Pension Risk Matters : Pension Risk News & Analysis : Investment Governance, Inc. : Pension Risk & Investment

A man is not old until his regrets take the place of dreams.
- - - - John Barrymore, "Good Night, Sweet Prince" 1943

If Betty White can rock Saturday Night Live to its highest ratings at the age of 88 and Sunset Daze is media gold for the senior reality television set, there is hope for anyone who wants to stay in the game rather than "retire" from the mainstream. In "Famous folks launched careers after 50" by CNN's Ethan Trex (May 16, 2010), more than a few individuals have realized great commercial success as seniors, including Colonel Sanders (of Kentucky Chicken fame), President Ronald Reagan and Takichiro Mori (twice reported by Forbe's as the world's richest man "with a net worth of $13 billion").

Good news is everywhere for the gray haired set if you accept current research about preservation and growth. In "Creativity and successful brain aging: Going with the flow" by Susan Krauss Whitbourne, PhD (March 23, 2010), having friends, enjoying leisure activities such as bridge or dancing and developing a "flexible mental attitude" are three hallmarks of a productive and enjoyable "later life."

At a time when the world is getting older, employers are challenged with managing the costs of providing post-employment retirement benefits as well as having skilled and experienced workers in place.

In a summary slide show, Business Insider excerpts from the 2009 EU Ageing Report to paint a sober picture of how age impacts gross domestic product ("GDP"), assuming that retired persons truly exit the economy and are given no opportunity to continue working in some fashion. (Keep in mind that official statistics do not fully capture actual employment.)

Country	Pension Cost compared to GPD in 2007	Estimated Pension Cost compared to GPD in 2035	Estimated Change in Working Age Population by 2020
Netherlands	6.6%	10%	-4.3%
Luxembourg	8.7%	17%	-1.1%
Denmark	9.1%	11%	-4.3%
Bulgaria	8.3%	9%	-5.6%
Czech Republic	7.8%	7.6%	-8.3%
Belgium	10%	14%	-3.5%
Poland	12%	9.3%	-5.7%
Hungary	11%	12%	-5.0%
Italy	14%	15%	-3.0%
Sweden	9.5%	9.4%	-6.0%
Malta	7.2%	9.7%	-7.1%
Greece	12%	19%	-3.9%
France	13%	14%	-5.5%
Finland	10%	14%	-8.5%
Slovenia	9.9%	15%	-6.6%

 

Things are not too much better in the United States with respect to financial solvency and unfunded retirement benefits. According to "The Market Value of Public-Sector Pension Deficits" by Andrew G. Biggs (Retirement Policy Outlook, American Enterprise Institute for Public Policy Research, April 2010), "public-sector pension plans have only a 16 percent probability of being able to cover accrued benefit liabilities with current assets."

The ramifications are huge in so many ways. Increased taxes, rescinded benefits or both are vote killers so you have to know that THE demographic time bomb is going to become political radiation in short order.

Until then, if you are healthy and able to continue working or are otherwise financially independent, enjoy the good life. Way to go!

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Complex problems deserve a lively debate about potential solutions. That is why I've asked both colleagues and critics to guest blog on www.pensionriskmatters.com from time to time. Interestingly, few have taken me up on the offer (though I get plenty of emails about various posts). One person who has accepted the challenge to disturb and entice is Mr. Wayne Miller. Formerly CEO of Denali Fiduciary Management and a self-described passionate fiduciary advocate, Wayne invites readers to ponder his suggestions about how to (a) manage the current banking crisis and (b) save the U.S. Social Security system. When asked why he expended time in penning his thoughts, Wayne wrote that "there must be a very clear example as to how personal responsibility will be incorporated into a market principle-based framework that could lead us out of this storm" and move our nation away from "political expediency" in order to avoid being "condemned to stir inside the box we made for ourselves."

While Wayne and I have had more than a few lively debates about the merits of free markets, he and I agree that the improvement of investment best practices redounds to everyone's benefit. 

Read Wayne's proposal. Decide for yourself. You can sign his petition by visiting www.sociallyresponsiblerescue.org.

• Click to read the one page summary of the "Proposal from Citizens of the United States of America."
• Click to read "The good bank/good trust proposal."

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According to Forbes Magazine journalist Stephane Fitch, public pension participants are living the life of Riley. "Gilt-Edged Pensions" (February 16, 2009) showcases individuals who have been able to retire at a relatively young age and with a comfortable nest egg, courtesy of taxpayers, at least in part. Examples include the following:

• Retired police offer who received a pension at age 42 worth about $2 million
• New Jersey social studies teacher who earns $80,000 per year, pays 5.3% towards a pension, can retire at age 60 with full benefits and the ability to teach part-time thereafter
• Florida security guards who can moonlight for private companies, with time clocked on such assignments being credited toward public pension payouts

Adding insult to injury, Fitch relies on Bureau of Labor Statistics data to suggest that a pay gap exists, in favor of public workers. He writes that "State and local government workers get paid an average of $25.30 an hour, which is 33% higher than the private sector's $19."

I'm not picking on public workers but I do think it is important to understand how much taxpayers owe now and in the future for others' benefit claims. (By the way, I think that includes Social Security and Medicare unfunded liabilities too.) Many people I know are amenable to the notion of a municipal employee receiving higher benefits if they receive lower cash wages, as compared to the private sector. However, few taxpayers want to subsidize both current and future compensation, especially if they themselves are cash strapped (self-employed, lost their job, work for a company without a retirement plan, etc).

The stage is set for continued frustration on the part of public employees (many of whom no doubt work quite hard to do a great job) versus Joe and Sally Taxpayer who have less and less disposable income to finance giant IOUs.

Editor's Note: Fitch quotes me in the article by writing that "Taxpayers are on the hook," says Susan Mangiero, who maintains Pensionriskmatters.com, a blog highlighting pension plan issues.

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According to Boston Globe reporter Matt Viser ("Bigger pensions drawing protests," May 28, 2008), an increase in retirement benefits for teachers and state workers will cost more than $6 billion. Meant to help individuals cope with a higher cost of living, some local officials say it will cost jobs instead. With no funding and limited budgets, the money has to come from somewhere and layoffs are inevitable. Making matters worse, taxpayers argue that closed-door hearings make it impossible to understand the likely fallout for cities and towns. Critics counter that "this has been a very open, transparent discussion." Besides the obvious impact on cash flow, State Treasurer Timothy P. Cahill calls attention to the bigger picture, adding that the "Legislature's approach will put the state's credit rating in jeopardy."

According to "Promises With a Price: Public Sector Retirement Benefits," Pew Center on the States, December 2007, Massachusetts has an unfunded liability in excess of $14 billion. (In contrast, the reported unfunded liability for states such as California and Illinois topples $40 billion.) According to their color coded map, Massachusetts is a blue state, meaning that its defined benefit plan funding falls between 70 and 79 percent.

Though written nearly two years ago, our blog post entitled "Tea Party Redux: State Pensions in Turmoil" (July 27, 2006) is worth a quick read. There is absolutely no doubt that retirement issues will occupy more and more of lawmakers' time. To repeat what I said then:

<< Nothing is ever free. Someone, somewhere, somehow, pays the bill. How will politicians respond? After all, grumpy taxpayers tend to vote. >>

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According to a just released study by the Pew Center on the States, state pension plans in aggregate owe nearly $3 trillion in pension benefits, of which about $400 billion is unfunded. Unfortunately, for some state residents, the financial pain is not evenly spread throughout the nation. Consider some of the findings.

• "Only a third of the states have consistently set aside the amount their own actuaries said was necessary to cover the cost of promised benefits over the long term.
• Twenty states had funding levels of less than 80 percent at the end of FY 2006—below what most experts consider healthy.
• Several states have seen particularly troubling drops in their pension funding levels. Some of the biggest drops have occurred in Hawaii, Kentucky, New Jersey, Pennsylvania and Washington."

Hold onto your hats.

The study further reports that post-employment healthcare benefits have a price tag of about $381 billion with only 3 percent of this total liability having been funded to date. "None of the five largest states—California, Texas, New York, Florida and Illinois—had put aside money for non-pension benefits as of FY 2006." and 11 states, including California, New York, New Jersery and Connecticut owe more than $10 billion to plan participants.

Ouch!

As this blog has pointed out repeatedly, there is no free lunch. Putting off the inevitable is going to be painful for employees, retirees and taxpayers.

Now imagine you are a resident of a state with post-employment funding woes. Your taxes go up to pay for someone else to retire at the same time that you are struggling with your own situation. That's exactly what is happening for millions of people, causing great angst for all.

Read "Promises with a Price" in full text. If you missed it, the October 2007 issue of Governing (by the same authors of this new Pew report) addresses anemic pension governance standards at the state level in "The $3 Trillion Challenge." Part of that article includes a sidebar with yours truly on suggested questions to ask as part of a governance check-up for a particular plan. Read the Q&A with Susan Mangiero.

Also check out our earlier blog post entitled "Tea Party Redux: State Pensions in Turmoil." Written a year ago, the message is still the same. Ask your state legislators for their proposed solution to the retirement funding crisis.

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In a special edition of employee plans news (October 2007), the Internal Revenue Service provides a link to its new web-based tool to help with 401(k) plan compliance. This 43-page document includes a chart that describes eleven "problem areas in retirement plans" as well as suggested ways to identify, correct and avoid such mistakes.

Click here to access the tool.

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Little noticed inside the pension community is a provision of the Pension Protection Act of 2006 that directly impacts reporting by tax-exempt organizations. What's interesting is that required changes mandate important governance disclosures for churches and foundations and other non-profits. According to Guidestar.org, "Form 990-T was considered a tax return and was not open to public inspection. The Pension Protection Act of 2006, however, mandates that any IRS Form 990-T filed by a 501(c)(3) organization after August 17, 2006, is now a public document. The exception is a Form 990-T filed solely to request a refund of the telephone excise tax."

Too bad the same disclosures are out of reach for anyone interested in understanding the nature of fiduciary risk attached to pension plans. As we pointed out in "Searching for Hidden Treasure" (April 17, 2006), even seemingly "mundane" information such as who makes primary decisions about defined benefit and defined contribution plans is often out of reach. As I wrote then, other than the names of the plan sponsor and plan administrator (found on Form 5500), no one knows much about who is in charge. (Some databases provide this information for a fee and various plan sponsors voluntarily provide this information online or in writing.)

Wouldn't it be grand to know more about who is making critical decisions regarding the $10 trillion pension industry? After all, how can we reward "good players" and hold "bad" or "careless" fiduciaries accountable if they operate in the shadows?

At a time when the SEC is asking for additional information (executive compensation decisions, audit committees, etc) and FASB wants to know more (having just announced plans to promote pension investment risk disclosure) where is the upset about pension fiduciaries - who they are, how they are selected and whether they are qualified for the tasks put upon them?

Editor's Note:

Part III questions of the newly revised form 990 are shown below. The IRS website provides detailed instructions and commentary.

• Enter the number of members of the governing body
• Did the organization make any significant changes to its organizing or governing documents?
• Does the organization have a written conflict of interest policy?
• Does the organization have a written whistleblower policy?
• Does the organization contemporaneously document the meetings of the governing body and related committees through the preparation of minutes or other similar documentation?
• Enter the number of independent members of the governing body
• If “Yes,” how many transactions did the organization review under this policy and related
  procedures during the year?
• Does the organization have a written document retention and destruction policy?
• Does the organization have local chapters, branches or affiliates?
• If yes, does the organization have written policies and procedures governing the activities of such chapters, affiliates and branches to ensure their operations are consistent with the organization’s?
• Does an officer, director, trustee, employee or volunteer prepare the organization’s financial statements?
• Does the organization have an audit committee?
• How do you make the following available to the public?

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If you read Thank You For Smoking (and/or saw the video), you understand Christopher Buckley 's ability to put things in perspective with humor. With his new book Boomsday, he seems to have done it again. The plot takes generational warfare to new heights. According to the book description on Amazon.com, escalating Social Security expenses compel "Cassandra Devine, a charismatic 29-year-old blogger and member of Generation Whatever" to suggest that "Baby Boomers be given government incentives to kill themselves by age 75." As you can imagine, the book is creating controversy. Click here to read more.

We've written extensively about the looming financial crisis due to increased lifespans. Click on the Demographics folder to access previously published posts (on the left hand side of the home page of this blog.)

Living longer if you are healthy, and have economics means, sounds like fun. Who wouldn't want to take a course in the classics or travel the high seas with family and friends? Unfortunately, for the younger folks who will be forced to foot the bill through higher taxes, things are not quite so grand. This is not to put blame on senior citizens. (Let's face it. We're all heading in that direction.) Unfunded benefits have never been a good idea.

If you don't mind some dismal reality with your coffee, check out The Coming Generational Storm: What You Need to Know about America's Economic Future by Laurence J. Kotlikoff and Scott Burns or Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It  by Peter G. Peterson.

The questions remain. Who has the power to solve what many believe is an imminent retirement system meltdown (including Social Security and Medicare)? What precludes them from doing something now? What is the consequence of playing ostrich, ignoring red flags and staying with the status quo? Take our 2 minute "Pension Crisis" survey and tell us what you think. Click here to start.

This post is written the day after April 1 by design. This is no April Fool's Day gag. Crushing "pay as you go" programs are here to stay until courageous leaders step up to the plate and take action or economies around the world implode.

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No more cream for fat cats if Congress gets its way. According to Financial Times journalists, Francesco Guerrera and Eoin Callan, the U.S. Senate votes this Tuesday to curb tax breaks tied to executive retirements. (See "Retirement tax will hit US executives - January 29, 2007). They write: "Under the new regime, executives would be allowed to defer up to $1m a year or the average of the previous five years' taxable salary, whichever is lower. Any sum above that would incur taxes and a 20 per cent penalty."

I could not find any details posted yet to the U.S. Senate Finance Committee website but I'll scour C-SPAN tomorrow for the exciting showdown.

The real shame is that, once again, we have a "one size fits all solution" that does not differentiate between "excessive" compensation arrangements and what's required to attract and retain leadership talent. Ben & Jerry's earlier use of a salary cap made it difficult to lure a CEO to Vermont, despite the promise of an unlimited supply of Chunky Monkey and Cherry Garcia (the low-fat version being my personal favorite). Ditto for other companies that did not heed the supply-demand dynamics of a competitive marketplace. (Click here to read "Putting a Ceiling on Pay: No Whole Foods executive can earn cash pay of more than 14 times what its average worker makes. Will other companies follow?" by Andrew Blackman, Wall Street Journal - April 12, 2004).

By extension, if deferred compensation at a certain level facilitates the hiring of a skilled CEO, why should it be discouraged? Shareholders may save money in the short-run but lose in the long-run. This could include 401(k) and defined benefit plan participants whose fortunes rise or fall with the price of company stock.

This story has legs, especially now that many experts predict a return to populism and a move against "mean, greedy executives."

Editor's Notes:

1. The topic of optimal executive compensation is broad and complex. However, there is real merit in letting companies self-police AS LONG AS shareholder stewards do what they are supposed to do. Be vigilant. Ask questions. Exercise proper fiduciary oversight.

2. Click here if you want to read last week's blog post about the proposed taxation of health care benefits.

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According to "Bush Bids to Increase Focus on Health Care with Plan on Tax-Based Aid for Consumers" (Wall Street Journal, January 22, 2007), the White House intends to curb skyrocketing health care costs by seeking tax relief for some. Journalists John D. McKinnon and John Harwood write that independent buyers of health insurance would get a tax deduction, arguably a boon for the millions of persons who are self-employed or work for companies that do not provide insurance. In contrast, employer-provided health insurance benefits would constitute taxable income. Likely winners include an estimated 80% of employees for whom the average premium (for a family policy) is a reported $11,500. Executives, professionals and some "rank-and-file" union workers may not be so lucky.

In a related article, "UAW May Run Some Retiree Benefits" (Wall Street Journal, January 23, 2007), reporter Jeffrey McCracken describes a "potentially revolutionary plan" whereby the United Auto Workers could assume responsibility for a ten billion dollar plus liability. A critical question is whether big U.S. auto manufacturers can find the money to finance "a handover of future retiree health-care obligations to a union-managed fund." Beyond costs, McCracken posits that union leaders face a real dilemma. Accustomed to negotiating hard on behalf of their members, can or will they want to police members' health care activity as a way to control costs?

As stated here and elsewhere, health care has the potential to dwarf the pension issue in a serious way. (Click here to read our most recent post about health care economics.)

If employers decide they can't afford to offer insurance coverage in its current form, pensions may be curtailed even further as part of a serious look at employee benefits overall. This is not necessarily a good thing if companies and municipalities then find it difficult to attract and retain productive workers.

Add the questionable state of Medicare to the mix and the current situation looks bad. With the 2008 election frenzy already underway, we're sure to hear more about health care solutions. Generating a meaningful dialogue (no sound bites please) is good. Without radical surgery soon, we're in for a long recovery.

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Ever read about an issue that strikes you as obvious and yet, here you are, reading about its existence? In a November 30, 2006 press release, the National Taxpayers Union describes its recent communique to House Speaker-Elect Nancy Pelosi and Senate Majority Leader-Elect Harry Reid to "end the slimy practice of allowing convicted lawmakers to draw taxpayer-subsidized retirement benefits." Other groups in agreement include Citizens for Responsibility, Family Research Council and the Congressional Accountability Project.

For further information, read "Nearly Two Dozen Citizen Groups Tell Pelosi and Reid: No Tax-Funded Pensions for Congressional Criminals."

What else is there to say? This one seems like a no-brainer.

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Is a modern Boston Tea Party soon to come? Will taxpayers say "enough" to what they perceive as generous municipal pensions while they struggle to save?

The Associated Press reports on July 21, 2006 that "Oregon's state pension board plans to ask about 1,900 retired government employees to repay an average of nearly $28,000 each. They are among 125,000 workers and retirees whose benefits will be cut as a result of a successful lawsuit filed by local governments who argued that the pension board put too much money in benefit accounts in 1999." Apparently, state employees will bear the brunt if retirees are loath to return the funds (though taxpayers ultimately finance salaries and benefits of existing and retired workers).

Moving east, a July 20, 2006 announcement from Albany has New York Governor George Pataki vetoing a bill "that would have allowed teachers and other government workers with 25 years of experience to retire at 55 with the benefits now available at 62", costing taxpayers more than $195 million over the next seventeen years.

Whether municipal benefits are excessive is hard to say. To be fair, many government workers accept lower than market salaries in exchange for better benefits. That being said, times are tough and it will become increasingly difficult for state, county and city employees to get much sympathy from individuals who have their own retirement crisis to solve.

Instigator of the now famous tea toss, Samuel Adams offered: "It does not require a majority to prevail, but rather an irate, tireless minority keen to set brush fires in people's minds." On the opposing side, British Admiral Montague countered: "You have got to pay the fiddler yet!"

Nothing is ever free. Someone, somewhere, somehow, pays the bill. How will politicians respond? After all, grumpy taxpayers tend to vote.

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