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1/ While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis (Roger Lowenstein, 2008)
Thread summary of the book with page references
https://www.amazon.com/While-America-Aged-Bankrupted-Financial/dp/1594201676/
Thread summary of the book with page references
https://www.amazon.com/While-America-Aged-Bankrupted-Financial/dp/1594201676/
Pennsylvania RR's pension expense swelled 34-fold from 1900 to 1931. When the industry declined due to competition from trucking, there were fewer workers to pay into the system. Unlike wages, pensions couldn't be cut, leading ultimately to a Congressional bailout. (p. 17)
Ironically, GM's pension problem was due partly to its record profits in the 1950's and the large dividends paid to shareholders. Refusing a union demand, even an unreasonable one, ran the risk of a strike that would make it harder to return cash to shareholders. (p. 27)
The automakers' success continued into the 1960s. With such a long run of success, the companies and felt invincible and had the money to give unions what they wanted.
It was easier to defer payments to the future through pensions and benefits than to raise wages. (pp. 31-32)
It was easier to defer payments to the future through pensions and benefits than to raise wages. (pp. 31-32)
Granting ever-richer benefits implicitly relied on GM's growth (and ability to pay "later") continuing indefinitely into the future.
In the 1960s, this didn't feel like a problem: profit margins rarely "feel" cyclical at a peak. (p. 33)
In the 1960s, this didn't feel like a problem: profit margins rarely "feel" cyclical at a peak. (p. 33)
In 1964, GM boosted retirees' health care benefits from 50% to 100% of costs. "In a pen stroke, the company thus committed to pay for procedures and drugs whose range would be limited in the future only by the (unforeseeable) powers of medical science." (p. 33)
In the late 1960s, the usual problems with high-growth companies began to asset themselves: government efforts to break up monopolies and new competition from foreign car manufacturers. Despite these developments, GM's management continued to increase pension benefits. (p. 35)
GM's attempt to negotiate by allowing a nine-week strike was unsuccessful: the company caved. Instead of getting workers to pay part of their future medical costs, GM actually ended up improving medical benefits and further raising the pension. (p. 37)
Tech companies (IBM, HP) refused to offer pensions to their new employees, and newer companies (Silicon Valley, Wal-Mart) were able to keep their benefit costs lower, though not at zero. The firms with unionized workers and legacy benefits bore the bulk of the pain. (p. 39)
Unions didn't necessarily protect their workers in this area. Some lobbied against reform, as they knew they could negotiate for larger benefits if companies were not required to show they had the financial strengths to pay out in the future. (p. 43)
"Pensions were ultimately 'paid' for by car buyers. Consumers now had a choice: they could buy cars with pensions from GM, Ford, and Chrysler - or cars without them from Toyota."
Pension benefits were a future cost, a way for troubled companies to defer liabilities. (p. 46)
Pension benefits were a future cost, a way for troubled companies to defer liabilities. (p. 46)
In theory, pensions could be treated as a predictable cost. In practice, unions regularly bargained for and received benefit increases for both future retirees and current retirees. A GM employee who retired in 1950 saw his after-inflation pension triple by 1980. (p. 48)
"Under the union's cushy plan, workers were indifferent to the level of medical spending (fostering random and unnecessarily costly treatment patterns). Rates of certain elective surgeries were dramatically higher in some regions, implying excessive rates of spending." (p. 50)
"Pouring its funds into pensions, GM was late to invest in hybrid vehicles - one of its many forgone opportunities. In fact, GM invested so much in its pension fund in the mid 1990s that, with the same money, it could have acquired half of Toyota Motor Corp." (p. 60)
2005: "GM's market value was down to a paltry $15 billion, compared with an absurd $195 billion it had pledged to retirees. The scale of its legacy obligations totally overwhelmed its car business." (p. 74)
2006: "Most of GM's employees were union members, and their average compensation, including benefits, equaled an astonishing $81/hour. The only sure way to reduce that figure would be bankruptcy." (p. 78)
As for public pensions, the problems were even worse. The decision-making was heavily influenced by the desire to win votes, and the costs were borne not by shareholders or consumers, but by taxpayers who had no choice in the matter. (p. 85)
2005: "Most of the people riding the trains could not hope to retire after twenty-five years, nor did they earn as much as the average transit worker, which, including everyone from cleaners to train operators, was $58,000 a year." (p. 86)
The public paid for these costs in the form of higher fares, deferred subway expansion projects, fewer bus routes and token booths, and less late-night service.
Negotiation was difficult, as a strike would knock out the commute for 4.5 million subway riders. (p. 86)
Negotiation was difficult, as a strike would knock out the commute for 4.5 million subway riders. (p. 86)
Legislators didn't have to know/care about the true cost of benefits for cops, teachers, etc. "Unlike corporations, legislatures were not subject to even rudimentary controls over pension funding and could grant increases without worrying about who would pay for them." (p. 101)
"So great was labor's clout in Albany that each state senator/assemblyman received each morning a specially tailored version of the legislative calendar on which, beside each bill, was bluntly stamped, "THIS BILL APPROVED (OR DISAPPROVED) BY THE NEW YORK STATE AFL-CIO." (p. 101)
"Unions bargained for numerous work restrictions (and thus, inefficiencies). For example, the TWU secured a ban on part-time work, meaning that bus drivers would be paid for long stretches of idle time between rush hours. 'Public servants' had beciome an entitled class." (p. 106)
"Government agencies tended to succumb because they were monopolies. New Yorkers could not shop elsewhere for subway service or police protection. No matter how much the employees earned, and no matter what their services cost, the citizens were captive customers." (p. 106)
Fearing a repeat strike, "transit agreed to change the definition of 'final salary'
upon which the pension was calculated from the average over 5 years to the last year's salary alone - including overtime. This led to significant abuse and heroic amounts of overtime." (p. 107)
upon which the pension was calculated from the average over 5 years to the last year's salary alone - including overtime. This led to significant abuse and heroic amounts of overtime." (p. 107)
The unions competed with each other for better and better settlements. As long as the payments would have to be made in the future, after current leaders would no longer be in office, unions tended to get what they wanted. (p. 107)
Then there was the variable pension supplement. When the city ran out of money, firefighters proposed that the pension fund be invested in stocks instead of the bonds and that surplus profits could be distributed to retirees at the end of each year.
This gave the retirees free
This gave the retirees free
options on the stock market and made the pension funds short these options.
The city would have to pay retirees if stocks went up, bore the risk if stocks went down, and was paid nothing to bear that risk, which was layered on top of the original pension obligations. (p. 108)
The city would have to pay retirees if stocks went up, bore the risk if stocks went down, and was paid nothing to bear that risk, which was layered on top of the original pension obligations. (p. 108)
"By the end of the 1960s, including Social Security (to which the city contributed), municipal employees earned *more* in retirement. A transit worker could retire on 120% of his final salary; a teacher, on 130%. Such rich pensions induced a wave of early retirements." (p. 109)
Due to overtime abuse, an additional $76 paid in overtime in an employee's final year would lead to an increase in lifetime pension benefits of $1,141. Increasing obligations led to severely underfunded pension funds. To compensate, New York city services were reduced. (p. 109)
"By the early '70s, New York was hemorrhaging private-sector jobs and losing its middle-class core to the suburbs, especially out of state, where taxes were lower. Just as car buyers were defecting from GM, "consumers" of government services were abandoning New York." (p. 110)
"New York had created a virtual welfare state - from subsidized transit fares to free tuition for 200,000 college students to its network of municipal hospitals. It was unsustainable. NYC used pension underfunding as one method of balancing its operating budget." (p. 114)
"When that no longer sufficed, the city began to patch its budget with short-term loans. Then, in 1975, lenders stopped the game, and the city ran out of people and institutions to borrow from." In September 1975, New York ran out of money to pay its employees. (p. 114)
The game repeated itself in the bull market of the 1990's. As stocks rose to stratospheric levels, underfunded retirement systems found that their problems suddenly disappeared.
Extrapolating gains into the future, government employees were able to extract greater benefits
Extrapolating gains into the future, government employees were able to extract greater benefits
because the funding appeared to be there. At the same time, some states began to contribute less to their retirement funds. All of this was premised on the idea that the stock market would not only retain its recent gains but also to continue rising. (pp. 125-6)
"The market had risen at an unprecendented rate, and stocks now traded at a sky-high multiple of earnings - with the exception of many of the newly minted dot-com stocks, which had no earnings at all. Organized labor supported the move to reduce contributions..."
"and demanded that they also be spared from contributing. This argument was deeply flawed. The principle of a defined benefit is that the employee promises a stated pension and assumes the full risk of paying it. The very reason such plans exist is the relieve the employee of..."
"any responsibility for what happens in the market, or with other contingent factors (e.g. life expectancy) that would affect the plan's cost. Since the employer assumes the full downside risk, it should also reap the savings." Again, unions wanted free call options. (pp. 127-8)
"In March 2000, the bull market finally snapped. In the subsequent three months, investors furiously unloaded tech stocks. By the time the legislature acted on pensions, shares in Amazon had plunged from 107 to 34 and the tech-laden Nasdaq index had tumbled 20%." (p. 131)
San Diego, 1980: More free call options...
"In any year in which the system earned more than 8% on its investments, half of the surplus would be distributed to pensioners. This was predicated on a seriously flawed actuarial premise. As in the biblical tale of Joseph and the
"In any year in which the system earned more than 8% on its investments, half of the surplus would be distributed to pensioners. This was predicated on a seriously flawed actuarial premise. As in the biblical tale of Joseph and the
Pharaoh's dream, bountiful harvests should be stored for the inevitable years of lean, not consumed when the harvest is in. But by the time the lean years arrived, Wilson would be long gone from San Diego." (pp. 159-60)
1990s: "With the stock market continuing to boom, the city was under pressure to raise pension benefits again. Legislators are naturally accustomed to making short-term accomodations; a tax may be levied and then, when circumstances change, rescinded. Police forces can expand and
contract with the level of crime. The trouble with hiking pensions is that the benefits are immune to cyclical fluctuations; they never go away.
"But as in New York State, politicians in California regarded the bull market as an excuse not only to raise benefits but to reduce
"But as in New York State, politicians in California regarded the bull market as an excuse not only to raise benefits but to reduce
contributions....
"By the spring of 2000, the height of the dot-com bubble, considerations of prudence were demonstrably passe. In the first few months of 2000, a newly minted tech stock was *doubling* on its first day of trading every other day, a speculative orgy that seemed
"By the spring of 2000, the height of the dot-com bubble, considerations of prudence were demonstrably passe. In the first few months of 2000, a newly minted tech stock was *doubling* on its first day of trading every other day, a speculative orgy that seemed
"to suggest, especially in California, that any public commitment could be underwritten by some future rise in the market. Moreover, 2000 was a local election year. The unions were pushing for higher pensions." (pp. 171-2)
Firemen got better benefits: 90% pension at 50 rather than 55. Policemen and the city council itself received increases as well.
"Each of these hikes increased the system's future liability. By the time they were enacted, the stock market was well off its highs." (p. 173)
"Each of these hikes increased the system's future liability. By the time they were enacted, the stock market was well off its highs." (p. 173)
2002: " 'It will not be easier nor desirous to pay later: just necessary.' This is the problem with all delayed pension schemes: they leave the fund vulnerable at the worst possible moment - when the sponsor is also hurting." (p. 187)
"The committee understood that conflicts of interest had undercut the board's judgment, and it made a truly sensible recommendation: cut the board from 13 to 7 members with none of them city officials or union reps. Needless to say, this proposal was highly unpopular with the
unions. Saathoff immediately denounced it, as did the powerful municipal workers' union. This dampened enthusiasm for reform.
"The sad thing is that these are serious problems. As soon as you turn these into political issues, all rational dialogue seems to disappear." (p. 205)
"The sad thing is that these are serious problems. As soon as you turn these into political issues, all rational dialogue seems to disappear." (p. 205)
"Most states have not accumulated *any* savings to pay for retiree health care. New Jersey, for instance, recently (and for the first time) added up the promises it had made for its retired employees' medical bills. The total was $58 billion - for which it has virtually no
reserves. That is *in addition* to the amount by which its pension fund is in arrears - roughly another $25 billion. Alarmingly, New Jersey does not have the option, as San Diego does, of raising taxes to normal and thus still-tolerable levels. Taxes in New Jersey are already
astronomical. Governor Jon Corzine has been mulling whether to sell the fabled New Jersey turnpike (much as GM has been selling *its* assets). Once you start to parcel off the farm to support the grandparents, you are in trouble." (pp. 222-3)
The author suggests that benefits be nationalized and payroll taxes be increased to ensure that the system is fully funded. Ostensibly, only federal government can offer a "collective guarantee." (p. 231)
I'll leave it to the reader to decide whether that's a good idea.
I'll leave it to the reader to decide whether that's a good idea.
2018, @larryswedroe:
"Municipal bond investors are not the only ones facing increased risks. Either states will default on their [pension benefit] obligations or investors will face defaults on their investments. Forewarned is forearmed." https://www.etf.com/sections/index-investor-corner/swedroe-performance-state-pension-plans
"Municipal bond investors are not the only ones facing increased risks. Either states will default on their [pension benefit] obligations or investors will face defaults on their investments. Forewarned is forearmed." https://www.etf.com/sections/index-investor-corner/swedroe-performance-state-pension-plans
âMany public pension funds have benefited from the 10-year long bull market. But now many are lowering their predictions of what they can earn in the future. That makes their liabilities look even larger, portending more strain in the coming decades.â http://blog.validea.com/the-bull-market-hasnt-fixed-public-pensions/
Rob Arnott on the Money Tree Investing podcast @MTIPodcast
* The U.S. pension crisis
* The March 2020 crash lowered interest rates, making the problem worse
* State pension obligations
* Which states are doing best/worst?
* Possible solutions https://moneytreepodcast.com/pension-crisis-rob-arnott/#.X2N8TGhKiUk
* The U.S. pension crisis
* The March 2020 crash lowered interest rates, making the problem worse
* State pension obligations
* Which states are doing best/worst?
* Possible solutions https://moneytreepodcast.com/pension-crisis-rob-arnott/#.X2N8TGhKiUk
