Wednesday, April 10, 2013

Collapsing Pensions

What a difference forty years makes.

When I was a Trotskyist I found articles about pensions and benefits boring. Who cares about all that stuff? I thought to my twenty-year-old self. Now I care, though I'm still afraid the topic will put my younger readers to sleep.

This post is based on three recent articles. The first, from The Militant by Alyson Kennedy, is an account of a demonstration in Charleston, WV, by United Mine Workers (UMWA) retirees surviving on a pension from the bankrupt Patriot Coal Co. The second, from Socialist Viewpoint, is by the irrepressible Gregg Shotwell and concerns Michigan's new Right To Work For Less law. And finally, is an article in today's Wall Street Journal by Andy Kessler on the Pension Rate-Of-Return Fantasy.

Frankly, the retired mine workers are mostly screwed--either them or the taxpayers. Kennedy does a pretty good job in laying out the problems:
In 2007 Peabody Energy spun off most of its union mines to form Patriot Coal Corp. A year later Patriot bought Magnum Coal Co., an Arch Coal spinoff. More than 90 percent of “Patriot” retirees today never actually worked for Patriot.
Of course Patriot's first obligation is to shareholders, and not to retirees. So naturally the miners get the short end of the stick. But it gets worse:
Both the number of coal miners and the proportion who are members of the UMWA has declined dramatically over recent decades. Only about one-quarter of working miners are members of the UMWA today, down from 43 percent in 1994. Today there are about 82,000 active miners in the U.S., down from some 89,000 in January of last year and from 175,000 30 years ago.
Kennedy says that Patriot is responsible for 10,000 UMWA retirees with 13,000 dependents, many of whom suffer from black lung-related illnesses. She doesn't say that Patriot Coal Co. today employs a grand total of 4,100 people, only 1,600 of whom are in the UMWA. So Patriot is responsible for six times as many retirees as current employees--there is no way in Hades that this is going to end well.

The only bright note in Kennedy's article is

Sen. Jay Rockefeller, in a videotaped message, promised to press for the Coalfield Accountability and Retired Employee Act, which would transfer money from the Abandoned Mine Lands fund, a government fund for restoration of mined land based on taxing coal production, to the UMWA 1974 Pension Plan.
The CARE Act is supposed to prop up the union’s pension plan — which faces insolvency as a result of declining unionization and funds lost through speculative investments — as well as cover retirees who lose benefits when coal bosses file for bankruptcy and reduce taxes on employer payments to benefit plans.
Ah yes--those funds lost through "speculative investments," as if Patriot had taken the pension funds to Las Vegas for vacation. And that brings us to Kessler's article:
In June of 2012, Calpers lowered the expected rate of return on its portfolio to 7.5% from 7.75%. Mr. Milligan suggested 7.25%. Calpers had last dropped the rate in 2004, from 8.25%. But even the 7.5% return is fiction. Wall Street would laugh if the matter weren't so serious.
The right number is probably 3%.
For the past 30 years the rate of return on investments has averaged about 8% annually. Pension plans have invested with that number in mind--at that rate your money doubles in about eight years. But since 2008 the rate of return is only about 3%, and doubling your money takes more than 20 years. Naturally all kinds of pension plans are now underfunded.

The common solution for this touted by the "bourgeois media" (Trotsky-talk for non-Communist newspapers) is a defined contribution plan rather than a defined benefit plan. This puts pension fund risk on the backs of the employee rather than the company, and unions tend to oppose it accordingly. After all, if the rate of return declines to 3%, that's going to affect the defined contribution plan just as much.

But I will argue that on average, employees will be better off with a defined contribution plan. There are three reasons:

  1. Employees will pay more attention to their investments than some hired pension manager will. They are less likely to follow the herd. In some cases they'll make big mistakes and lose a lot of money, but in most cases they'll come out ahead. Professional managers can lose their jobs by not following the herd, even if the know the herd is wrong. They won't buck the trend.
  2. My defined contribution pension plan is mostly invested in TIAA-CREF (a fund for teachers). TIAA-CREF's fiduciary responsibility is to its investors. This is different from Patriot Coal, who a) has a primary fiduciary responsibility to shareholders, and b) doesn't really know how to manage a pension plan to begin with. They're going to screw it up.
  3. Defined benefit plans give everybody an incentive to lie. This is most evident for the public employee unions. The union bigwigs want to brag about their bargaining chops and will negotiate the biggest pension deal they can, even if the math makes it totally impossible. And elected politicians are always generous with taxpayers money, especially since the taxpayers won't get the bill until twenty years later. Thus both the unions and the politicians have every reason to make promises that can't possibly be kept. To a lesser extent, that's true in negotiations between the UMWA and Peabody Coal. Whoever did the negotiation for the company is long since retired (or deceased) and completely out of the loop. The workers are left out to dry. Indeed, Peabody Coal doesn't even exist anymore.
The promises in defined benefit plans are not worth the paper they're printed on. Especially in the public sector, a large number of plans are simply going to default. It looks to me like the UMWA pensions are headed in the same direction. Think Cyprus, folks.

In a slightly different vein, Mr. Shotwell writes a totally depressing article about what he calls the Right To Work For Less law in Michigan. Its real moniker is the Right To Work law, but Mr. Shotwell's addendum is accurate. Wages will go down. But wages will go down anyway. The union scale is just unaffordable, and those jobs will be either out-sourced or automated or both. 

I think Mr. Shotwell pretty much throws in the towel in this article. His purpose is to justify paying union dues in a Right-to-Work state. He can't really give a good reason. The best he comes up with is this:
A union is forged in trust and camaraderie. If a union stands for anything other than fellowship between workers, it’s probably a front for a commercial enterprise.
That's just it. All a union can provide these days is trust and camaraderie. That's something, but it won't pay the bills.

Further Reading

No comments:

Post a Comment