Even if you are not one of the 44 million Americans lucky enough to be in a private-sector traditional pension plan, you should care because if enough fail, your tax dollars will be needed to clean up after them. Defined benefit pensions, properly funded, are the most economically efficient way to finance old age. Congress has failed since it enacted ERISA, the 1974 Employee Retirement Income Security Act, to impose rules to get the most benefit with the least risk out of traditional pensions. Instead, campaign-donation-seeking lawmakers have enabled rules that encourage the private pension system to shrivel and weaken.
In July the 100 largest company pension plans had their worst recorded month and now owe $533 billion more than they have assets to pay, the Milliman benefits consultancy says. Other consultancies have issued similarly dire reports.
The core problem has been too little money put into pension plans. Putting in too little money, as noted economist Martin Feldstein pointed out more than three decades ago, inflates stock prices by obscuring corporate liabilities for future pension obligations. This distorts current investment decisions and creates future risks for investors and workers when these pension obligations come due.
Pension funds come from workers, who set aside what would otherwise be current cash wages to provide for their old age. Not putting that money into the pension plan is a subtle, but widespread form of wage theft. Companies argue that they make funding estimates based on what the law allows, which is true. But then it is usually what the law allows, not venality, that is the scandal.
Compounding the thievery are 12 years of abysmal stock market returns. From its 2000 peak, the total market, with dividends reinvested, is down a fourth in real terms, prices of Vanguard’s total stock index fund show.
Further pressing down on pension plans is ZIRP, the Federal Reserve’s Zero Interest Rate Policy. The Fed says its policy is needed to stabilize the economy, but of course there are other stabilizing options like Congress making investments in infrastructure and research that put people to work while making commerce more efficient and profitable.
Artificially reducing interest rates reduces returns on bonds and cash. This, in turn, requires larger cash infusions, which are even harder in these hard times.
The Fed has been holding the interest rates it controls at next to nothing for almost four years and plans to keep doing so for another two.
For a benefit due in three decades, reducing the expected annual interest rate from 7 percent to 2 percent requires more than four times as much cash today. One way to avoid putting in more money is to freeze pension plans, an especially cruel policy for workers with long tenure.
By 2004 just four of the 1,000 largest companies with pensions had frozen, but five years later 310 had, according to the National Institute for Retirement Security and the Watson Wyatt compensation consultancy. More freezes are a certainty.
If you want to know about the health of your pension plan go to pensioninspector.com. Registration is free for individuals. David J. Tananbaum, a veteran pension actuary, has compiled years of Form 5500 annual reports by pension plans, analyzed them and applied a simple A to F grading system.