagle-Chief:]

It's too bad we keep hearing about a coming "pension crisis." It's ironic - I just did an internet search on it last night. I don't know much about the pension "crisis" but I will say this - it's too bad that companies that contribute money to their employees retirements trust the crooks on Wall Street to make money for them. I have started to think over the last 2 years that investing in stocks & mutual funds for retirement may be a charade designed to benefit the crooks on Wall Street & the multi-million dollar salaried CEO's of the companies. So we invest our hard earned money for 20+ years and then we hear that there is a "crisis" with OUR retirement money. B.S.! The companies investing the money did criminal, or at least, reckless things with that money & should be held accountable. But also it's a warning for all of us - we should not trust the "investment companies" with our money. If we do, we may end up with NOTHING!

2008 Jun 02 12:28 AM

[NewRetirement:]

I think many public sector workers will be surprised when their plans are cut - although they shouldn't be if they consider how tax payers will feel about huge tax bills to fund a workers retirement at ~50 years old...the tax payers will push back - or leave those areas that have made impossible promises.

2008 Jun 02 12:31 AM

[Night trader:]

Remember when the Govt.(Regan) took over the Teamsters pension fund.Giving it to the renouned "GoldmanSacks" they lost over 30% of it in a very short time! The pensioners have lost there 30yr.and out.,lost monthly payment amounts.,and there guaranteed Healthcare for life is now a joke!

2008 Jun 02 10:26 AM

[greeytop:]

Our Social Security "lock box" is in a file cabinet in West Virginia. It consists of non-negotiable treasury notes while Congress skims off FICA taxes to help fund current appropriations. If this was done in a civilian enterprise, the perpetrators would go to jail. Senators Rockefeller and Byrd of West Virginia don't have to worry, they have their separate retirement fund. I am 78 and retired but I worry about our grand children.

2008 Jun 02 12:31 PM

[Reinko:]

To greeytop:

I understand your worries because the Social Security scam is just so utterly weird and indeed criminal. You are 78 but I am 44 and I live in Holland, Europe.
And we have real pension funds with real money in it, but I worry for my children that those Dutch pension funds do not disinvest in the USA fast enough.

Most people simply do not understand that the mess at the banks looks a lot like the mess in Iraq; the incompetents rule!

2008 Jun 02 05:15 PM

[brianoh:]

I was going to say that it is the job of accountants and actuaries and auditors to ensure that books are in order. I then recalled the chief US federal accountant The Comptroller General is on a crusade to expose the under-provision for government pensions and Medicare. See :
www.youtube.com/watch?...
It appears that congress does not have the people with the necessary knowledge to interpret the facts and prevent the demise of the USA, in a similar way to the fall of Rome - inability to fund the empire.

2008 Jun 02 07:02 PM

[Geoff Consi...:]

Nice article. Thanks. The responses suggest some basic confusion about pensions--perhaps you could write something more basic on this topic. In a nutshell, here is the problem:

1) Pensions made bad assumptions about how long people would live
2) Pensions mad bad assumptions about the returns that would generate from investing
3) PBGC creates a moral hazard problem
4) Lax regulation made all this possible.

I do not see the issue being "crooks on Wall St." This is a complex situation.

GC

2008 Jun 06 10:42 AM

[Jorb:]

Click here!

May 15 11:47 AM

[Jorb:]

Click here!

May 15 11:48 AM