Coming Boomer pension cuts
This site, Remapping Debate, by Colombia Review Journalism shows some promise for information.
Here’s a piece missing from the debate on the impact pension cuts on a consumer and credit driven economy (Coming boomer pension cuts…what impact on the economy, by Diana Jean Schemo) might have on the Great Recession.
It is long and has great links:
Over the last two decades, pension cutbacks have left relatively few private sector workers with defined benefit pensions plans. Now, with health and pension funds for state and local government employees said to be facing massive funding shortfalls, many are describing the guaranteed retirement benefits paid to teachers, police officers, street cleaners, and other public workers as overly expensive and sclerotic. These pensions, the argument goes, are unrealistic — they are throwbacks to another era that must now be curbed.
…If there is one document that can be said to have galvanized public alarm over the state of public pensions, it would be an analysis issued by the Pew Center on the States last February. The study, whose findings were reported by almost every major media outlet and echoed by countless lawmakers and pundits, threw a spotlight on public sector pensions and health benefits for retirees, estimating that these obligations were under-funded by at least $1 trillion. It urged drastic and immediate action to put existing pensions on more solid footing, and to lower future taxpayer obligations by curbing benefits. In state houses across the land, lawmakers are heeding the call.
But another major analysis of the movement in pensions, alarming from a different perspective, drew virtually no notice. The November 2009 study, by researchers at the Social Security Administration and the Urban Institute, modeled the consequences over the next 22 years of eliminating many defined benefit pensions. The report projected what would happen if, over the ensuing five years, all defined benefit plans in the private sector were frozen, and a third of all state and local government plans were also frozen. It then asked: what would that mean for the income of Boomers when they reach the age of 67, between now and 2032?
Remarkably, the report disappeared into a media and public policy-making void. Not a single newspaper covered the report’s projections and, according to Nexis, the news database, they have never come up in public hearings or testimony debating the future of defined pension benefits.
Drawing on more than 100,000 employee records, the report makes its forecast based on the premise that current participants in defined benefit plans would collect benefits based on their previous service, but would not accumulate additional benefits. Based on past practice, the model also assumes that employers would shift their contributions to 401(k) plans. (The assumption may or may not hold entirely true, given that the aim of cutting retirement guarantees is largely to save money.)
With 50 to 56 percent of Boomers not in line to receive defined benefit pensions — in part, a result of the abandonment of defined benefit pensions that has already occurred in the private sector — the report found that many Boomer retirees would be unaffected by the changes envisioned in the model. But among those who do receive such pensions, the changes would be substantial. The report broke its findings down by four waves of Boomers, from the eldest, born just after World War II, to the youngest, born in 1964. In each wave, there would be more losers than winners, with the repercussions for the youngest Boomers most severe: 26 percent of them would lose an average of $4,200 in retirement income, while 11 percent would see their incomes rise by an average of $2,800.
The result: a net decline in retirement income among Boomers, in 2010 dollars, of roughly $46.3 billion a year once all Boomers have retired.
Taking the Social Security Administration report, and then drawing on census data to calculate the aggregate net impact on each cohort of Boomers, it appears that the net loss would be $2.9 billion a year among the oldest Boomers, $10.4 billion a year among the group that will turn 67 starting in 2018, $17.1 billion a year for those retiring around 2023, and $17.8 billion for those retiring between 2028 and 2032.
Allowing for deaths as the population ages, Gary Burtless, an economist at the Brookings Institution who helped develop the mathematical model used in the pension study, suggested a graduated formula for calculating the accumulated impact once all Boomers have retired. The result: a net decline in retirement income among Boomers, in 2010 dollars, of roughly $46.3 billion a year once all Boomers have retired.
That scale of loss, said Rodrigue Tremblay, an economist who has written widely of the risk of “stagflation,” would weaken the larger economy.
“Because Boomers represent some 75 million consumers, any spending cut by this group will have a profound impact on the overall economy,” Tremblay said. “This could precipitate a vicious cycle of slow growth, with fewer jobs for the young.” Boomers would not only retire with less disposable income, but — anticipating a less secure retirement — would spend less in the years leading up to retirement.
“Such a shift in pension plans represents, and will represent even more so in the future, a tremendous shift of investment risk from employers to retirees, and will negatively influence the macro economy,” Tremblay said, as retirees “spend less and save more to compensate for lower incomes and for a greater expected volatility in their income flows.”
The reality is – as should have been clear for decades now – that the “owners” don’t give a fat rat’s ass about the US “macro economy”. They’ve already shorted the US and its workers in favor of higher ROI elsewhere. And our government – which is elected by “the people” to represent their interests – has long since given up even a pretense that it has any responsibilty to protect the living standards of US citizens if that conflicts with the maximization of the profits of the multi-national corporations who are their paymasters. Incomes for all but the top 1% have been stagnant for years. The transfer of all the wealth to the top 1% – combined with the Great Recession, which wiped out over a trillion of net worth in combined housing and stock portfolio losses – is why there’s no domestic demand available to lead us out of the recession. No is there any forseeable scenario under which the further decline of the US middle class and increased income inequality won’t continue. Particularly if we continue to waste $$ on the military industrial complex and wars of choice while failing to increase taxes on the only income group that has any wealth to tax.
i have been paying attention to this for a few years. beyond the facts, i have a suspicion.
they do not of course care about the workers. what has happened is that times have changed. and the well being of the owners no longer depends on high mass consumption. sufficient workers can be found to support the rich in the style to which they are accustomed. the rest of us are a “dead weight loss.”
there has a been a world wide assault on retirement for ordinary people. Social Security of course was the focus of the assault, but private pensions took the hit first, followed by public sector “privatized” pensions. and SS is being groomed for slaughter as we speak.
of course Sarkozy has already shown that he can get away with it even in France.
the argument is always “we” can’t afford it. but “we” can always afford to set aside some of our own money for retirement. the problem for working peole has always been protecting that money from inflation (as well as market losses).
SS did that very well. as did public pensions and defined benefit plans. now we are all going to be at the mercy of the financial markets, just as we are at the mercy of the labor markets.
Just another way that the benefits of “CHEAP LABOR” are coming home to roost.
Well coberly has already made the point, but for all those folks out there –particularly young ones who think that killing social security would be a good thing, just think about what that would do to the economy. Indeed, Obama’s failure to take social security off the table for the Catfood Commission has affected my consumption practices and the Comission has not yet come out with its report and I still have almost 8 years to go to full benefits–under current law. There is a lot of money being used in elections to protect the moneyed interests, but at the end of the day it is still voters who elect politicians.
Unfunded state and local pensions around $1T US.
Hell in 1984, a good Reagan year, the US DoD stopped paying military pensions from current appropriations its unfunded liability was $500B, what is it now? And the special treasuries are not funded by cash like special treasuries in SS or Medicare, they are accounting “obligations” which create the future obligations turning the appropriated obligation into a special treasury with no cash in between, and don’t decrease the annual deficit like SS receipts.
The point of capitalism is to produce a product for which the producer of said product receives greater value for that product than was required to produce that product. In effect the capitalist takes from the economy more value than is put into the economy. This is a continuous process. At some point the availability of the excess value that the capitalist seeks from the economy must be sought from under utilized sources of value. There is just so much value to go around, especially with much of an economy’s assets are beginning to shift to other economies in exchange for labor of lesser value. So the value of labor is under pressure. Given that the producers in an economy have more direct control over the assets of the economy those producers are better positioned to determine those assets are distributed and how the value of those asstes is shared. In their continuing effort to receive greater value than they produce, the capitalists will always claim that the value of your assets is certainly less than the value of theirs. Therefore, given that the value of your labor has already been degraded their are few sources remaining from which to extract yet more value. That is when the value of your unproductive years will be seen to be too great an expense for the economy to bear.
Let’s make it a little plainer: the “malefactors of great wealth” will lose no opportunity to further enrich themselves at cost to everyone else as long as they can get away with it. Their credo will always be “let them eat cake” until their heads are in the basket. Any “ism” that supports continuing the ability of the few to keep their boots on the necks of the many will do just fine.
The issue of poorly funded pension plans was addressed in the early 1960s when Studebaker went under and again in September 1972 when NBC aired the special, ‘Pensions: The Broken Promise’. Two years later, the Employee Retirement Income Security Act of 1974 (ERISA) was signed into law by President Ford. ERISA required a number of things, but it did not require private sector companies to provide pension plans or healthcare plans. Pension plans are still not required by Federal law as we speak.
There shouldn’t be a strong expectation that municipal, county, and state defined benefit pension plans will remain unchanged or survive in the future as budget confrontations continue, probably well into the future. I doubt that will be in the cards as local voters voice complaints about taxation.
I expect that some blame for major changes in pension plans rests with U.S. consumers. After all, consumers wanted cheaper prices for goods and services, and something had to give. Obviously, defined benefit plans were on the block.
I don’t understand why it took so long for the shift from defined benefit plans. Part of that blame should rest with the Congress for failing to enact earlier legislation that allowed for tax breaks on other types of pension plans and personal savings plans.
There is no future in defined benefit plans for most business operators.
The U.S. has had over two decades to prepare for the changes in benefit plans and related impacts on the economy. While this issue may be played off as another of the endless ‘we didn’t see it coming’ issues, that simply isn’t the case. The academics and government policymakers have known. No question.
Government defined benefit plans are not inherently a bad thing, but become a problem because of some combination of:
1) chronic underfunding
2) ridiculous earnings projections
3) benefits stuffing (allowing immense amounts of overtime in the last three years to jack up the three year average to provide higher benefits)
4) double dip – plans to allow a few high value school teachers and specialists to retire/rehire have become, in some states, a bonanza for school administrators, judges, etc.
Some of the blame for this has to fall on public employee union leaders. They knew this was happening but counted on two things, namely 1) they would be retired before the crap hit the fan with the members, and 2) a healthy economy would allow big enough tax increases to cover for the incompetence and corruption. Oops.
Jack: “The point of capitalism is to produce a product for which the producer of said product receives greater value for that product than was required to produce that product. In effect the capitalist takes from the economy more value than is put into the economy.”
Jack, you are assuming a zero sum game. In fact, commerce is mostly win-win. All parties benefit.
Capitalism as we know it may tend to oppression, but that is not a characteristic of capitalism. The same was true of feudalism, which it replaced. Capitalism was democratic in the sense that it replaced the aristocracy with a new and, at first, wider class of oppressors. It is still possible for people to join the oppressor class without being born to it.
Defined benefit private business pensions are inherently a gamble. The obvious alternative is a defined contribution plan. The employer does not want to set aside the contributions now, instead of investing it in the company, or paying dividends or executive salaries. The pensioners are betting that the benefits can earn more by being retained by the company than by diversified investment. That’s a bad bet.
Social security is different, with a fiat currency. The gov’t can always meet its obligations. The question is whether the economy can provide its retirees with enough goods and services for a dignified retirement without descending into poverty. There is also the question of the political will to do so. Many people are apparently content to let a significant number of old people rely upon their children and relatives to get by, or to become homeless or wards of the state.
“It is still possible for people to join the oppressor class without being born to it.”
And so too was that possible in feudal societies. If one were adept enough, or vicious enough, or exhibited great military prowess, one could be annointed by the King, Queen or what have you. This took place most often in in the aftermath of wars of conquest. This was best represented by William, the Duke of Normandy, who granted many titles to his Norman warriors after having vanguished the English and taken over their land.
Capitalism may have started out as a better alternative, but as the assets of an economy begin to spread thin those in control need to find new sources of asset value to maintain and enhance their personal positions within that economy. By the way, wasn’t it the case in feudal economies that the estate of the deceased would in large measure revert back to the lord of the realm? There was some good utility to such an estate tax even a thousand years ago. It kept the wealthy on their toes in each new generation.
I also have to wonder who these folks blame for the United Airlines pension ripoff. The CEO and managers told their employees “Tough shit, you trusted us” when Chicago Seventh Circuit Chief Bankruptcy Judge Eugene R. Wedoff let them walk away from a $3B promise.
Jack: “Has anyone blamed the creditors of private industries for the bankruptcies of their debtors lately? That’s no different from blaming the employees for fighting for their share of the asset/income pie.”
Yes, it is interesting how creditors are favored when they are rich, but not when they are workers.
i essentially agree.
it is problematic for a business that can go bankrupt to provide a guaranteed pension. but the unwillingness of the taxpayers to pay for public employee’s pensions is simple stupid greed. the state can guarantee a pension and if that’s what the workers would rather have than “money now,” there is no reason not to offer it as part of the compensation package. the trouble comes when the high end taxpayers decide that they don’t have to keep their promises to pay the pension part of the contract.
moreover there is no reason why a PERS type pension plan could not be offered to all workers. unlike Social Security it would be subject to the markets, but with the size of a nationwide investment system it could do a better job of weathering the down cycles.
so, yeah, we seen it coming, but be careful that what you see isn’t just another way for the rich to steal from the poor.
oh, yes, and in this case even the poorer taxpayers are as greedy and stupid as their rich bosses, because in the case of public employees, the poor taxpayers ARE the bosses. they can see as far as their own short term bottom line, with no concept that what goes around comes around.
yep. but it is important to keep in mind that the stupidity of government deciders is not a reason that government plans should be scrapped. i am sure we could find a way to solve these problems if we did not get hysterical and vote for our destroyers every time the newspapers tell us a story of abuse or bad planning.
oops. didn’t notice you were blaming the unions. yes the bad old unions fooling those poor government bargaining officials into signing bad contracts. why, isn’t that the way the unions destroyed poor confiding general motors?
not quite. it’s not the printing of money. SS is pay as you go. as long as there are enough workers making enough money so that a small percent of that is enough to provide a living pension to the number of retired workers, there is no “financial” problem whatsoever. there has never been a time and never will be a time when that equation fails. everything you have been told to the contrary is a Big Lie.
it’s not a question of political will as much as it is a question of stupidity. the SS payment you make is the foundation of the SS benefit you will get. you may think you are being clever cutting the pensions of the now retired. you won’t think you were so smart when you retire youself and see what the pension you left yourself will buy.
the capitalist does provide an important service and does deserve fair compensation. trouble is that he gets too much power and his compensation becomes excessive. worse, the economy depends on his mood, and if he grows fearful the economy goes to hell.
there is no reason it has to be this way. “lenders” can make a fair return on their capital. enough to keep the economy working, but not enough to support unreasonable speculation and wild cycles of boom and despair. or the gradual flow of “money” into the hands of the rich and the impoverishment of the many below a decent standard of living.
i know of no way to accomplish this but by means of what we call “government.” unfortunately there are always forces of greed (normal) and greed (criminal) that defeat government either by direct attack or by sabotage from within, so there is no perfect solution. but the current wave of anti government insanity does not bode well for us.
The union leaders were only doing the job the members elected them to get the most for their members. Its a 5th level the dumb politicans who gave in. Ranging from allowing collective bargining on up (it used to not be allowed). They gave in to buy votes.
the unions and the gov bargaining officials made a bargain based on reasonable expectations. that good economy allowing tax increses that rusty thinks was fraudulent was exactly the same as good economy allowing divident increases… the whole idea of “finance” is that investement… in either private sector or government creates enough growth to at least beat inflation.
your idea that workers esp gov workers should not be allowed collective bargaining is just an assertion that you prefer that workers accept conditions of slavery.
I believe union leaders knew the members were sitting on a long term time bomb, and decided silence was the best way to keep a job until their own retirement.
I’m a former union member (Laborers) and my union ended up in receivership for corruption and because some locals were “mobbed up.”
Public employee union leaders were either in denail or were actively corrupt, if we can define corrupt as witholding information from the membership.
Defined pension plans were not a gamble in the way they were initially set up. Pension funds were initially invested in the lowest of return and most secure funds available at the time. Those investments which were not so liable to the moods and swings of the market place. With the rise of returns on Wall Street and changes in law, the investments were placed in riskier and higher return investments. Why? Because pension investors could cut back on the amounts placed into retirement funds by companies.
What has also changed is potential for jobs in the market place as opposed to the public sector. The whine used to be we get higher salaries in the private sector because we take a higher risk as opposed to the lower salaries in the public sector which was supplimented by better benefits. Even unions went that route when GM negotiated better benefits for UAW workers in place of higher wages. Since neither public or private pension funds have placed adequate funds into their pensions due to the flawed expectation of “forever” higher returns, the whine has reached a cresendo amongst taxpayers (cutting their own throats) and public companies. “The big bad unions and public Labor are the cause of these issue!” Yea right . . .
Volcker abandoned the Fed role of stimulating both balanced employment growth and a growing economy. Greenspan just carried it along a couple of extra decades (there abouts). We have an economy more interested in capital appreciation rather than product made with the input of Labor. If we want to change the paradign from capital appreciation to Labor Growth than make it more profitable to make things with labor input rather than 3-4% profit (which would be laughable on Wall Street).
With growth in Labor comes more Tax Revenue something which is not realized to the same degree on Wall Street.
Knight against Pawn. Always been that way, slaughtering the peasants in a medieval manner. Not exactly King Arthur’s war.