Tuesday, May 31, 2016

The Pension Crisis

Pensions have been underfunded for decades, and now the chickens are coming home to roost.   It won't be pretty.

When I was a Teamster with United Parcel, I was told that if I stayed with the company, I could retire with a fat pension.  I declined their generous offer.  But others took them up on it, conveniently forgetting about Jimmy Hoffa, the Mafia, and how the Teamster's Pension plan was a slush fund account for the mob.

It took decades, but the entire thing is finally melting down and this could be a disaster for many Americans.    Right now, the Central States Pension Plan which covers truckers, is basically insolvent - paying out $3 for every $1 it takes in.   The current plan is to cut benefits by 60% for retirees, including those already retired.

But wait, it gets worse:
The Treasury Department appointed attorney Ken Feinberg, who's known for overseeing the 9/11 victim compensation fund, to review the plan. He has until May 7 to make a decision. If he approves the plan, it will be put to a vote for the plan's workers and retirees. But no matter how they vote, Feinberg has the final say.

That's because the Central States Pension fund is one of the biggest in the country and if it fails, it could also wipe out the government's pension insurance fund, the Pension Benefits Guarantee Corporation. 
You read that right.  If this pension plan fails, it is so large that it would bankrupt the safety net for pension plans.  This would mean that Congress would have to bail out the Pension Benefits Guarantee Corporation, or failing that, when other pension plans fail, there would be no alternative but to lose all of your benefits.

Pensions were a good idea, but they failed for three reasons.   First, companies promised lavish benefits to workers to get them to avoid striking.  Second, the companies didn't fund these pension plans, as they needed the money to invest in R&D and pay shareholders.   Third, people started living longer and retiring earlier than ever before, padding the ranks of the retired.   We already saw this effect bankrupt both GM and Chrysler just a few years ago.

In my posting The Year of the Living Dead, I noted that it takes a long time for companies to topple - Sears has continued to struggle while closing stores.  JC Penny is doing likewise.   Radio Shack finally threw in the towel last years - years longer than analysts thought it would.   It takes quite a while for economic systems to fail.  You could lose both engines on your airplane at 30,000 feet, but it would still take 20 minutes or more for you to finally hit the ground.   Similarly, in your personal finances, you can spend more than you make for years before the chickens come home to roost.

The problems with these pension plans have been well-documented for years.   And people see the problems with the companies supporting the pension plans, but nothing is done about it.   Some politicians, including Bernie Sanders, support bailing out these pension plans, as the Pension Benefits Guarantee Corporation was supposed to do.

The problem with bailing out failing pensions, of course, is that once companies realize they can let pensions fail - and that pensioners realize they will be bailed out - companies will just stop funding pensions entirely and pensioners won't object, knowing the government will bail them out.   And unlike Social Security, pensions can be rather generous.  Do we bail out the entire pension plan, or just a portion of it, as the PBGC currently does?   Either way, someone gets screwed.

The pension debacle is one reason why the IRA and 401(k) plans were created in 1978.   Congress saw that unfunded pension liabilities were soaring.   Companies simply couldn't afford to fund the promises they made to employees back then, as the economy was in dire straits.   And like underfunding your 401(k) plan, it is very hard, if not impossible, to play "catch up" later on.

Government pension plans seem fairly safe - for the time being.   High government salaries and generous pension plans, along with earlier retirement ages and longer life expectancy has meant that property taxes and State taxes have risen and States are finding it hard to balance budgets.   The Federal Government simply operates at an increasing deficit to fund the pension plans, which means that inflation could end up making all of us pay.   All of us except pensioners who have cost-of-living (COLA) adjustments.

For those of us retiring on our savings, inflation could wipe us out.

Already noises are being made about cutting public employee salaries and benefits.  What is happening in Wisconsin is no accident.   And there are more property tax and income tax payers in that State than there are public employees, which is why Governor Walker survived a recall.   Private pension plans are threatened and failing now.   Perhaps government pensions, at least on the State and Local levels, might be under attack in the future.  Some smaller towns and cities are already defaulting on obligations.

And in a way, this is to be expected.  A town or city is like a Corporation (and indeed may be "incorporated" at least in name).   If the amount of income drops (people move away, businesses close) and expenses increase (a large number of pensioners starts to accumulate) then bankruptcy is inevitable and pensions may be at risk.

So what can be done about it?   Vote for Bernie?   I doubt that would change much, as it would be Congress, not Presidents, who rescue these plans - if they are rescued at all.   Even if a bailout occurs, most pensioners can expect less than half their promised retirement.   It will get ugly.

Sadly, a lot of people did retire based on these pension promises.   And since they had these promises, they didn't bother to save - not one penny.   I know two Federal government employees who have nice pensions but only $30,000 in savings.   Like Bernie, they borrow money to buy everything, applying for 30-year mortgages at a time in life when their life expectancy is less than 30 years.   So long as the government holds up its end of the bargain, they are set.

But not too long ago, in the era I grew up in, people would save up money in addition to relying on pension plans.   Pension plans were not so generous back then (some today paying 75-80% of last year's working salary!) and were designed to supplement retirement income, not replace it.   Today, you can live high on the hog on a pension plan, which has COLA increases annually.

So my parents tried to accumulate wealth instead of dissipating it.   And it wasn't easy to do with four children to put through college.   Today, we would rather spend it all now and have a higher standard of living than save for tomorrow or for future generations.

Inheritances were another aspect of the equation.   A middle-class child could expect some sort of inheritance "nest egg" that would represent wealth in addition to pensions.   My parents inherited $400,000 from my late Grandmother (on my Mother's side, my Dad's Mother was left destitute by her husband).   This supplemented a small pension and social security - along with their own savings and home equity (yes, they had no mortgage) to live comfortably.

Of course, this money got spent, so I ended up with no inheritance.   Mark's parents were a little more thrifty and left some money to their kids - a nice supplement to existing savings.

But inheritances are getting harder and harder to come by.   The Baby Boomers spent it all and are going into retirement with mortgages and reverse mortgages and leaving their children with nothing or often worse than nothing.    Insolvent Estates are the new thing - leaving your kids just a tangled mess of debts and problems to unwind, often at their personal expense.

Yes, this all sounds very bleak, and to some extent it is.   So what can be done about it?   On a national scale or whatever, not much.   Money simply doesn't exist to fix all the problems with pensions.   And it is very unfair that a few people will get paid generously in retirement while others with similar or even more important jobs will end up broke.   Life isn't fair.

However, you do still have personal responsibility and personal choices you can make.   If you are younger, you can jump off the consumerist bandwagon and create your own wealth by saving rather than spending.   Don't count on pension promises to fund all of your retirement.   If you are older, you can spend less and live more frugally.   The fellow in the story profiled above said he was "cutting back" by getting rid of a few cable channels.   With about half his pension ready to evaporate (or all of it, in a few years) he should be cutting cable out entirely.

We all face this risk in retirement, although some more than others.  My friends with the Federal pensions seem pretty safe.   Folks with State and Municipal pensions much less so.   Those with private pensions are at a very high risk.   People with pensions from rust-belt industries are basically screwed.   And those of us with IRA and 401(k) plans just have to hope and pray that deficit spending doesn't blossom into hyper-inflation down the road, even if inflation seems eerily quiet today.