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The nation's pension system is collapsing at the same time its population is aging. In the late 1960s, 60% of Americans were covered by a pension plan; today it is under 20% of those in private employment. Pension funds in the private sector are $350 billion in deficit, and many employers (IBM, Sears, etc.) are freezing their plans to keep obligations from growing further. Similarly, states and localities are hundreds of billions behind on funding, and Lowenstein declines to even get into Social Security's status or obligations for health care to retired public employees. (In another source Lowenstein estimates a $1 trillion deficit for retired public employees - presumably this also includes health care.)
"While America Aged" covers how we went from almost no pensions in the early 1900s (most worked on farms, and 'retirement' consisted of working less while relying more on family members), to a high proportion of coverage (more workers were in industry), to unsustainable benefit levels, using three case studies (G.M., the New York City subway system, and San Diego municipal employees).
In each case, management officials were lulled (and sometimes forced through long strikes) into acceptance by the delayed impact involved. At first few, if any workers were retired, and they were supported by a very large employee base.
In G.M.'s case, the firm also benefited by being the dominant force in the industry - 50%+ market share. Then autoworkers aged, Japanese autos reduced G.M.'s market share, cheap money to encourage home ownership and consumer spending undermined G.M.'s ability to attain adequate pension-fund earnings, and G.M. dug itself in even deeper with unrealistic assumptions on fund earnings and further benefit increases. Thus, from 1991-2006 it poured $55 billion into its pension funds, and only paid $13 billion in dividends.
To date, most corporations continue to minimize the problem, or pass off pension obligations to the government through bankruptcy, especially steel and airline companies. Unfortunately, the PGBC program is in deficit as well, and not designed to also take the burden of municipal pension funds.
New York City's transit, teachers, sanitation, firemen, and police public employee unions engaged in a "leapfrog" contest during the 1960s. Between them they steadily increased pension benefits through lowering the age of retirement, the proportion of "ending" salary paid upon retirement, changing "ending" salary to just the last year and including overtime (a extra $76 in overtime pay during a retirees final year created $1,100+ in pension liabilities), adding an inflation index provision, and reducing/eliminating employee contributions. These escalating costs for the MTA were hidden through deferred maintenance, state and federal aid, a soaring stock market, actuarial manipulation, and increased taxes. Mayoral egos bent on higher office often facilitated these additions. All this on top of high pay - in 2005 the average high-school educated NYC worker earned $29,000, vs. a public bus driver at $63,000.
Similarly, San Diego in 2005 found itself with a public employee pension fund deficit of $1.7 billion ($6,000/family of our), no audited financials, and a reputation as the "Enron-by-the-Sea." It had fallen into this through Proposition 13, mayoral candidates aspiring to higher office (eg. Pete Wilson), and union influence on elections and decision-making.
Finally, a 5/19/08 USAToday article contends that state and local retirement obligations total $3.6 trillion, out of a total government retirement debt of $61.7 trillion ($541,472/household), on top of $13.8 trillion in personal debt (mortgages, credit cards, etc.), for a total of $650,644/household.
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Only a few decades ago, most American families looked forward to having pensions when they retired. In the interim, that anticipated security has greatly evaporated, just in time for the big increase in retirees due to the Baby Boomers. This book describes how pensions came into being, and how private and public pensions accrued hundreds of billions of dollars in unfunded liability.
Roger Lowenstein tells the fascinating story via three case studies: of the United Auto Workers (UAW), the New York Transport Workers Union (TWU), and the San Diego city pensions. Lowenstein writes that the lesson from all three is "those who mortgage the future come to rue the day."
There were some different causes for the pension crisis between the private and public sectors. But one common explanation is the human tendency to delay that which we find unpleasant . "Pensions are the perfect vehicle for procrastination." The benefits are among the most long-enduring promises that exist. It's easy to overpromise when keeping it will be someone else's obligation.
Private sector pensions gradually became established during the WWII wage freeze, when companies could help workers by giving them pensions; ergo the number of workers with pensions tripled. During the 1940s, GM and Ford started pensions for executives only. UAW President Walter Reuther said UAW wouldn't tolerate a double standard of pensions for execs but not hourly workers. In 1950, GM agreed to a pension of $125 a month, minus Social Security, funded by the company. In return, GM got a five-year contract, which meant labor peace. An initial problem was that pensions covered all existing workers for whom no money had been set aside, so firms faced an unfunded liability from the gitgo.
Walter Reuther was, writes Lowenstein, the person most responsible for the pension crisis. One might also say Reuther was the person most responsible for the golden age of the American worker. Lowenstein points out that executives at GM and elsewhere agreed to higher and higher pensions over the decades because they were future costs as opposed to current pay raises. The auto industry also resisted Reuther‘s pressure to properly fund its pensions, so underfunding by GM and other auto companies became a common practice.
This pattern continued into the 1990s by which time GM was required by federal regulations to make large payments into the underfunded pension fund, which left fewer resources to invest in product design or to pay shareholders. Though the number of workers declined, GM huge legacy costs compared to the Japanese. By 2005, GM's market share of the auto industry dropped to 25 percent, half its peak level, and GM's market value dropped to $15B, compared to $195B it had pledged to retirees.
In the public sector, the pension crisis has different reasons:
• Public pension benefits are protected in state constitutions, such as in Illinois and New York, from being reduced once an employee starts.
• States can't go bankrupt. Consequently, public pensions are the public's problem, unlike private pensions.
• Public employee unions have political clout, which produces conces-
sions at the bargaining table from officeholders worried about their next election.
Regarding that last point, there is no doubt that public employee unions have been effective in lobbying for pension sweeteners. On the other hand, the author of a more recent book contends that unions don’t explain why some states have solvent pension funds, while others don’t, and why the worst-funded plans are typically not the most generous in their benefits. Alicia Munnell, the director of the Center for Retirement Research at Boston College, wrote State and Local Pensions: What Now? (2012). Her research concludes that the states with huge funding gaps “behaved badly…Fiscal discipline simply appeared not to be part of the state’s culture.”
The first public pension was for New York City cops in 1857. By 1878, cops who worked 25 years could retire at age 55. Early in the 20th century pensions spread for cops and firefighters in 80 cities. Eventually pensions spread to other civil servants who were poorly paid but had security. NYC recognized the TWU in 1958.
Public employee unions learned they could lobby the legislature in Albany and elsewhere to sweeten their pension benefits without paying for them. By the end of the 1960s, transit workers and teachers had pensions allowing them to retire on more than they earned while working. That’s because pensions were based on the final year's salary when workers loaded up overtime.
During the stock market boom in the 90s, worker contributions were cut in Illinois, New York and elsewhere, while benefits were sweetened. In 2005, the New York Metropolitan Transit Authority (MTA) shut down city transit for four days over proposed pension cuts.
New York City wasn't the only place where employee benefit costs were consuming a rapidly growing share of public budgets. Illinois faces the same challenge, where the history of underfunding goes back to 1917. San Diego faced a severe pension shortfall. During the 1991 recession, the City recalculated pension liability so as to reduce its short-term payment, but they bought off the unions by agreeing to higher benefits -- a double whammy for future taxpayers. The same pattern happened again in 1996 and in 2002.
By 2005, the San Diego pension fund was $1.7B in the red. When the financial crisis hit, the mayor and other officials resigned. Unlike NYC, San Diego officials had refused to raise taxes to pay for their benefits. They followed the typical pattern to cheat on pension contributions to satisfy present needs. The pension scandal became the dominant issue as the NY Times dubbed San Diego "Enron-by-the-sea ."
What should be done about pensions? Lowenstein is weaker on prescriptions than he is on telling the history. National health insurance is part of the solution, Lowenstein argues. It seemed radical when Walter Reuther proposed national health care after WWII. But Reuther recognized that health care is too basic a need for workers to do without and too burdensome a cost for employers. In an economy where workers change jobs frequently, writes Lowenstein, there's no good reason to tie health care to the workplace.
The 401(k) is far inferior to the pension. Lowenstein suggests the feds should regulate to better protect workers. One thing that could be done is require 401(k) sponsors to offer annuities as workers retire.
Public employee pensions are here to stay, Lowenstein predicts. Public employers still need stability in their workforce, and pensions are effective in keeping workers. What is needed to assure the proper funding is a law to require that every dollar of state and local pension benefits is funded as the benefit is accrued. That is the way the Illinois Municipal Retirement Fund works, and why the IMRF is well funded. This reviewer heartily agrees with Lowenstein that the credit card should be banned when it comes to pensions so we can’t "fob off on a future generation the burden accrued in the present one." ###