Dennis Miller
What about my Member
- Joined
- Mar 13, 2003
- Posts
- 200
Sept. 13 issue - Oops, we've done it again—drilled a blast hole into the bedrock of workers' financial security. In the mid-1980s, a laissez-faire Congress let the savings-and-loan industry blow itself up, endangering the very existence of federal deposit insurance. The rescue cost taxpayers $200 billion. Now we're replaying that dangerous game with traditional lifetime pension plans—still enjoyed (and trusted) by some 45 million workers and retirees.
Reckless investment incentives have joined with bad politics and fairy-tale accounting to endanger the safety of many plans and risk the solvency of federal pension insurance. Pensions are safe as long as the companies sponsoring them do well. But if trouble comes (think Polaroid, Bethlehem Steel or Eastern Airlines), your company might let the plan fail.
The federal Pension Benefit Guarantee Corp. picks up the pieces—only for pensions, not 401(k)s. Currently it insures part or all of the pensions owed to nearly 1 million workers and retirees in 3,200 failed plans. Single workers retiring this year at 65 can collect as much as $44,386 in benefits, with lesser amounts for early retirees. At 55, the maximum payout drops to $19,973, even if your company promised more. Any pension income exceeding the caps is usually lost.
The PBGC relies, for support, on insurance premiums paid by the companies that sponsor pension plans. It also takes over the assets of plans that fail. Several super-large plans collapsed in recent years, leaving fewer than usual assets to help pay the claims. Now United Airlines hopes to dump a record $6.4 billion in pension obligations on the PBGC, paving the way for Delta and US Airways to follow.
Bailing out the airlines would not be the end of the world, says the PBGC's former chief actuary Ron Gebhardtsbauer. In the worst case, the agency's $10 billion deficit might rise to $40 billion—small scale compared with the S&L debacle, he says. But behind the airlines lurk autos and other weak industries. If the PBGC can't collect enough to pay benefits, who's on the hook? Friends and taxpayers, look in the mirror. We are.
Most workers have no clue that their "guaranteed" pension system rests on sand. President George W. Bush has proposed some smart fixes, but his business buddies don't want to play. Here are some of the danger points, and what could be done:
—Pension promises have been all too easy to make. Troubled rust-belt companies, for example, traded wage hikes for higher health and pension benefits, and then didn't fund them all.
Solution: Stop troubled companies with weak plans from promising workers more.
—Your pension-fund managers have strong incentives to hold the bulk of their assets in riskier investments (stocks) rather than in conservative ones (bonds). If stocks pay off big, your company won't have to keep making annual contributions toward its workers' retirement security. Future pensions can be magically funded with capital gains.
But over several 15- and 20-year periods in the past century (not to mention many shorter periods, such as now), stocks underperformed. When that happens, prudent companies should step up their contributions, to keep plans whole. But—here's the crazy part—they don't always have to. By law, pension plans are allowed to "assume" that stock prices are rising even when they fall! (Don't ask me; I just write about this stuff.) So even when stocks dive, companies don't have to beef their plans up. As a result, some of them never recover.
Solution: Fund pension plans primarily with bonds, says finance professor Zvi Bodie of the Boston University School of Management. Bonds' fixed incomes and maturity dates can be matched with the years that retirees will be owed the money—creating a genuine guarantee. For its own trust fund, the PBGC is already headed that way. After making (and losing) a big bet on equities, it now plans a maximum stock exposure of 25 percent. Corporations, however, shudder at this idea. If they held more bonds in their pension plans, they couldn't project high, mythical future returns. They'd have to back their workers' pensions with more cash. (They say, "Ugh." I say, "Yes, exactly.")
—Workers can't tell how safe or risky their pensions are. Just before it failed, US Airways pilots' plan was said to be 94 percent funded. At termination, it turned out to be just 35 percent funded. So the pilots lost $1.9 billion they thought was guaranteed.
Solution: Disclose how well each pension plan is currently funded, and also the loss if it should end. "This should be motherhood and apple pie," says Bradley Belt, head of the PBGC. "Workers should know what they're at risk of losing."
—The politics stink. Pension regulations say, loud and clear, that companies with underfunded plans have to make catch-up payments. But does that really happen? No. They go whining to Congress for relief—backed by threats to close their plants, fire local workers or shut down airline service to a senator's hometown. Last year, with airline and steel pensions teetering, Congress tweaked the law to let them skip some of the payments owed. If those plans now fail, workers will lose even more.
Solution: None. Congress will always cave. That's what makes the risk so great.
Reckless investment incentives have joined with bad politics and fairy-tale accounting to endanger the safety of many plans and risk the solvency of federal pension insurance. Pensions are safe as long as the companies sponsoring them do well. But if trouble comes (think Polaroid, Bethlehem Steel or Eastern Airlines), your company might let the plan fail.
The federal Pension Benefit Guarantee Corp. picks up the pieces—only for pensions, not 401(k)s. Currently it insures part or all of the pensions owed to nearly 1 million workers and retirees in 3,200 failed plans. Single workers retiring this year at 65 can collect as much as $44,386 in benefits, with lesser amounts for early retirees. At 55, the maximum payout drops to $19,973, even if your company promised more. Any pension income exceeding the caps is usually lost.
The PBGC relies, for support, on insurance premiums paid by the companies that sponsor pension plans. It also takes over the assets of plans that fail. Several super-large plans collapsed in recent years, leaving fewer than usual assets to help pay the claims. Now United Airlines hopes to dump a record $6.4 billion in pension obligations on the PBGC, paving the way for Delta and US Airways to follow.
Bailing out the airlines would not be the end of the world, says the PBGC's former chief actuary Ron Gebhardtsbauer. In the worst case, the agency's $10 billion deficit might rise to $40 billion—small scale compared with the S&L debacle, he says. But behind the airlines lurk autos and other weak industries. If the PBGC can't collect enough to pay benefits, who's on the hook? Friends and taxpayers, look in the mirror. We are.
Most workers have no clue that their "guaranteed" pension system rests on sand. President George W. Bush has proposed some smart fixes, but his business buddies don't want to play. Here are some of the danger points, and what could be done:
—Pension promises have been all too easy to make. Troubled rust-belt companies, for example, traded wage hikes for higher health and pension benefits, and then didn't fund them all.
Solution: Stop troubled companies with weak plans from promising workers more.
—Your pension-fund managers have strong incentives to hold the bulk of their assets in riskier investments (stocks) rather than in conservative ones (bonds). If stocks pay off big, your company won't have to keep making annual contributions toward its workers' retirement security. Future pensions can be magically funded with capital gains.
But over several 15- and 20-year periods in the past century (not to mention many shorter periods, such as now), stocks underperformed. When that happens, prudent companies should step up their contributions, to keep plans whole. But—here's the crazy part—they don't always have to. By law, pension plans are allowed to "assume" that stock prices are rising even when they fall! (Don't ask me; I just write about this stuff.) So even when stocks dive, companies don't have to beef their plans up. As a result, some of them never recover.
Solution: Fund pension plans primarily with bonds, says finance professor Zvi Bodie of the Boston University School of Management. Bonds' fixed incomes and maturity dates can be matched with the years that retirees will be owed the money—creating a genuine guarantee. For its own trust fund, the PBGC is already headed that way. After making (and losing) a big bet on equities, it now plans a maximum stock exposure of 25 percent. Corporations, however, shudder at this idea. If they held more bonds in their pension plans, they couldn't project high, mythical future returns. They'd have to back their workers' pensions with more cash. (They say, "Ugh." I say, "Yes, exactly.")
—Workers can't tell how safe or risky their pensions are. Just before it failed, US Airways pilots' plan was said to be 94 percent funded. At termination, it turned out to be just 35 percent funded. So the pilots lost $1.9 billion they thought was guaranteed.
Solution: Disclose how well each pension plan is currently funded, and also the loss if it should end. "This should be motherhood and apple pie," says Bradley Belt, head of the PBGC. "Workers should know what they're at risk of losing."
—The politics stink. Pension regulations say, loud and clear, that companies with underfunded plans have to make catch-up payments. But does that really happen? No. They go whining to Congress for relief—backed by threats to close their plants, fire local workers or shut down airline service to a senator's hometown. Last year, with airline and steel pensions teetering, Congress tweaked the law to let them skip some of the payments owed. If those plans now fail, workers will lose even more.
Solution: None. Congress will always cave. That's what makes the risk so great.
