The utter failure of the US retirement system has set us up for the mother of all economic crises as the baby boomers are pushed inexorably toward a very poor future. Like any crisis worth its salt, this one will have a number of parents, but surely the greatest is the poor governance and bad faith shown by employers in the management of traditional pension funds. That this bad faith is part of a larger pattern that includes relentless outsourcing, a shift to contingent labor, gutting of health benefits and decades of falling real wages is both obvious and curiously missing from narratives about pensions.
Rather than making any of these linkages, most reporters seem content to simply report the underfunding as an emergent phenomenon (the pension version of Immaculate Conception) without any discussion of the role of those most responsible for the underfunding. So I offer here only two of myriad ways in which pensions are being driven to failure by those who stand to gain the most from that failure.
Raiding the kitty
As Ellen Schultz notes in her excellent book Retirement Heist , one of the primary scams used by private sector executives is to camouflage huge amounts of deferred executive compensation by hiding it in the aggregate pension obligation. In many of the cases Schultz documents, these new liabilities overwhelm the workers’ accrued benefits in scale while retaining an extra layer of legal protection that ensures that executives receive their money – paid out of worker’s accrued benefits, no less – even if the plan fails. Preferential tax treatment shields both the executives and the company from tax obligation for these assets while they accrue. In other words, executives siphon money from workers and taxpayers while strengthening their own ability to point to the company’s pension as a growing and “unsustainable” benefit for workers – a trifecta of sleaze.
This tactic is hardly limited to the private sector. From USA Today:
More than 4,100 legislators in 33 states are positioned to benefit from special retirement laws that they and their predecessors have enacted to boost their pensions by up to $100,000 a year, a USA TODAY investigation found. Even as legislators cut basic state services and slash benefits for police, teachers and other workers, they have preserved pension laws that grant themselves perks unavailable to voters they serve or workers they direct.
In some states, lawmakers add expenses, per diem allowances and stipends to their base salaries. That inflates the compensation that’s used to calculate retirement benefits, which are typically a percentage of final pay. In other states, legislators have written a special definition of salary that applies only to their pensions. Additional tactics include:
• Basing pensions on salaries legislators are not paid or were paid in non-legislative jobs.
• Collecting state pensions while also collecting legislative paychecks
• Retiring earlier — at a younger age or after fewer years — than other state workers, or with richer benefits.
…The generous systems mean that at least 570 lawmakers in 19 states have qualified for pensions that will pay them as much as — or in one case 17 times more than — their base legislative salaries, USA TODAY found….That represents nearly 10% of the 5,900 lawmakers in the 40 states with legislative pensions.
In other words, a good portion of what makes pensions “unsustainable” is the rapacious behavior of those tasked with governing them rather than the alleged greed of workers who accepted pay freezes in return for promised retirement security.
Welching on commitments
Another common practice – and I would guess the largest single causal factor in the underfunding of pensions – is the refusal of both private and public sector employers to set money aside to meet funding obligations. In the private sector, intensive lobbying by corporations with pension plans has succeeded in a steady erosion of requirements that they meet their obligations. To take only the most recent in a litany of examples, the bulk of the proposed “funding” to offset the $6 billion cost of extending low student loan interest rates will come through this mechanism:
…$5 billion would come from the way employers compute their pension liabilities while $500 million would be the result of changes in employer contributions to the Pension Benefit Guarantee Corporation, the aide said.
What is amazing here is that (assuming I’m correct in this) corporations are being allowed to reduce their contributions further, worsening the retirement gap, yet this is somehow “paying” for federal spending elsewhere. I’ll have to look into that further once the deal is done, but the larger point remains – intensive lobbying by corporate plan sponsors has played a role in removing obstacles to underfunding.
The problem is much worse in the public sector, where news reports are profoundly misleading. Coverage of the recent pension-related voting in San Diego and San Jose, for example, generally highlighted the big jump in annual funding costs for pensions over the past decade or two. But this ignores the fact that municipalities across the country have been terrible about reneging on their funding obligations, which means that the lower payments in the past may well have been below what they were obligated to pay (San Diego in particular has a long and shameful history in this regard). The math is hardly rocket science. If you are on the hook for, say $10 in funding this year but only fund $2 of it (I’m looking at you, Christie), then do that for 15 years, then guess what? Future payments will be a multiple of current ones in order to catch up.
What is especially pernicious here is that journalists either don’t know or don’t mention this background, which means that their stories end up implying that that these skyrocketing payments are inherent in the pension structure itself, or just appeared out of nowhere. This lazy approach to reporting allows politicians to point to the funding gap as “proof” that pensions are inherently unsustainable and must be abandoned. New Jersey is among the worst offenders in this regard, with Governors from Christine Todd Whitman (who used funds that should have gone to the pension to pay for magical tax cuts, in yet another transfer from the working class to the wealthy) to Christie refusing to pay into the pension fund while loudly complaining about the unfunded liability.
The lack of coverage of these aspects of the crisis is matched (and certainly feeds into) the poverty of policy recommendations being put forward to address it. The default approach seems to be glib moralizing about shiftless workers who refuse to save, without any acknowledgement that widespread elderly poverty will need to be addressed ASAP. The fact that much of this moralizing comes from corrupt billionaires and glibertarians decades away from bearing the cost of their own recommendations only makes it more irritating. It would at least be a start if every talking head who opines on pensions and retirement were required to answer a few simple questions:
1.) To those arguing for a higher retirement age: What will that mean for younger workers who are already facing a lifetime of lost income? And that’s assuming that the older workers can even find jobs – how are older workers without jobs, and facing deeply entrenched age discrimination, supposed to find work if they don’t already have it?
2.) To those arguing that public sector pensions need to be cut: Who will pay for public sector retirees? In most cases, they were not allowed to participate in Social Security, so what do you propose as an alternative to make up that funding gap?
3.) To those pointing to 401k-style offerings as a solution: Since 401k plans have failed widely (the average balance is $75,000 or so – hardly enough to retire on, and as a mean, most likely skewed upward), what or who is supposed to make up that gap? Bonus points for answering while taking into account 30 years of falling real wages and rising expenses.
Right now, the “serious” conversation we’re supposed to have is one about cutting everything imaginable. No one seems to acknowledge that this should trigger an even more serious conversation about how much elder poverty we are willing to tolerate as a result. But since we live in a country that seems fine with 1 in 5 children living in poverty, I would say the odds are pretty low of that conversation happening any time soon.