Discoveries are often made by not following instructions;
by going off the main road;
by trying the untried.
Frank Tyger
Pensions, Harkin and More
In yesterday's post, I included a cartoon on pension reform by retiring Iowa senior Senator Harkin (D). I initially intended to expand on the pension topic. Let's be clear here: we are not talking about the notoriously underfunded state/local government employee pension plans or even the largely ignored but also grossly underfunded federal employee/military retirement plans. There are a couple of relevant issues: a looming crisis in legacy private company pension plans guaranteed (of course) by the do-as-we-preach-not-as-we-do US government, and Harkin's dream of a universal pension plan system. (The cartoonist is referring to the former, re. insolvent pension plans)
It seems ever since I started my work career my employers have had primarily defined contribution plans, not defined benefit (pension) plans. In the private sector, these are 401-K plans; in the public sector 403-B. Usually employers will contribute some fixed amount with an employee vesting schedule on those contributions; details differ by employer, but in a typical scenario the employer might match up to 3% of individual contributions capped as a percentage or ceiling of annual salary, and employees might fully vest in employer matches in 5 or more years of employment. These plans are administered by a number of financial sector vendors, most prominently large mutual fund families like Vanguard or Fidelity.
In fact, in my entire post-Navy work history, I can only remember pension systems discussed once--I had an in-person interview for a perm DBA position at a Chicago area steel company, and the recruiter pushed it hard as a competitive advantage.
Although private-sector pension plans have usually been funded on a sounder base than public-sector ones (with less generous assumptions of fund earnings, requiring more employer contributions), many of them were badly hurt by the Great Recession. Of particular concern are the multiple-employer plans: there are just over 1500 plans covering clusters of more transient-employment smaller companies in industry segments, like trucking, retail food, garment and entertainment industries. Some 10 million current and retired employees are covered in these funds. Nearly 10% of these plans are headed to insolvency, and without changes, the number of troubled plans might double over the next 4 years. The Pension Benefit Guaranty Corporation isn't really in that great shape itself. According to Washpo:
PBGC is funded by a combination of insurance premiums from private pension plans, investment returns on its $85 billion in assets and recoveries from bankrupt companies. It receives no taxpayer money, and its leaders say it has has sufficient reserves to cover its obligations.
Overall, the agency saw its long-term liabilities increase $12 billion to $119 billion, while its assets grew by $4 billion over the past year.
If the shortfalls continue, Gotbaum warned, “PBGC may face for the first time the need for taxpayer funds. That is a situation no one wants.”And this is from an earlier 2004 study:
The agency that insures 43 million pensions could run out of money by 2020 if there is no taxpayer-funded government bailout, according to an independent study.
The 29-page report by the Center on Federal Financial Institutions said the Pension Benefit Guaranty Corp. (PBGC) "is insolvent on the basis of Generally Accepted Accounting Principles (GAAP) and would be shut down if it were a private insurer." In June, the PBGC said the airline and steel industries had accounted for more than 70 percent of claims since its insurance program was created in 1974.If PBCG has to take over a plan, I believe the guaranteed benefit is $11700 per year for a 65-year-old with 30 years of service. Some companies in the multiple-employer plans complain they are absorbing a disproportionate, noncompetitive burden. Sen. Harkin is looking at reforming the system, including management-union negotiated benefit cuts in troubled plans at some offset above PBCG minimum benefits.
The idea that some retirees in at risk plans could see their checks reduced by up to two-thirds or so is a tough sell, but the idea that the taxpayer should bail out failed compensation plans in the private sector is anathema. I oppose any burden-shifting where successful companies are required to pick up the pension liabilities of failed competitors (particularly more than a prorated share of PBCG minimum benefits); other than adjusting for any unrealistic high investment return assumptions, I oppose premium increases where benefits and employee contributions are not on the table.
Onto universal pension plans: Sen. Harkin doesn't have much faith in Americans being able to cope with retirement at all without the guidance and policies of the State:
Sen. Tom Harkin, D-Iowa, chairman of the Senate Health Education Labor and Pensions Committee, would like to create a new private retirement system that is based on professionally managed pools of retirement funds. He doubts that Americans on their own can cobble together nest eggs big enough to finance their post-work needs.
“Forcing people to manage their own retirement funds isn't working,” Mr. Harkin said of the growing use of 401(k) plans by employers. “Most people don't have the background, the interest or the time. Instead, retirement dollars need to be pooled to take advantage of economies of scale and managed by professionals who carefully select and monitor every investment in a diversified portfolio.”Why not just take over their checkbooks, too, while you're at it, and put everyone on allowances? There is moral hazard in governments raising unrealistic expectations. Why save for a rainy day, a down payment, retirement? If you blow your savings gambling or live beyond your means, don't worry: paternalist progressives like Tom Harkin know without the "experts" in government looking over your shoulder, you can't function on your own. After all, we can trust the same "experts" that supervised Fannie and Freddie's use of government guarantees, sustain the money-losing Amtrak system, have managed to accumulate over $80T in unfunded liabilities while it pulls in less than $3T a year in revenues, have let the nation's publicly-funded infrastructure fall into disrepair, and presciently anticipated today's highway traffic density in cities like DC, Los Angeles, and Chicago, among other places. And I'm just getting started; do I need to print a list of abandoned public boondoggles?
This is from Harkin:
Now, defined-benefit pensions are an endangered species. When I started in Congress, one out of every two workers had a pension. Now, it’s one out of five. It’s fallen by over 30 percent in just a couple of decades, and it’s only going to get worse unless we take action.Why? Because unlike the government, company liabilities aren't off the balance sheet, and companies understood the demographics of an aging population. Besides, the costs of benefits are fungible: they aren't "free", i.e., you get higher wages and/or other benefits without it.
In addition to private pension reform, I have also proposed some improvements to the most efficient, most effective retirement program we have – Social Security.Talk about delusional! The program is currently unsustainable; it has been running at a deficit since 2010. Its reserves are IOU's covering past government overspending. Bonds are a lousy long-term investment relative to stocks.
To augment existing employer-provided defined benefit and defined contribution retirement plans, Mr. Harkin is proposing a new employment-based retirement plan — Universal, Secure and Adaptable or USA Retirement Funds.
Employers' responsibilities would be limited to enrollment, processing payroll contributions and making modest employer contributions. Fiduciary responsibility for selecting money managers would be handled by an independent board of trustees.
As with existing retirement savings, tax incentives would be offered for employers and employees to participate.
“This is not government spending. The essence of it is private investment,” Mr. Harkin said at a news briefing Friday. “It's sort of a middle ground between pensions and 401(k)s. Employers bear no investment risk; the risk is shared by all.”First of all, it's difficult to see how this works without mandates (i.e., offering tax incentives). Second, the tax incentives would cost the Treasury. Third, benefits are fungible: it merely displaces other income in total employee compensation. Fourth, if he has such faith in professional managers, he should agree to let them manage part of the social security reserve. Fifth, the devil is in the distribution details--and I suspect this is yet another Democratic redistribution scheme. Lower-wage workers probably won't accumulate enough to build a significant nestegg, and mid-to-upper income earners could probably do better on their own.
As for me, the government is excessively paternalistic and overextended enough, the tax system is already too convoluted and biased against savings and investment. The last thing employers need is yet another mandate. Individuals need to accept responsibility for their own decisions. I've made it a priority to save for my retirement and rainy days, and like other investors, I lost money during recessions.
But most of all, this is morally corruptible. Companies with failing business models go bankrupt; a lot of Enron employees, instead of diversifying their retirement as per Investing 101, let it all ride on Enron's improbable stock price appreciation. Is it tragic? Yes. But we can't stop fellow citizens--or government bureaucrats--from making mistakes; and investments--and decisions not to invest--involve risk. The stock market last year posted strong returns (the S&P returned 13%, above-average). A number of investors put their money into safe, but low-yielding bonds; they missed out on the gains in a more diversified portfolio.
But we have a robust financial sector, and a dazzling array of investment vehicles: you can invest in a stock market index, blue chip funds, dividend aristocrats, small caps or emerging markets in a few mouse clicks.
We need more trust in the free markets, less trust in dysfunctional government.
Miranda Warnings Waived for Boston Marathon Massacre Suspect: Thumbs DOWN!
I understand the distinction between criminals and terrorists is a hot button issue with many conservatives. But I have not seen any evidence this attack went beyond the Chechen suspects. In fact, I've seen reports that the FBI interviewed the older (deceased) suspect before the attacks; I'm sure the brothers were being monitored. It seems clear from context that the brothers had plans for additional attacks (other bombs uncovered by police), but no evidence the plots were coordinated with other parties. We should abide by the rule of law, include respecting the individual rights, including a Miranda warning and the right to counsel. NOTE: I am not arguing the young man isn't likely guilty, and I have previously described the bombings as murderous acts of terrorism. But I am concerned about a double standard under our justice system.
Catholics, Evangelicals as Extremists? Thumbs DOWN!
I am not that defensive as a Catholic, and I've encountered examples of anti-Catholicism over the years. You would think with one in 4 Americans Catholic, including 5 members of the Supreme Court, the last two Speakers of the House, and the current VP, categorizing the largest organized religious group in America as 'extremist' would be out of bounds, but the same old same old garbage (remember the infamous 2009 DHS memo?) from an ideological Administration also includes evangelical Christians as such in a US Army Reserve training slideshow. Unconscionable!
State of Texas Waters Down High School Math Requirements Thumbs DOWN!
The Texas House has sent to the Senate a bill watering down high school math standards (dropping Algebra II) and dropping two-thirds of the number of standard tests; I call on the state senate to reject these items and if it does pass , I call on Gov. Perry to veto it. I think backtracking on fundamental disciplines like English and math degrades the meaning of a high school diploma. Standard testing provides much needed independent validation of student performance. Decreasing test observations decreases reliability and early notice for identifying and resolving learning performance problems.
Political Cartoon
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| Courtesy of Henry Payne and Townhall |
The Temptations, "The Way You Do the Things You Do". My next series....
