Re: Pension Crisis

[pdavidso <pdavidso@xxxxxxx>]

>===== Original Message From "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx> =====
>Between corproate bankruptcies and equity market collapse, the pension
>time time has a very short fuse. Every corporation I am familiar is now
>underfunded in its pension obligations. GE recently faced a strike over
>the issue. Even law firms and colleges are in trouble as their pension
>investment lose up to 60% of their value. This is one problem that
>cannot be fixed with reflation, as it is a fixed income arrangement.,
>even though some are inflation indexed.
>
>It will be a campaign issue for 2004.

I agree with Henry about the problem -- but I doubt whether the Democrats will
use it in 2004 -- because they do not have the foggiest idea of how to releive
the problem.

Paul
>
>Henry C.K. Liu
>
>
>    New York Times January 25, 2003
>
>
>    $8 Billion Surplus Withers at Agency Insuring Pensions
>
>By MARY WILLIAMS WALSH
>
>T he federal agency that insures the pensions of some 44 million
>Americans has been pounded by a succession of big corporate bankruptcies
>and has burned through its entire $8 billion surplus in one year.
>
>The agency, the Pension Benefit Guaranty Corporation
><http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.ma
rketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=GRTYA>,
>provides protection to retirees in case of a failure, much as the
>Federal Deposit Insurance Corporation protects depositors when a bank
>fails. Though it can continue to make its current payments, the agency
>is expected to disclose a deficit of $1 billion to $2 billion at the end
>of this month.
>
>Its soundness is likely to deteriorate further in the coming months, as
>more bankrupt companies find themselves unable to fulfill their promises
>to tens of thousands of present and future retirees. US Airways, United
>Airlines and Kmart
><http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.ma
rketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=KMRTQ>
>are among the companies struggling to emerge from bankruptcy protection
>under the weight of large underfunded pension plans.
>
>An awareness of the pension agency's rapidly diminishing strength is
>already fueling a debate in Washington about whether the guaranteed
>retirement benefits of millions of Americans are at risk and, if so, who
>should pay to make them airtight.
>
>Businesses support the agency's operations by paying premiums for each
>person covered by the insurance, and they are sure to resist any
>increase. The decisions are difficult. Postpone the increase and the
>pension system could be imperiled, but increase it too sharply and
>companies might decide to stop offering pensions altogether.
>
>"You can get this wrong in both directions," said Damon A. Silvers,
>associate general counsel at the A.F.L.-C.I.O.
>
>Among the remedies being discussed are charging all companies with
>pension plans higher premiums, requiring them to fund their plans more
>fully, making the companies with the shakiest plans pay the most and
>changing the way the agency invests its money.
>
>Traditional company pension plans became commonplace after World War II
>and are estimated to be the second-largest source of income today for
>elderly Americans, after Social Security. But employers offer them
>voluntarily, and over the last decade many have been switching to 401(k)
>plans, which are simpler and generally cheaper to administer because
>employees set aside the money and decide how to invest it themselves.
>
>For workers, traditional pensions are considered more reliable than
>401(k) plans, because pensions provide a predetermined monthly check
>from retirement to death and are guaranteed by the government.
>
>The Pension Benefit Guaranty Corporation was created in 1974 to take
>over insolvent pension plans and keep paying benefits when a company
>could not. A retiree whose plan is taken over keeps getting monthly
>checks, but the amount may be smaller, because the government limits the
>amount it insures. The current maximum is about $3,600 a month for those
>older than 65 at the time of the takeover, and less for those who are
>younger. As of 2001, the agency had $22 billion in assets and was
>responsible for paying the pensions of 624,000 current and future
>retirees. It paid more than $1 billion in stipends that year.
>
>The agency has weathered deficits in the past, its finances worsening
>when stock prices have fallen or when very large corporations have
>collapsed. In 1992, after it shouldered $1.4 billion in unfunded claims
>from Pan American World Airways
><http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.ma
rketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=WLDA>
>and Eastern Air Lines, there were warnings that the agency itself might
>go broke, much as the Federal Savings and Loan Insurance Corporation had
>done a few years earlier.
>
>Steps were taken to strengthen the agency and make it harder for
>companies to run their pension plans into the ground. Rising stock
>prices further bolstered the agency in the latter half of the 1990's,
>and the warnings of a disastrous S.& L.-style collapse died away.
>
>Now, those warnings have returned, as the gap has soared between what
>companies have promised to pay in pensions and the funds they have set
>aside to do so. At the end of last year, the gap was estimated to be
>$300 billion. During the agency's previous crisis, in 1993, the funding
>gap peaked at $109 billion.
>
>Stock prices are down again, and interest rates are unusually low.
>Normally, stock prices and interest rates move in opposite directions.
>When they both go down at the same time, it is particularly painful.
>
>In pension accounting, the lower the interest rate, the greater the
>future obligations. That is because of the difficulty of setting aside
>enough money to cover future payments, which loom large if interest is
>accruing at only a few percent a year, and has nothing to do with any
>increase in the number of retirees or their benefits.
>
>"This is really the first time the P.B.G.C. has been faced with this
>confluence of events," said Mark A. Oline, a managing director of Fitch
>Ratings. Mr. Oline monitors airlines, which make up a large part of the
>pension agency's workload. The last time a three-year bear market
>coincided with low interest rates was 1939 to 1941, he said, and the
>agency did not exist then.
>
>"The big question is, if all of a sudden these liabilities have become
>so enormous, how is this situation addressed?" Mr. Oline said.
>
>Although the Pension Benefit Guaranty Corporation is a government
>agency, its work is financed entirely by companies, not general tax
>revenues. Companies pay $19 per person covered each year, or more if a
>pension fund is underfunded. The basic rate has not changed since 1991.
>
>That means that if the agency's troubles worsen, businesses will be
>asked to pay higher premiums, put more cash into their own pension plans
>or both. The agency is also considering a new way of assessing premiums,
>making the companies with the weakest pension funds pay the most.
>
>Any of those changes would require Congressional action and would be
>controversial. Already companies are struggling with their own pension
>deficits, and are finding they must pay millions of dollars to keep
>their plans compliant with the current rules.
>
>"The well-funded employers don't want to pay a lot of money to bail out
>the employers whose pension plans have fallen," said Judith F. Mazo,
>director of research at the Segal Company, a benefits consulting firm,
>and a member of the pension agency's advisory committee.
>
>At the same time, Ms. Mazo said, the companies with the shakiest pension
>plans will protest if their premiums go up, saying they obviously do not
>have the cash. If they did, they would have put it into their pension
>plans.
>
>For now, most big companies with pension plans are taking the position
>that the current troubles will pass on their own.
>
>"There is no crisis whatsoever," said Janice M. Gregory, vice president
>of the Erisa Industry Committee, a group that lobbies on behalf of the
>largest corporations on pensions and other issues regarding employee
>benefits.
>
>As members of the Erisa Industry Committee see it, interest rates are
>sure to rise again. Then the balance-sheet values of future liabilities
>will shrink, and much of the pension agency's deficit will disappear.
>
>In addition, Ms. Gregory said, businesses anticipate further relief
>through an initiative by the Treasury Department to change the interest
>rate that companies use for their pension calculations. In the past,
>they used the 30-year Treasury bond as a benchmark, but the government
>announced in early 2000 that it would stop issuing those bonds.
>Businesses want to switch to a high-quality corporate bond as the
>benchmark. That rate would be higher, shrinking future pension liabilities.
>
>Such a change would be subject to approval by Congress.
>
>In the meantime, Ms. Gregory noted, the pension agency has more than
>enough cash on hand to make its current payments. It takes in some $800
>million each year in premiums.
>
>"That gives them a cushion to cover any additional new claims that come
>in," Ms. Gregory said. "The P.B.G.C. is in good shape."
>
>That view is firmly countered by some financial analysts. Zvi Bodie, a
>professor of finance at the Boston University School of Management who
>was invited to present his position to the pension agency, wrote an
>academic paper in 1996 laying out a "possible doomsday scenario" ending
>with an enormous taxpayer bailout.
>
>Ominously, some of what he foreshadowed has already happened: a sharp
>and prolonged drop in stock prices, a proliferation of pension-plan
>underfunding and several large pension defaults.
>
>Professor Bodie says the agency should begin charging premiums based on
>the riskiness of a company's pension portfolio. He has also spoken to
>the agency's advisory committee about the merits of investing the
>agency's own trust fund in fixed-income securities. The agency's board
>voted in 1994 to permit its trust fund of seized plan assets to be
>invested up to 100 percent in stocks, but the agency is considering
>scaling back. The money from premiums is invested in government securities.
>
>Much of the agency's surplus disappeared early last year when it assumed
>the pension plans of the LTV Corporation
><http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.ma
rketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=LTVCQ>,
>the large steel company. LTV
><http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.ma
rketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=LTV>
>had already been through one bankruptcy and pension trusteeship, in
>1986. After LTV reorganized, the pension agency forced it to take back
>its pension obligations  only to watch the company file for Chapter 11
>protection again in 2000.
>
>In March 2002, the pension agency assumed LTV's pension payments for a
>second time, wiping out $1.6 billion of its surplus. In December, the
>agency assumed $1.1 billion in unfunded pension claims from National
>Steel
><http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.ma
rketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=NSTLB>,
>and later that month, it took over Bethlehem Steel's
><http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.ma
rketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=BHMMQ>
>pension plans, for an estimated $3.7 billion.
>
>Until last year, the agency's largest case was the 1991 takeover of Pan
>Am's pensions, for $841 million.
>
>The big pension plan failures show no sign of stopping this year. US
>Airways' reorganization plans depend heavily on the airline's ability to
>cope with some $3.1 billion in pension contributions due over the next
>seven years. The airline has been seeking government permission to
>stretch the payments out over 30 years.
>
>"The minute you grant that, you'd have all the other airlines lining
>right up," Mr. Oline of Fitch Ratings said, "and some other industries
>after that, asking for the same thing."

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
phone # (561)369-1951; fax #(561)369-1951;
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/davidsonextra/Davidson.html