THE ENTERPRISE
It is Indy 500 weekend and the starting lineup portrays an interesting picture of the US auto producers' decline. Of the 33 cars, only 5 are powered by US auto-makers' racing engines (Chevrolet). The remaining 28 are equally split between (want to guess?)--Toyota and Honda! How the times change. The largest part of the decline in the US auto industry is due to its inability (unwillingness) to produce the kind of cars that excite American drivers--myself included. As their fortunes decline, they must cut back on non-essential efforts like building racing engines--which is a form of "applied R & D"--which leads to less innovative engines in future consumer offerings.
Another (large) part of the US auto industry's decline is due to the insane, costly labor contracts negotiated during days when the foreign competition was minimal, and avoiding conflicts (strikes) at all costs was the norm. A big part of those legacy costs are to cover the huge number of "retirees" as more and more jobs disappear from GM & Ford. That is my segue to this week's topics--retiree benefits, but especially pensions.
Pensions--a legacy liability
The pension mess is just the beginning. Can you say "Pee Bee Gee Cee" 3 times fast? That's not a tongue-twister, it is the initials of the Pension Benefit Guaranty Corporation, a government funded “insurance” plan to protect retirees pensions, even if the companies that granted them are unable to fund them or cease to exist. You've probably read by now that US private sector pension funds are $450 Billion under funded, and while many officials are sweating over the $23 Billion that the PBGC is under funded, they might want to calculate what that 20:1 ratio of trouble just over the horizon means.
If that isn't scary enough for you, there are huge under funded plans in the public sector too. Many of these future liabilities remain not even fully quantified. Who has to pay these benefits, if the employees who “earned” them are to get them? That's right, current wage earners--taxpayers! Is a broad-based pension system collapse coming? No, at least not anytime soon. Why? Because rising stock markets and interest rates will boost pension fund returns, eliminating some of the under-funding, and not all of the under funded plans will collapse at once.
In addition, Kiplinger Forecasts predicts (and I concur) that Congress will shore up the Pension Benefit Guaranty Corporation to ensure the agency has the resources to absorb failed pension plans (near term, partially using taxes to do so). Annual fees for employers will increase, from $19 per worker to $30, as will surcharges on badly under-funded plans. There will be tighter rules and higher/faster payments for firms that fall behind. Don't be surprised if legislators forbid firms from promising better pension benefits to employees in lieu of immediate increases in compensation. Now they "close the barn door"--whoops, it's 30-40 years too late.
And we aren't alone; and there's bigger ones ahead
The fact that Europe has a bigger problem than the US is small consolation when you realize that the retiree health care issue is much larger than the pension problem. The outcome of these issues is that either retired people get less or every taxpayer pays more and here is no "free lunch" in this one.
This situation sort of reminds me of the Jurassic Park movies. Just as the heroes were evading a fierce dinosaur, a larger, fiercer one appeared. The larger one in this situation is looming retiree health care obligations. But back to the pension problems. Kiplinger Forecasts also predicts that Congress will back a permanent plan based on average corporate bond rates, instead of setting formulas each year or two, and offer tax benefits for making extra contributions in good years to build surpluses as a hedge against market volatility.
But, that won't stop the retreat from defined-benefit plans. These plans are leftovers from a prior era, started in the 19th century to protect the families of soldiers who died in battle, then extended to the soldiers, then to workers, and finally, to almost everybody. But that is history. Now, over 80,000 businesses, mostly small, have already dropped defined benefit plans--they have just become too costly. 30,000 companies still offer them, and most are large ones--75% of the Fortune 500. As a result, the number of participants, counting retirees, has continued to increase over the past decade.
Pensions won't go away--but...
Most employers that still have plans won't abandon them entirely, especially where they are part of Union contracts--except where companies are in bankruptcy and hand them off to PBGC. Many will continue to take steps to slow growth and limit liabilities. Freeze the benefits accruing for current employees to contain costs and offer new hires only 401(k) plans with company contributions. Or convert to defined contribution or cash-balance plans, particularly after some legal questions are resolved.
Bottom line: Companies are still fighting the "smaller dinosaur"--defined benefit pension plans. Our government has its own "dinosaur" to deal with--Social Security. Meanwhile, just over the horizon there is an even bigger dinosaur lurking--health care costs for retirees, for everyone else and of course, Medicare and Medicaid.
Talking about it won't fix it...
Many columnists are writing about this, so I won't--at least not here and now. I've seen at least one new book on this problem that is worth reading--CONSUMER DRIVEN HEALTH CARE by Roger Blackwell (a Marketing Ph. D.) and Thomas Williams (an M.D.). In it, they define and "deal with" a large part of the problem and propose some good solutions. But much, much more must be done--or else someone needs to come up with some new ideas for killing off these BIG old dinosaurs--and not getting killed in the process.
That's a huge topic, perhaps for future editions of THE ENTERPRISE. For now, recognize the size of the problem, do what you can to advance the good ideas and keep your hand firmly on your wallet, because the only place the additional money to fund these legacies can come from is (directly or indirectly) the taxes on those who earn it. That's you--and me! OUCH.
Best, John
PS: Although the economic news is better this week/month, I still think the economy is plateaued, waiting for something to nudge it one way or the other. "Keep your powder dry."
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