A Stitch in Haste

Gee, I've been blogging about airline pensions, the Pension Benefit Guaranty Corporation and Social Security since, um, forever, and now suddenly everyone is connecting the dots.

For those interested, here is my complete archive on the subject:

Airline Pensions and Social Security, 1 August 2004
Airline Pensions, Part 2, 16 August 2004
The Other Pension Crisis, 14 September 2004
Slouching Towards "Air Amtrak," 1 November 2004
PBGC Continues to Foreshadow Social Security Crisis, 16 November 2004
Government Takes Over United Pilots' Pension, 31 December 2004
A PBGC Crisis Update, 16 January 2005
Another Airline Pension Mess — The Present as Prologue, 5 May 2005

Just a quick reminder that the Pension Benefit Guaranty Corporation is still heading full-throttle toward insolvency and a taxpayer bailout:

The Pension Benefit Guaranty Corp. disclosed in its annual financial report that as of Sept. 30, it had $56.5 billion in assets to cover $79.2 billion in pension liabilities.

There has been an explosion in recent years in the number of big, ailing companies — especially in labor-heavy industries like airlines and steel — transferring their pension liabilities to the PBGC. With billions of dollars flying out of the agency's door, concern has been mounting in Congress and elsewhere over its financial footing.
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Without a legislative overhaul of the private pension system, the PBGC eventually will run out of money to pay the pension claims of the retirees of companies whose plans it has assumed, some experts predict. That would mean that people retiring from financially troubled companies would have nowhere else to turn for their promised pension payments — raising the possibility of a taxpayer bailout.

Of course, "labor-heavy industries" is a polite way of saying "unionized industries." The American landscape is littered with industries that have been collectively bargained straight into bankruptcy. The PBGC is no different (if Delphi and a few more airlines aren't enough to nudge the agency off the cliff of insolvency, then the increasingly likely bankruptcy of General Motors certainly would). The PBGC crisis is not a question of if, but of when.

Overpromise, ignore the demographics, ignore the finances. Then, once it's too late, blame the people who came before you and stick taxpayers with the bill — for a few tens of billions of dollars in the case of the PBGC.

Now multiply that by a factor of 100 or more and you have an idea what it will be like when the Social Security crisis arrives in earnest, around 2017 or so.

The worst kind of bankruptcy is a bankrupt idea.

The United States Government now owns 23.4% of United Airlines.

That's on top of the 7% of USAir that the government owned as of a few months ago.

The reason we are descending into old-fashioned socialism is the Pension Benefit Guaranty Corporation, the guarantor of failed private pension plans. When a company files for bankruptcy protection, the PBGC steps in and assumes the assets and liabilities of the company's pension pan, thereby becoming a creditor, often the dominant creditor, of the firm. If the company reorganizes (as opposed to liquidates), then the creditors become stockholders, including the PBGC (which will itself soon be a failed program).

I warned against this practice previously, and my position is unchanged — the PBGC should be required by law to sell the equity holdings it received in bankruptcy reorganizations as quickly as possible without causing a liquidity shock in the security. If the PBGC or any other part of the government wants to gain equity exposure (i.e., "play the stock market"), then it should be limited to passively-managed index funds. The government should never, ever, be a direct stockholder. The potential conflicts of interest are simply too great.

And it deserves repeating: the great heavy industries of a past era — steel, autos and now airlines — that are now the crippled foster children of the PBGC, were also the great unionized industries, as were other now dead or dying sectors such as textiles and mining.

Ironic, isn't it? The socialists, who wanted government ownership of industry but had to settle for collective bargaining laws, wound up getting exactly what they wanted, if not quite in the way they wanted it.

Anyone still care to argue that unions have been — over time — good for American blue-collar workers?

And anyone still care to argue that the Social Security crisis isn't the exact same phenomenon doomed to the exact same outcome for the exact same reasons?

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?

I casually noted in my most recent post on the pension reform bill that the situation regarding defined-benefit pension plans for state & local government employees is far worse than the situation for plans of private corporations. The last number I had access to was a $279 billion deficit between projected obligations and projected accumulations — all of which will, someday and somehow, fall on the shoulders of each jurisdiction's respective taxpayers (assuming of course no federal bailout at some point down the road — big assumption).

Today we get some updated numbers:

It is hard to know the extent of the problems, because there is no central regulator to gather data on public plans. Nor is the accounting for government pension plans uniform, so comparing one with another can be unreliable.

But by one estimate, state and local governments owe their current and future retirees roughly $375 billion more than they have committed to their pension funds.

And that may well understate the gap: Barclays Global Investments has calculated that if America's state pension plans were required to use the same methods as corporations, the total value of the benefits they have promised would grow 22 percent, to $2.5 trillion. Only $1.7 trillion has been set aside to pay those benefits.

So the situation has worsened from an estimated $279 billion to an estimated $375 billion or even $800 billion. One way or the other, the situation is getting worse, and at an increasing rate.

When private employers short-change their pension plans, they are penalized legally, in the financial markets and through the media. When hack politicians short-change their pension plans — bupkes.

Indeed, to them, having a twelve-digit shortfall is something to boast about:

As a group, state and local pension systems have nearly 90 cents for each dollar they owe in liabilities.

In other words, they openly acknowledge having "only" a deficit of ten percent — of $3 trillion, give or take. "Move along folks, nothing to see here..."

As with the Pension Benefit Guarantee Corporation, as with the fraudulent Social Security "trust fund," so too with the pension fund volcano under the city fiscs: It is only a matter of time before the eruption.

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One thing that the private and public defined-benefit pension crises do share is the role of labor unions in pressuring employers into offering lucrative pensions that prove impossible to maintain. Almost every major private pension default has been in a ubiquitously-unionized industry: steel, autos, textiles and airlines come to mind. Just as the unions collectively bargained themselves straight into bankruptcy, so too are they collectively bargaining themselves straight into pension default. Because "it's all about the future." Go figure.

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It's been far too long since I called out an example of the Broken Window Fallacy:

State and local pension plans fuel national, state and local economies. Public plans distribute more than $130 billion annually (an amount greater than the total economic output of 22 states) in benefits to over 6 million retirees and beneficiaries, with an average annual pension benefit of roughly $19,500. These payments are steady, continuous, in great part adjusted for inflation and provide a strong economic stimulus to local economies throughout the nation.

This is, of course, utter nonsense.

No one denies that government employees deserve pensions if that's what they contracted for, just as they deserve the paychecks they contracted for. But every single dollar paid to a government employee comes from a taxpayer, either directly or indirectly. And every single dollar paid as a tax is a dollar not spent directly in the economy. That is not "a strong economic stimulus" — it is the exact opposite. The drain on the economy from the drag of bloated government overwhelms — totally swamps — any purported stimulus effect of pension flows. And the fact that pensions are "in great part adjusted for inflation" is also not something to brag about — but that's another blogpost.

No economy has ever taxed itself into prosperity. End of discussion.

Read the Broken Window Fallacy here.