Why Pensions Are Soon To Be History

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It’s been a few years since the United Airlines debacle where they unloaded their pensions onto the government-created Pension Benefit Guaranty Corp, but the future of pensions are still a huge issue for many people. If you’re interested in more background, try perusing this New York Times article called The End of Pensions. It’s long, but I found it fascinating.

First, some background:

It happened that 401(k)’s, which were authorized by a change in the tax code in 1978 and which began to blossom in the early 1980’s, coincided with a great upswing in the stock market. It is possible that they helped to cause the upswing. In any case, Americans’ experience with 401(k)’s in the first two decades of their existence was sufficiently rosy that few people shed tears over the slow demise of pension plans or were even aware of how significantly pensions and 401(k)’s differed. But 401(k)’s were intended to be a supplement to pensions, not a substitute.

I find it very ironic that companies are failing to provide for their employee’s retirements, just like individuals are now accused of failing to provide for their own retirements. Simply put, these corporations used rosy predictions to justify not saving enough money!

Given that pension promises do not come due for years, it is hardly surprising that corporate executives and state legislators have found it easier to pay off unions with benefits tomorrow rather than with wages today. Since the benefits were insured, union leaders did not much care if the obligations proved excessive. During the previous decade especially, when it seemed that every pension promise could be fulfilled by a rising stock market, employers either recklessly overpromised or recklessly underprovided – or both – for the commitments they made.

Gee, that sounds kind of familiar. You could partially blame the government for their lax accounting and lack of good funding requirements. Still, if the government provided the bullet the companies pulled the trigger:

For example, United Airlines did not make contributions to any of its four employee plans between 2000 and 2002, when it was heading into Chapter 11, and made minimal contributions in 2003. Even more surprisingly, in 2002, after two of its jets had been turned into weapons in the Sept. 11 disaster, and when the airline industry was pleading for emergency relief from Congress, United granted a 40 percent increase in pension benefits for its 23,000 ground employees.

So what does the future hold?

In 1980, about 40 percent of the jobs in the private sector offered pensions; now only 20 percent do. The trend is probably irreversible, because it feeds on itself. Hewlett Packard, for instance, must compete with younger companies like Dell Computer that do not offer traditional pensions.

And what about state and city governments? Chances are that they’re underfunded too.

Because public pension benefits are legally inviolable, default is not an option. Sooner or later, taxpayers will be required to put up the money (or governments will be forced to borrow the money and tax a later generation to pay the interest).

Thus, unions can bargain for virtually any level of benefits without regard to the state’s ability, or its willingness, to fund them… At least in the private sphere, there are rules – ineffectual rules maybe, but rules – that require companies to fund. In the public sector, legislatures wary of raising taxes to pay for the benefits that they legislate can simply pass the buck to the future.

Yet another form of focusing on short-term gain and not looking at the big picture. Sigh.

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  1. Without traditional pensions to fall back on, I certainly hope the government fixes Social Security to be really solid for the future. It’s the only safety net left.

  2. Kansas City Saver says

    MiMi…. Your Dreamin’!

    If you want a solid future for yourself… you better be maxing out your 401k & your roth IRA!

  3. It is unconscionable for career politicians to allow generous pension benefits to public employees and leave the tax payers to hold the bag. Like what the article stated, some municipalities are extremely generous with their pensions that the obligations have or will bankrupt the cities/counties. What’s happenning in San Diego is a disgrace. To guarantee a significant future benefit when you don’t know what is going to happen in the future is idiotic, to say the least.

    The government argues that they must provide generious pension benefits to attract talents who may otherwise get much higher salaries in the private sector or for policemen and firemen who face danger daily. Well, some how I don’t think this apply to toll booth clerks that will be collecting 80% or more of their salary after 20 years on the job. Not that have anything against toll booth clerks for they are honest decent work, but I don’t think the argument for generous pension apply here. Perhaps what should be done is to have different levels of benefits depending on the type of work.

  4. 401(k)’s: a 70’s loophole for a few powerful Xerox executives that has turned into the biggest rip-off and con of the American worker.

    So dark the con of average man.


  5. Independent George says

    I’m probably in the minority here, but I say ‘good riddance’.

    Does anybody else think that defined benefit plans – including social security – are just plain wrong? What I mean is that, by their very nature, defined-benefit plans make a promise that is impossible to keep. The fact is, nobody can guarantee future payments – not even the federal government – because nobody can project future income with any degree of accuracy.

    That’s not to say that we should just cut off everybody currently in a pension plan; far from it. People over 50 should be guaranteed their pensions as-is; it’s not their fault they were sold a lie for so long, and there is a compelling moral argument for holding up our promises. People between 35 and 49 should have their benefits reduced based on how long they’ve already vested in the system. But people under 35 – like myself – should expect nothing.

  6. George – Yes, I do think defined benefit plans are wrong. I have often wondered why Social Security wasn’t just setup as a mandatory savings plan. You put $X in, the government invests it in something extremely safe, and when you retire you are paid based on what has accrued in your account. Does not seem complicated. They could even take a fixed percentage off the contributions to fund other programs.

    The real problem is you can’t trust our government. They can’t just leave the Social Security fund sitting there generating interest. Thay have to steal money from it. The problem with SS and most other defined benefit plans is mismanagement. There is no reason why a plan like that cannot be administered and made to work. Actuarial tables give statistical life expectancies, we have plenty of historical data on CPI changes, explain to me why it’s so difficult to manage a plan that will have enough money to cover everyone when they retire?

    The real problem with Social Security, Pensions, or any other corporate/government savings/retirement plan is the management. The people that manage these funds can impact thousands, millions or even billions of lives. With my 401k or other privately held accounts, the only liability is to myself and family. If I mismanage my funds, choose poorly and allow a disreputable company to mismanage my funds, underfund my plan or fail to diversify adequately only one family unit is impacted.

  7. Defined benefit plans will not disappear. They will simply change to meet the new demands of employers, and the economy. By this, I mean provisions which were designed to encourage workers to leave early and put in place when jobs were physically demanding will disappear, to be replaced by provisions to encourage workers to stay past their normal retirement age now that there is a premium on experience. (Although this is debatable. For example, economics professors hit their peak publishing age at around 50. In any job, there will still be an age where salary outstrips productivity.)

    From an employer’s perspective: If a company were to rely solely on personal savings for retirement, they would most likely find that a lot of employees will retire when the market is doing well (and when more workers are needed), and fewer when the market is doing poorly (and fewer workers are needed). A properly designed defined benefit plan will encourage workers to stay as long as they are needed and productive.

    From an employee’s perspective: Personal savings are much less efficient than pensions. An annuity of $10,000/year for life for a 65 year old will cost a company around $100,000. If the company were to give that same $100,000 directly to the employee, and the employee were to invest it at 8%, the employee would outlive that amount with 60% probability. To be sure that he does not outlive his savings with 95% probability, the employee would need to have $150,000. That extra 50% would need to be saved up over one’s life time, resulting in lower disposable income, and lower standard of living. In short pensions, same amount of money == better standard of living while working, better standard of living in retirement. What’s not to love?

  8. I’m not for private sector socialism or government socialism in the pension area. This what a pension really amounts to.

    The pensions run by most companies and governments are a long term bet that they will always exist and that there will alway be more employees there to contribute to the till. This little more than a collectivist outlook.

    Personal savings will work, but this would require that the Federal Reserve be abolished and return to a precious metals monetary system where only the market can determine the value or amount of money that is necessary.

    What is hurting us most is inflation and taxes. Fractional reserve banking is no helping either. If the Feds would stop creating so much money for spendthrift socialists in congress, that 5% interest in savings might really mean something.

    I’m in a state run pension system that is solvent for now, but changes the rules at its convenience. The retirement age is now up 58 from 55 years old and years of service has changed to. Yes, if this pension is an honest system, then yes, the future payout is not a terrible deal if you have a long life expectancy. However, I just assume take my 6% and figure it out for myself.



  9. I have to disagree with giving people too much control over their money. Although, I would agree with the amount that has been deposited into social security could be held in separate accounts for each individual, rather than being held by the government. However, I would totally recommend that choices in investment be closely monitored and put together by a special agency (another TIAA-CREF or something for everyone) that would have pretty sure performing mutual funds and what not. I don’t think it would be very prudent to have Ma and Pa Kettle betting on the stock market with their only retirement dollars (it’s fine for supplementing but for the whole thing). Because even those of us who are somewhat savvy could lose our shirt and then what? Be left with nothing? No, I think we really need a government-supported (at least) way to retire. Most of us are saving for ourselves on our own too – but what about everyone else? What if all your friends and family mess up their accounts? What about the rest of the country that lives from paycheck to paycheck? Where will they be? Camping out on your lawn?

    No, I definitely think Social Security must be fixed to provide security for everyone. To protect us from our own bad choices.

  10. mimi – I don’t disagree that there is risk in allowing people to invest in their own retirements, but there is no evidence that the government is any better.

    The US Government has not proven that they can successfully manage anything. Social Security, Medicare, Medicaide, the war in Iraq are all underfunded/overbudget. Congress can’t even balance the federal budget, why do you think they should be allowed to manage anyone’s retirement funds?

    Ma and Pa Kettle have as good a chance of managing their money competently as Ted Kennedy and Nancy Pelosi. Personal investment doesn’t necessarily mean investing in the stock market, but even if it does your concerns are unwarranted. If the stock market crashes hard and all the investors lose their shirts there will be plenty of people camping out on lawns regardless of where retirement accounts are handled.

    The idea that I should be protected by my ‘own bad choices’ is the number one reason why I despise liberals. This is America. I should be able to make all the bad choices I want.

  11. Let’s be honest bob, someone like you probably doesn’t have anything to worry about. But there are lots of seniors right this minute for whom, without social security, would be starving and unable to afford a place to live. It may not be much, but it’s guaranteed money coming in for the people who truly need it. If it wasn’t around, you would have many elderly on welfare and public assistance (or living with family, if their family is able to support them).

    I definitely feel for seniors without money, even though, personally I don’t plan to be one of them. But I see many people in my day that will one day have little to fall back on. Add to this, the people who happen to save their whole lives and then get ripped off of their retirement (hello Enron, United Airlines), and then those of us who make mistakes with our investments (I’ve done that, lost $15K, but was really young so to recover). Only guaranteed income like Social Security can protect large segments of society. I am hardly a liberal, but worrying about large groups of people retiring in poverty does scare me quite a bit.

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