Via Atrios. And this is a very, very bipartisan complaint. 86 senators who voted for this idiocy. And we need a better press corps as well. The lead should be, "The Senate, acting with rare election-year concord, voted to reduce by $96 billion the payments companies will make into their pension plans this year and next. This will boost the companies' stock prices, increase the gap between the pension promises the companies have made and the resources committed to funding pensions, and increase the chances that workers will find at retirement that the pensions they were counting on just aren't there":
Yahoo! News - Senate Passes Pension Relief Bill: The Senate, acting with rare election-year concord, passed a bill Wednesday to reduce by $96 billion the payments companies will have to make into their pension plans this year and next. Sponsors said the measure, passed 86-9, will help preserve pension benefits for millions of workers by discouraging financially strapped companies from terminating plans as no longer affordable.
"Our pension plans are being battered by a perfect storm of declining interest rates, stock market declines and a weak economy," said Sen. Edward Kennedy, D-Mass. The bill, he said, "will help the hard-earned pensions of millions of Americans to weather this storm." The Senate must still work out differences with the House, which passed similar legislation late last year, and answer administration objections to a provision that would excuse airlines and steelmakers with chronic pension underfunding problems from $16 billion in catch-up payments. For thousands of companies, speed is crucial. They face huge increases in payments to their pension funds if the measure doesn't become law by April.
"A lot of companies have suffered" already as a result of congressional delay, said Lynn Dudley, vice president of the American Benefits Council, a business group representing employers and retirement-plan providers. She said her group's "members are withholding opening plants, not increasing new hires and avoiding improvements to their programs until they know what their liabilities are." Unions have also lobbied for the legislation. Although the legislation will result in smaller payments to pension funds over the short run, it gives some financial breathing space to companies that might otherwise go bankrupt, lay off workers, freeze their pension plans or renege on the promised benefits. Failed pension plans are turned over to the Pension Benefit Guaranty Corp., a government agency that insures pensions for some 44 million people in more than 30,000 defined-benefit pension plans.
The PBGC finances itself with premiums it assesses pension plan sponsors, in much the same way the Federal Deposit Insurance Corp. collects premiums from banks and thrift institutions to insure their depositors. Last year the PBGC took over 152 bankrupt single-employer pension plans covering 206,000 people, and saw its deficit rise to a record $11.2 billion. Workers may lose a portion of their benefits when the PBGC becomes trustee of a plan. For example, the agency announced Wednesday it was taking over the plan of a bankrupt North Carolina construction company with 6,300 workers, pension plan assets of $95 million and benefit promises totaling $215 million. The PBGC estimated it will end up assuming $104 million of the $120 million shortfall, with the rest made up by lower retiree benefits.... Underfunding of pension plans is now estimated to total $350 billion nationwide.
The Senate bill would establish a new formula that would make contributions dependent on the investment return from a blend of corporate bond index rates. The PBGC says that will save companies $80 billion over the next two years while Congress and the administration work on long-term overhaul of the pension system. The measure is particularly important to mature industries such as automobiles, where retirees at some companies outnumber current employees. General Motors Corp., for example, has 25 retirees for every 10 active employees and will have to pay out $6 billion in pension benefits this year....
Perhaps the most interesting thing is that the unions are weighing in on the side of the corporation's shareholders, managers, and current workers, and against their retiree members...
Posted by DeLong at January 29, 2004 07:38 PM | TrackBack
The quotes in favor of the measure indicate that the reduction in reuqiured contributions is in order to
1. avoid freezes in retirement plans
2. avoid companies from reneging on plans and bankruptcies that would add to payouts by the PBGC.
So I can see why the measure might be pointless, since if the companies are not contributing enough now, and will be allowd to contribute less, then this measure simply moves the bankruptcies and reneges from this year into the future.
But why is it so bad? I mean, the pension situation in many declining industries is a complete mess, so short of meaningful reform, isn't arguing about this pointless. Kind of like arguing about re-arranging the deck chairs on the Titanic and all that.
So, what should be done about the overall mess, as opposed to jigguring aroud when the stuff will hit the fana little , and also the size of the flow into the fan.
Am I missing something?
Posted by: jml on January 29, 2004 09:20 PMI wonder if the plan is to dump all pension and health care costs on to the US government (SS and National Health) and then slowly strangle them in their cribs or drown them in the bathtub.
Posted by: dilbert dogbert on January 29, 2004 10:02 PMOne can understand the unions going for this to get some the crumbs of what's left of corporate promises. And I can understand the dynamics of the promises when they were made (some time ago in a different, pre 401k era). And I'm not accusing anybody of being evil (well perhaps in the banal sense, yes).
However, this is a classic example of corporate america walking away from its responsibilities, and a classic example of socialism for the rich.
If it's so good for them, whey do they always say it is so bad for us? Makes you wonder.
Posted by: bobbyp on January 29, 2004 10:23 PMIt's S&L deregulation all over again. Penny wise, pound foolish. Of course, this is in perfect concord with the "put it off 'til after the next election" attitude.
Posted by: Julian Elson on January 30, 2004 12:28 AMWhy are the unions supporting this? Because the pensions carry government guarantees. This is pure moral hazard - and all the more shameful that Congress should have backed it.
Posted by: Dave L on January 30, 2004 02:36 AMA further shame is that Congress didn't extract a price for this relief.
I remember when firms, as stock values rose, cut back on pension contributions, because capital standards were being met by the appreciation of assets already held. This compounded the rise in stocks, as a reduction in pension contributions boosted earnings. The obvious implication was that the same situation would lead to a magnification of losses, as the need to make up pension contributions detracted from earnings. Perfect symmetry. If firms don't want to make necessary contributions when their stock value is falling, then logically they should be required to make unnecessary contributions when their stock value is rising, to save for a rainy day. Such an arrangement would help moderate stock swings and avoid the moral hazard that Dave mentions. But that isn't what Congress did.
Posted by: K Harris on January 30, 2004 04:07 AM"If it's so good for them, whey do they always say it is so bad for us? Makes you wonder."
Posted by: bobbyp on January 29, 2004 10:23 PM
Because we're not rich. Simple as that.
Posted by: Barry on January 30, 2004 04:08 AMI recall that during the mid-80s many defined-benefit
plans were overfunded because of high interest rates.
Companies were allowed to capture the excess. Now most plans are defined contribution and they are underfunded because...well they just are. Companies are now being let off the hook. The symetry
is beautiful. Profits and windfalls are privatized.
Losses and unexpected liabilities are socialized.
Swashbuckling capiltalism?
What happened to the idea that a pension obligation was a debt just like a bond obligation.
It is alright in our system to default on debt obligations to workers but not to other capitalist.
Posted by: spencer on January 30, 2004 06:35 AMI don't understand the following:
"unions are weighing in on the side of the corporation's shareholders, managers, and current workers, and against their retiree members... "
Why is this measure supposed to be favorable to current workers and bad for retirees? I would have thought that the long term insolvency of pension plans is bad for future retirees, ie current workers.
The lead should be "...This will boost the companies' stock prices, increase the gap between the pension promises the companies have made and the resources committed to funding pensions, and increase the chances that workers will find at retirement that the pensions they were counting on just aren't there"
And you should add at the end "and taxpayers will be left to pick up the tab through the PBGC."
Posted by: Dave on January 30, 2004 07:44 AMAny role of unions providing/ administering pensions in their position on this? Just wondering.
Posted by: tegwar on January 30, 2004 07:59 AMI didn't even know there was such a thing as the PBGC, putting a taxpayer floor under lousy pension planners. I suppose I should have expected it, though. Another penny in the fuse box of the free market. Depressing.
Posted by: tbrosz on January 30, 2004 09:27 AMKrugman nails it.
http://www.nytimes.com/2004/01/30/opinion/30KRUG.html
Still, the big story isn't about Mr. Bush; it's about what's happening to America. Other presidents would have liked to bully the C.I.A., stonewall investigations and give huge contracts to their friends without oversight. They knew, however, that they couldn't. What has gone wrong with our country that allows this president to get away with such things?
Jimbo:
"I recall that during the mid-80s many defined-benefit plans were overfunded because of high interest rates. Companies were allowed to capture the excess. Now most plans are defined contribution and they are underfunded because...well they just are. Companies are now being let off the hook."
Thanks for jogging my memory. Can anyone point me to a history of this process? I'd like to get some numbers and see an analysis of what the net position of these funds would be if the companies had not beenn allowed to run off with the goodies -assuming that is the case. But my memory has been jogged, and I think that it is the case. But I am curious about what difference it would make in the long run.
Posted by: jml on January 30, 2004 10:35 AMSadly they are forced to vote for a stop gap because the political process to address the long term problem is broken.
Posted by: bakho on January 30, 2004 10:35 AMWhy did idiotic unions let corporation manage their pensions? They knew better at the time, they should have taken cash and defined their own pension plan.
In other words: the market is soft--and pension funds generate less income and need more money to guarantee payments--so the solution is to put even LESS money into the fund?
Do I understand this correctly? Would an insurance company LOWER its premiums when it realized that it had less money in the bank to pay out for claims?
What is going on here?
Posted by: Michael Steinberg on January 30, 2004 11:17 AMK Harris -
"If firms don't want to make necessary contributions when their stock value is falling, then logically they should be required to make unnecessary contributions when their stock value is rising, to save for a rainy day."
Infuriatingly right!
Posted by: anne on January 30, 2004 12:28 PMWhether or not their stock is rising or falling, firms do not want to make unnecessary contributions.
Whether or not their stock is rising or falling, firms do not want to make necessary contributions.
What firms want to do is to PRETEND that they are making necessary contributions without actually doing so. It's called bait and switch.
Posted by: joe on January 30, 2004 05:26 PMDoes anyone know whether it makes any difference? If the companies had been forced to make the "unnecessary" contributions when the pensions were overfunded, would the pension funds be in significantly better shape today for the long term? (obviously they would be in better shape for "right now".) Has the cherry-picking "privatize the gains and socialize the losses" behavior made any difference? Or do the secular and unfavorable changes in demographics, industry structure, and the declining US manufactoring industry segment mean that we would be here anyway, sooner or later?
Could the pensions be in good shape, or is it just a matter of the companies jiggering a lttle bit how much they are going to unload onto the PBGC?
I did some internet searches for analyses after work today but found nothing much. Anyway wisdom on that here?
Posted by: jml on January 30, 2004 07:02 PMThe size of a companies pension liability, and therefore the amount of money necessary to fully fund the pension obligation, are dependent on a whole bunch of basically arbitrary accounting rules and assumptions. Some of these arbitrary requirement (emphasize arbitrary) were about to drive some companies into bankruptcy because they could not meet the consequent funding requirements. What both management and the unions have realized is how idiotic it would be to allow otherwise fully solvent and liquid companies to be driven into bankruptcy because of arbitrary accounting rules when the simple solution is to CHANGE THE RULES. Nothing else has changed. The companies will continue to fund their pensions and pay their retirees.....and, oh by the way, will be able to stay in business. Quelle horrible!!!!
Posted by: flory on January 30, 2004 08:03 PM"Driven into bankruptcy" by "idiotic" accounting rules? I don't see it that way. When times are good, and the assets in the fund are exploding, companies are allowed to cut back contributions based on past performance. That, coupled with some overly optimistic actuarial and FUTURE PERFORMANCE assumptions allows companies to take these "excess" contributions and move the dough to the bottom line. Why they would do this is patently obvious.
This behavior may be characterized as somewhat unwarranted. However, the overly optimistic assumptions made when times are good has led, with a certain degree of inevitability, to the present crisis. The question is, who pays.
I suggest there is a straightfoward remedy. Meeting pension commitments should have first claim on company assets, ahead of shareholders, bondholders and the bankers, for example. This may crack the whip to enforce some kind of fudiciary responsibility on company management and the wizards of Wall Street who tirelessly sermonize to us about "lucky duckies" whilst simultaneously holding their hat out for more bail outs.
Posted by: bobbyp on January 30, 2004 09:07 PMIt's simple. Corporations will just end their DB plans.
Posted by: WallyWhirled on January 30, 2004 09:22 PMIt's simple. Corporations will just end their DB plans.
Posted by: WallyWhirled on January 30, 2004 09:22 PMTrue, Wally. They have, for the most part curtailed or ended DB plans. You even see this in the public sphere.
But you still have to answer the original question: What do we do about past underfunded commitments? Who pays? This was a promise, remember?
And, by the way, depending on the setup, a corp may still have some large implied commitments and a high level of fudiciary responsibility even under a defined contribution plan.
Posted by: bobbyp on January 30, 2004 10:03 PMGuys. Where's your political smarts in like, no politician's ever gotten credit for solving a problem before it arose.
The answer's simple. Hold increases in the PBGC's guarantee of individual workers' pensions to well under COLA and hope for substantial inflation.
Problem solved.
Posted by: Ellen1910 on January 30, 2004 10:33 PMflory writes:
"What both management and the unions have realized is how idiotic it would be to allow otherwise fully solvent and liquid companies to be driven into bankruptcy because of arbitrary accounting rules when the simple solution is to CHANGE THE RULES. Nothing else has changed."
The auto and airline industries are probably not the "fully solvent and liquid companies" you have in mind but they are the mature industries behind this rule change. It was thought that the 9% expected return on these huge pension funds was reasonable ( not exactly arbitrary). And for a few years it was. So the Earnings numbers were spectacular . But then there were 3 years of not-so-slightly less than 9% returns. And more retirees. (The recent report on GM was: 2.5 retirees for each worker.)
In other words, there was a change. Pension funds suffered losses on the stock market ( even though companies still claimed their 9% expected returns). Promises were made that could not be kept. Those promises were short-sighted, looking only as far as getting mitts on workers wages to bolster pension funds that had the principal function of padding the earnings numbers.
The union support for the rule change is pragmatic as you point out but also a betrayal of the retired worker.