A Stitch in Haste

The government has ensured that pensions will be safe from — the government:

The Senate, in its last vote before adjourning for a four-week summer break, approved the 900-page bill that compels employers with defined-benefit pension plans to meet their funding obligations and seeks to prevent companies from terminating plans and shifting the financial burden to the taxpayer.

Um, no and no.

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Let's take the second "no" first — for years and throughout the recent Pension Benefit Guaranty Corporation crisis the federal government has insisted and indeed boasted that the PBGC does not now nor will ever receive any taxpayer money — it was and would remain (so we were assured) funded exclusively by premiums paid by employers.

So why brag about the fact that there will be no "shifting the financial burden to the taxpayer"?

Of course, we heard the same gobbledygook about the FSLIC. And the federal flood insurance program. And the Social Security "trust fund."

So, to summarize the government's view: there is no crisis until we've already prevented it, at which point there was in fact a crisis which we prevented. Aren't you grateful?

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Now about "meeting funding obligations."

All this new law does is require employers with defined-benefit pensions to increase their target funding percentage from 90% to 100% of their projected pension obligation. But it's still just a target and a projection; employers are not really required to "fully fund" anything. Nor should they be. They simply need to use a different set of guesses.

The financial accounting rules for pensions are complicated. But here's a simply analogy. The parents of a newborn want to start a college fund. They have no way of knowing exactly how much a college education will cost in 18 years. Neither do they know how their investments will perform over those 18 years. Nor do they know whether their child will need four years or five to finish college. Or whether they will become unemployed during those 18 years. And so on.

It's all guesswork. You can make intelligent estimates. You can make either conservative or optimistic guesses. You can adjust your estimates as time goes on. But it's still all guesswork until the day of reckoning.

Moreover, no one would seriously suggest that the parents ought to "fully fund" the child's education the day she is born (i.e., put away the full cost of tuition immediately upon the child's birth). It is perfectly reasonable to stretch out the contributions to the college fund over the period while the child is not yet in college -- so long as the estimates are themselves reasonable.

Now assume that there is no single day of reckoning, because the children keep being born, keep growing up, keep going to college, and keep graduating. The estimates never stop being estimates, because the future never arrives. It's a never-ending process so long as the family is a going concern.

This pension bill merely makes employers -- the "parents" -- be a little more conservative in their estimates regarding their pension obligations -- the never-ending "college fund."

Which is, somehow, a good thing. Because, of course, politicians are better money managers than professional pension analysts and portfolio managers. Aren't you grateful?

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By the way, guess where most underfunded defined-benefit pension liabilities are to be found these days.

Hint: Not with any private employer.

Which means the pension bill does not apply to them or the $279 billion total deficit and state & local government employees. Who's going to solve that crisis?

Still grateful?