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June 22, 2005

Department of "Huh?"

The Economist's Buttonwood seems to think that it is a bad thing for companies to have to fund the pensions that they provide as part of compensation in the wage bargain--or at least that whether companies should be responsible for making sure pensions are funded is an open question:

Economist.com: Who should be responsible for honouring the promises that companies make to their workers?

Pension plans depend on company contributions and investment returns for their funding. Actuaries’ assessments of mortality rates give a guide to future liabilities. Bond yields provide the discount rate that broadly determines what current assets the plans must hold in order to meet those liabilities. The situation has been dire all round. Returns on investment have been lower than expected. Bond yields have been too, thus swelling the amount of current assets plans must hold. Beneficiaries are living longer than anyone thought they would.

True, companies could have spent more of their recent record profits topping up their pension plans and less of them pleasing shareholders with dividend increases and share buybacks....

[I]n America... people are speaking openly of a taxpayer bail-out to rival the rescue of America’s savings-and-loan (S&L) sector in the late 1980s. The pensions insured with the PBGC showed a shortfall... the PBGC needs an infusion of $92 billion in today's dollars to meet its future obligations....

Companies and asset managers have tended to take a laid-back approach to pension underfunding.... What is worrying about the latest numbers is that we are seeing them towards the end of a period of strong economic growth and corporate profitability, neither of which is likely to continue....

Should workers just be forced to accept the bad hand that fate dealt them? That looks rash as well as unfair: in America, the workers who would be thus left to their own devices fall disproportionately in swing electoral states.... Should a company’s current shareholders bear the brunt? If so, more firms than ever will close their defined-benefit schemes... and the investment risk inherent in saving for retirement will fall on the untrained individual. Or the taxpayer could foot the bill.... “All the choices are ugly.”

Buttonwood's general principle that it is "ugly" to make companies fulfill their contracts is capable of much wider application than just to the pension issue.

Posted by DeLong at June 22, 2005 04:07 PM