Fortune Magazine on Corporate Pension Plans

Justin Fox thinks “corporate pensions are an unstable, unfair and economically perverse means of paying for retirement”:

This phenomenon, along with the more dramatic cases of companies going bankrupt and defaulting on existing pension commitments (think United Airlines), has gotten tons of press, most of it of the “ain’t it a shame” variety. But the real shame may be that we ever put so much faith in such an inherently unstable, unfair and economically perverse means of providing for retirement.

I have a mixed reaction to his op-ed. Some of what he writes makes sense, but much of it strikes me as simply incorrect:

But there were problems with Wilson’s approach that, while they didn’t seem like a big deal in 1950, were to loom large decades later. For one thing, the Wilson way assumed that lifetime jobs with big, pension-granting corporations were the American norm – which ceased to be the case decades ago. For another, it failed to foresee that pension commitments could become a heavy burden for companies (among them Wilson’s own General Motors) forced by competition and changing consumer demand to get smaller or at least leaner. If GM had simply set aside all the money it put into its pension plan over the decades in individual retirement accounts for its employees, it wouldn’t have this problem.

Who would not have what problem? This last sentence implies that the manager of the GM pension proposal received a poor portfolio return. In GM’s case, isn’t it more likely that management invested less of GM’s funds into the pension plan than what the workers had given up in terms of reduced wages when they struck their deferred compensation deal in the 1980’s? If this were the case, it was not a poor portfolio performance but a diversion of worker’s wealth towards shareholder’s wealth.

Some GM retirees would be worse off than they are under the existing pension plan, but prospects for current employees (and potential future employees) would be far better. That’s the problem with pension plans that promise a specific benefit in the future – they amount, pension consultant Keith Ambachtsheer says, to a contract between current and future generations, and those future generations aren’t represented at the bargaining table. As a result, they get stuck guaranteeing the retirement income of their elders while receiving nothing in return.

OK, there may be indeed an intergenerational concern where younger GM workers are losing out. But in one way, they are losing out to current shareholders who in turn may have been mislead by accounting gimmicks that allowed former shareholders to make out with equity that should have been put back into the pension plan.

Fox links to material put forth by the University of Toronto’s Rotman School of Management, which are interesting. But let me get to where Fox and I agree. Fox rejects the rightwing canard that goes like this: if corporate pension plans are going bankrupt, then a publicly funded defined benefits plan is also a bad idea. No, the fact that workers do not stay in one job for their entire career heightens the need for a publicly funded defined benefits plan. Fox concludes with:

That’s sort of what President Bush was proposing last year with his Social Security private accounts – but those accounts were relatively puny, the president was unwilling to come clean about the true costs of his plan, and Congress in its wisdom (and fear of the AARP) chose to do nothing. A long-cracked pillar of the American retirement system is crumbling, and not nearly enough is being done to build a replacement.