Relevant and even prescient commentary on news, politics and the economy.

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.

Double Double — The Absolute Simplest Look at Wages and Pensions

By Noni Mausa

Double Double —  The Absolute Simplest Look at Wages and Pensions  
One of the best loved Canadian drinks is the famed Double-Double, a
big coffee with two creams and two sugars from the Tim Horton’s coffee
shop chain.  Millions of double-doubles warm grateful workers hands
and wake up their brains on the way to work each morning.  Want to
raise a cheer from a Canadian crowd?  Just toast the double-double.
But Canadian workers need more than coffee to see them through.  They
need wages and pensions.  How big do they need to be?  In a time of
drooping wages and wavering pensions, we need to know.  Let’s approach
the wages, retirement and pension discussion by simplifying it as much
as possible.

Let’s assume that the work life extends from age 20 to 60.  The work
that people do before and after those ages is balanced by people who
are not able to work at all, for whatever reason.  We’re talking
averages here, spread across 33 million Canadians.
So for half your life you work, and for half (birth to 20, and 60 to
80) you don’t.

As you can see, on average every person working must earn double what
it costs him to live.  That extra money pays for the child the worker
is before he goes to work, and the senior he is afterwards.  For the
population of Canada to stay level, each Canadian must raise one
child, and he must support himself once he retires.  What it costs to
do that is the “lifetime wage.”

How can we calculate that?

Well, to start we can set a lower limit.  Each individual must earn or
somehow acquire no less than what he needs to stay alive.  A rough
guess for that number is around $800/month.  That’s in the range of
what single welfare recipients receive.  I have no idea how they live
on that, but thousands of them do.

Full time minimum wage is roughly double that, about $1600/month
before taxes, about $1350 after. (Manitoba minimum wage currently
$10/hour.)   This is still not enough to be a lifetime wage.  Also,
most minimum wage jobs are not full time or continuous employment, so
the effective income from minimum wage employment is closer to welfare

Canadians are being exhorted to live responsibly, only bearing
children if they can afford to raise them, saving for their education
and also for the their own retirement.  The smallest sufficient income
to accomplish this seems to be about double current minimum wages, or
about $20/hour in Manitoba, $35,000 to $45,000 per year averaged over
a working life.

Business won’t pay such wages if they aren’t forced to.  But somebody
must.  Why?  Not for moral reasons, we’re not dealing with morality
here, just practicality.  Whatever way you try to jig the numbers,
half the population depends on the other half just to live.  In a
nation, these life-stages overlap so the burden levels out over time,
but effectively one half is always supporting the other.
Paying out to each worker less than double the bare cost of living in
a closed system will result in collapse or shrinkage of the system.
But suppose you don’t treat your nation as a closed system?  Maybe you
can outsource some of the cost at the two “nonproductive” ends of the
lifespan.  If you want to cut your costs to the bone so your workers
can be paid only their immediate costs of living, you have to tackle
the problem at the child end and the senior end.

At the child end, you can outsource the production of new workers to
other, poorer countries – i.e. depend on immigration for population
growth.  That’s one thing Canada is doing.

StatsCan tells us “In 2006, international migration accounted for
two-thirds of Canadian population growth… in the mid-1990s, a reversal
occurred: the migratory component became the main engine of Canadian
growth, particularly because of low fertility and the aging of the
population… Around 2030, deaths are expected to start outnumbering
births. From that point forward, immigration would be the only growth
factor for the Canadian population…”

In Canada in 2010, of the 280,000 immigrants, 60% were “economic”
(adults ready to work.)  Another 28% were classed as “family.” The
hard lifting of childbirth and childrearing and child mortality was
done by other countries with no cost to Canada. In fact, immigrants
pay a small but significant landing fee, $500 to $1000 depending on
entry class.   We further maximized the value of the outsourced new
citizens by selecting capable applicants free of serious medical

At the senior end of the lifespan, you can cut elder supports as much
as possible.  This is harder to do because elders are aware of the
process and often have younger relatives to advocate for them, but
though it’s going slowly, it is a work in progress.
A maximally efficient economy in a non-closed system would be one
where you import all your workers, keep them as long as you need them,
and repatriate them afterwards.  But that is not a nation.  Nations
grow their own people, they don’t rent them.

Canada-the-nation may not need to support home-grown population
growth, because we are a nation that encourages many cultures.   The
fact that our immigration policy skims good citizens from poorer
nations doesn’t bother anyone except, I suppose, the poorer nations.
But Canada-the-nation must support seniors.  Business won’t pay enough
in wages for workers to save money for retirement, and for many people
saving or investing isn’t a reliable strategy.  Private business
pensions are becoming quaint luxuries (unless you’re in the government
or you’re a CEO.)

We pride ourselves on being a secure, stable nation.  The chaotic,
competitive and short term business community won’t and probably can’t
supply that stability; only a government has the ability over
generations to ensure stability.

A centralized, national fixed-benefit pension, solid and boring and
guaranteed by the government, is the only practical approach for most
Canadians.  Additional savings are fine, for people who can afford
them, but millions cannot.  Cutting and privatizing senior supports
(Canadian Pension Plan, Old Age Security, and for the very poorest,
the Guaranteed Income Supplement) is the opposite of what
Canada-the-nation needs to be doing.
(This was written in the Canadian context, where our right-wing prime
minister is in the fast lane to transform Canada to conform more
closely to US antisocial policy.)

State pension funds, funding, and options

Felix Salmon writes on the question of appropriate pension plans for state systems (emphasis on teacher retirement systems) in Reuters…however, the comment section offers a superb range of thoughts by non-experts on the matter of state pensions as well.

1. Is a 7-8% return reasonable to expect (smoothed over time) in the future?
2. If a different system is used from here on out? what are appropriate transitions?…Felix compares to 401k plans as being totally inadequate but there are other proposals.
3. What about the question of buyouts?
4. Interestingly several of the commenters were using the MA teachers retirement system as an example, which makes it useful for the AB post here.
5. What are the incentives inherent in the current system? (ie. most value is actually ‘accrued’ in the last five (?10) years of acummulated contribution for a pensioner? Not unlike any plan based on yearly contributions over decades.
6. The meme of baby boomers/versus younger contributors was brought forward but without numbers…this also could be subsumed under #2 and #3.
7. What is ‘underfunding’ in this context?

MA Teacher Retirement System (and WI a bit)

H35 provides for these amendments to the MA teachers retirement system by Gov. Duval Patrick:

An Act Providing for Additional Pension Reform and Benefits Modernization
This legislation filed by Governor Patrick proposes further pension reforms to achieve the following objectives:

  • Update the system to reflect demographic changes, such as the fact that people are living and working longer;
  • Eliminate abuses, through anti-spiking measures, extending the number of years used to calculate pension benefits, and increasing scrutiny of legislation benefiting individual employees; and,
  • Address fairness issues, through updating purchase of creditable service and buyback provisions, eliminating early retirement incentives, pro-rating benefits based on employment history, eliminating the right to receive a pension while receiving compensation for service in an elected position, and allowing retirees who married a person of the same sex within the first year after it became legal to change their retirement option in order to provide a benefit to their spouse.

Most of the provisions in the bill would apply to new members of the retirement system.

H1 (section 37):Governor Patrick recommends a 3% cost of living adjustment (COLA) for retired members of the state and teachers’ retirement system as part of his FY2012 state budget. The COLA will be applied to the first $12,000 of the retirement benefit, for a maximum increase of $360 per year or $30 per month.

From the annual report of the Mass. Teachers Retirment System finacial report: MTRS statement demonstrates the heavy use of equity and other non-fixed income assets to generate returns, which make for volatility.


New teacher’s pay in approximately 10% of salary.

I believe in 2008 the MTRS reported a 29% drop in ‘value’ of its assets:
$ 25,318,713,892 2007

$ 17,177,957,406 2008

$ 19,311,587,953 2009

$21,262,462,000 2010

Via Andrew Leonard at Salon comes this quote from the CEPR and Dean Baker

On July 1, 2010, the S&P 500 was already more than 11 percent higher than its July 1, 2009 level (from 987 on July 1, 2009 to 1101 on July 1, 2010). Most funds use the stock market’s closing value at the end of the fiscal year as the basis for determining the valuation of their assets. Of course they also use an average, so the valuation would not simply reflect the market value at the end of the fiscal year. However, with the market having already risen substantially from its low (the S&P 500 had risen another 19 percent to 1293 by January 10, 2011), it is likely that pension valuations based on current and future market levels will show smaller shortfalls. In other words, a substantial portion of the shortfalls that were reported based on 2009 valuations have likely already been eliminated by the rise in the market.

MA Massachusetts Teachers 0.12% (unfunded liabilities as a per cent of expected revenues) 1/1/2010

WI Wisconsin Retirement 0.00% (unfunded liabilities as a percent of expected revenues) 12/31/2009

Of course projected revenues can be argued at another time.

Economics and Bosses

Peter Dorman at Econospeak, who is smarter and nicer than I am,* boils down the question:

[D]o you believe that managers normally make the right decisions over how to run organizations?

If you believe that premise, please explain:

  1. Why all those great managers of the late 1940s through the mid-1970s ran defined benefit contribution plans, but their successors—who supposedly are more capable—are only capable of offering defined contribution?
  2. That “underfunded pension benefits” are evil, but “overunded” pensions led to the LBO (now “Private Equity”) movement of the 1980s.
  3. That, in the 1980s, GM being $1B underfunded caused Congress to pass a bill allowing pensions to become fully funded over 20 years—and that most of those targets were missed?

If bosses are so good at managing “ongoing concerns,” why do they take their payments upfront? What does—and should—this tell us about discount rates?

*This is a fairly low standard, outside of people who work in finance.