America's pension time bomb

CRAFT and many other education reformists have often talked about the troubles of the Teachers Retirement System. We are glad to see so many problems with our system now being played out in the mainstream media. Both of these articles appeared at CNN Money. Voting yes on referenda only increases the obligation of the pension because of the increase in salaries that occur. This burden of paying the pensions will be passed on to your children.

America's pension time bomb
Commentary: Workers, employers, taxpayers, governments. Meet the key players in the coming battle.

By Geoffrey Colvin, FORTUNE senior editor-at-large
January 13, 2006: 11:03 AM EST


NEW YORK (FORTUNE) - Some of the nastiest conflicts in America's future have recently begun to reveal themselves. Let's call them, broadly, the pension wars.

They will be fought on a wide range of battlefields, involving not just workers and their employers but also governments at all levels, regulators, accountants and taxpayers. And these wars will be bitter -- because the combatants will be desperate.

Corporate pensions are an unstable, unfair and economically perverse means of paying for retirement. (Read column)
A hint of what's to come could be seen in the New York City transit strike. Most of America didn't notice exactly what sparked the first such strike in 25 years, costing businesses, individuals and the city hundreds of millions of dollars. The answer is pensions. The transit authority and the workers were agreed on virtually everything except how much new employees would contribute toward their pensions--6 percent of wages vs. 2 percent -- and neither side felt it could give an inch on that.

The reasons illustrate the larger problem. The transit authority, like many private and public employers, is watching its pension costs rocket as longer-living retirees increase in number. That burden will become unbearable. On the other side, union members are watching employers nationwide dumping or cutting their pensions just as Social Security starts to look shaky. They figure retirement security is the one thing they cannot sacrifice. Result: war.

New York's transit strike also illustrates an important reason that the pension wars weren't headed off long ago. The truth about pensions has been systematically hidden, with all parties collaborating in the deceit. Public-employee pensions have never been accounted for like those run by private employers. No government is required to tell you its pension liability the way, say, General Motors is, on the theory that governments can always just extract more money from the taxpayers to pay retirees.

But this year the Governmental Accounting Standards Board, which sets the rules for the public sector, is changing its regulations. State and local governments will now have to reveal their pension liabilities, which may be underfunded by $1 trillion or more.

Private employers, while required to account for their pensions, have played sophisticated games with the numbers -- all within the rules. For example, they can assume the pension fund increased in value when it actually declined. They can assume it will continue increasing in value at a rate that is almost certainly way too high. They can even jack up their reported profits based on that assumed, though nonexistent, increase in pension-fund value.

But eventually actual dollars must be paid out, a prospect that has seriously spooked private employers. Just this month IBM (Research) announced that it would join the long list of companies (Verizon, Hewlett-Packard, Motorola) that have frozen their pension plans, instead increasing 401(k) contributions for employees. And the 18-month negotiation between UPS and its pilots has come down to just two points: whether outsourced pilots overseas must be union members, and (you guessed it) pensions.

The pension wars will inevitably include Congress, which is working out a way to increase funding for the federal Pension Benefit Guaranty Corp., now deeply in the red as huge companies like UAL, parent of United Air Lines, dump their pension plans on it. Since the PBGC is an insurer, the logical move is to raise the premiums companies pay, especially for the riskiest plans.

But if Congress mandates a premium hike, as it probably will, then more companies will just dump their plans on the PBGC, redoubling the need for more funds, leading to more premium hikes, and so on. If you can see any way taxpayers will not get billed for a giant bailout, please e-mail Congress immediately.

And then there's the greatest pension crisis of all: Social Security. We've stayed in denial thanks to the so-called trust fund, that magical place where the plan's annual surpluses are sent to be invested until we need them. But since those surpluses must by law be invested in government bonds, they have simply been handed over to the U.S. Treasury and spent by Congress.

The trust fund is in fact meaningless, a bit of marketing hooey cooked up in the '30s. When Social Security's annual surpluses end in just six or seven years, the battle over whose ox to gore in order to cover the plan's obligations will be truly epic.

The hard reality is that for decades we haven't told ourselves the truth about pensions. Now, as the first baby-boomers turn 60, we must finally confront reality -- and absolutely no one will like it. In New York last month, transit workers and management compromised; employees will make small contributions toward health insurance premiums but will keep one of the richest retirement deals around.

Soon those compromises simply won't be affordable. And that's when the pension wars will explode.

The next article can be viewed at http://money.cnn.com/2006/01/12/news/economy/pluggedin_fortune/index.htm.

Good riddance to pensions
Corporate pensions are an unstable, unfair and economically perverse means of paying for retirement.

By Justin Fox, FORTUNE editor-at-large
January 12, 2006: 5:56 AM EST


NEW YORK (FORTUNE) - It really is over for the corporate pension. Now that IBM has opted out, telling employees last week that their pension benefits will be frozen in 2008, it's hard to see what's to stop every last American corporation from preparing its eventual exit from the pension business. Lots of reasonably healthy companies -- Verizon, NCR, Lockheed Martin and Motorola, to name a few -- already have.

This phenomenon, along with the more dramatic cases of companies going bankrupt and defaulting on existing pension commitments (think United Airlines), has gotten tons of press, most of it of the "ain't it a shame" variety. But the real shame may be that we ever put so much faith in such an inherently unstable, unfair and economically perverse means of providing for retirement.

The corporate pension has been around since the 19th century, but really came into its own in the United States in the years just after World War II. General Motors president Charles Wilson was its most visible champion, creating a company-run pension plan in 1950 over the initial objections of the United Auto Workers union because he believed it would improve employee relations.

But there were problems with Wilson's approach that, while they didn't seem like a big deal in 1950, were to loom large decades later. For one thing, the Wilson way assumed that lifetime jobs with big, pension-granting corporations were the American norm -- which ceased to be the case decades ago.

For another, it failed to foresee that pension commitments could become a heavy burden for companies (among them Wilson's own General Motors) forced by competition and changing consumer demand to get smaller or at least leaner.

If GM had simply set aside all the money it put into its pension plan over the decades in individual retirement accounts for its employees, it wouldn't have this problem. Some GM retirees would be worse off than they are under the existing pension plan, but prospects for current employees (and potential future employees) would be far better.

That's the problem with pension plans that promise a specific benefit in the future -- they amount, pension consultant Keith Ambachtsheer says, to a contract between current and future generations, and those future generations aren't represented at the bargaining table. As a result, they get stuck guaranteeing the retirement income of their elders while receiving nothing in return.

When succeeding generations are bigger and wealthier than the ones whose retirements they must help fund -- as is the case in a growing corporation or in the United States since the launch of Social Security -- this isn't much of a problem. But it's no longer the case at GM, and may no longer hold for the U.S. as a whole a few decades down the road.

An alternative
So what's the alternative, when it's also clear that many otherwise productive members of society are incapable on their own of setting aside enough money and investing it wisely enough to fund a comfortable retirement?

Toronto-based Ambachtsheer has been thinking about this harder than just about anybody else over the past few years (a sampling of his writings can be found on the Web site of the International Centre for Pension Management at the University of Toronto's Rotman School of Management) and he has become a big believer in individual retirement accounts that are aggregated into what he calls "buyer's co-ops."

That is, the money belongs to the individual, but the choices of how much money to set aside and how to invest it are at least partly in the hands of professionals who aren't in the employ of a for-profit mutual fund company or brokerage firm. The closest thing to such a co-op currently in existence in the United States is TIAA-CREF, the retirement fund for academic, medical, cultural and research workers. But more and more corporations are now approximating the buyer's co-op model by reinventing their 401(k)s as paternalistic organizations that automatically set contribution percentages and investment choices unless employees opt out.

That still leaves the majority of Americans who don't happen to be professors or employees of especially enlightened corporations. To help them provide for retirement, we could move to a system like Australia's, where 9 percent of every worker's income (up to a limit similar to the wage ceiling on Social Security payroll taxes) is automatically funneled into retirement accounts managed by organizations akin to Ambachtsheer's buyer's co-ops.

That's sort of what President Bush was proposing last year with his Social Security private accounts -- but those accounts were relatively puny, the president was unwilling to come clean about the true costs of his plan, and Congress in its wisdom (and fear of the AARP) chose to do nothing.

A long-cracked pillar of the American retirement system is crumbling, and not nearly enough is being done to build a replacement.