Pensions and retirements…
The New York Times points us to private industry under funding for your retirement:
AFTER years of poor investment returns, the pension funds of the United States’ largest companies are further behind than they have ever been.
The companies in the Standard & Poor’s 500 collectively reported that at the end of their most recent fiscal years, their pension plans had obligations of $1.68 trillion and assets of just $1.32 trillion. The difference of $355 billion was the largest ever, S.& P. said in a report.
Of the 500 companies, 338 have defined-benefit pension plans, and only 18 are fully funded. Seven companies reported that their plans were underfunded by more than $10 billion, with the largest negative figure, $21.6 billion, reported by General Electric.
The other companies with more than $10 billion in underfunding were AT&T, Boeing, Exxon Mobil, Ford Motor, I.B.M. and Lockheed Martin. JPMorgan Chase had the largest amount of overfunding, $1.6 billion.
The main cause of the underfunding at many companies does not appear to be a failure to make contributions to the plans. Instead, it reflects the fact that investment markets have not performed well for a sustained period.
A few points on this. First, state and local municipal pensions are in far worse shape when measured apples to apples https://www.cbo.gov/publication/22042 :
“According to the Public Fund Survey of 126 state and local pension plans, which account for about 85 percent of pension assets and participants in state and local pension plans in the United States, those plans held roughly $2.6 trillion in financial assets in 2009 but had about $3.3 trillion in liabilities for future pension payments. Thus, those assets covered less than 80 percent of liabilities, and unfunded liabilities (the amount by which liabilities exceed assets) amounted to roughly $0.7 trillion. That share of liabilities covered by assets in 2009 was the lowest percentage in the past 20 years. By comparison, the amount of state and local governments’ debt that was outstanding at the end of 2009 was $2.4 trillion.
That estimate of unfunded liabilities is calculated on the basis of actuarial guidelines currently followed by state and local governments.
“Another approach for measuring pension assets and liabilities, which more fully accounts for the costs that pension obligations pose for taxpayers, yields a much larger estimate of unfunded liabilities for those plans in 2009—between $2 trillion and $3 trillion.”
It’s the latter approach that private firms are subject to – FASB accounting as opposed to GASB accounting. There are numerous articles about how the switch to GAAP accounting will impair the appearance of funding status of public pensions.
Second, more monkeying around from our elected officials in gaming the tax revenue system – from the NYT article:
“Next year, pension funds will appear to be better funded, even if they are not. Congress voted this year to allow funds to discount their obligations using a 15-year average of bond yields, meaning they can use a higher rate and so report lower obligations.
. . .
“Because such contributions are tax-deductible, lower deductions may mean higher tax bills, which would increase government revenue, at least for a few years.”
Related, back in the late-90’s early-2000’s, government’s thirst for tax revenues prohibited companies from contributing to their pension plans because they were deemed to be over-funded at the time. Contributions to pension plans are a tax-deductible business expense (like any form of employee compensation).
This is the future for Social Security if the republicans get their way.
Note that the question is what is the 80% funding level of the companies cited. Many companies stop at 80% since there and above lump sums are permitted.
These are weasel words:
“The main cause of the underfunding at many companies does not appear to be a failure to make contributions to the plans. Instead, it reflects the fact that investment markets have not performed well for a sustained period.”
Hmm, sorry. The same people who made the decision about the level of contributions are the folk who signed off on those expected returns on investment. Maybe they were acting in good faith, or maybe they were vulture boards deliberately hollowing out the pension funds of the rank and file even as they awarded themselves huge bonuses based on short term performance. And almost certainly there were elements of both. But per the author of this piece those poor fortune 500 boards are composed of simple naifs buffeted about by economic winds totally unpredictable to them.
Even as they pay lip service to EMH and the belief that their compensation is simply due to their elevated skill levels in reading and for that matter molding the economy. Not only are they socializing financial losses as they privatize gains they are doing the same thing for ‘responsibility’.
“Hey I don’t have responsibilities for anything the company does. I draw a six figure compensation plus profits as sole shareholder and have fancy business cards saying “Chairman of the Board, President and CEO” but gee whilakers who knew that assuming 8.5% real returns on investment wasn’t a prudential assumption when it came to funding pension plans for everyone but me? Oh and sorry for the bankruptcy of YOUR company. And the offshoring of the jobs from YOURS. Nothing to do with me of course.”
(Mitt being just an exemplar of this and not an exclusive actor)
Basically, the private sector can’t handle retirement. I was just reading an article on how most Americans have underfunded their 401ks, largely due to a lack of money. It’s hard to save $14 an hour, 25-35 hours a week. We know that corporations underfund their pensions, except for top executives, for a variety of reasons.
In fact, the only working pension system is Social Security. Yet another private sector failure.