“Why, sometimes I’ve believed as many as six impossible things before breakfast.” The White Queen was responding to Alice’s disbelief as to her alleged age. In today’s world, with its unfunded (or poorly funded) pensions, we are asked by corporate CEOs, union leaders, politicians and pension fund trustees to believe another impossible thing – that everything is hunky-dory in the world of pension and health obligations to retirees. Additionally, they seem blasé about the achievability of 8% per annum growth, when calculating expected returns.  

Nevertheless, it is possible that a crack has appeared in that veneer. Congress may be concerned. Buried in the spending bill just passed by Congress and signed by the President was a provision that would permit benefit cuts for retirees in multi-employer pension plans. It is true that multi-employer pension plans represent only a small percentage of plans covered by the Pension Benefit Guaranty Corp. (PBGC), but the news is welcome for anyone concerned with fiscal responsibility. There are an estimated 1,400 multi-employer plans in the U.S., covering about 10 million people. Such plans, which can be carried from one employer to another, are common in industries such as construction, trucking and mining, where employees are typically members of a local union that, in turn, is part of a national one. The plans are jointly managed by unions and employers. The plans are guaranteed by the PBGC, and therein lies the rub. The PBGC, in its annual report, noted that its projected long-term deficit for multi-employer plans had widened to $42 billion from $36 billion a year earlier, despite hefty returns to stock and bond markets.

 

Eoin Treacy's view

I have to admit to being ignorant of the Pension Benefit Guaranty Corp’s existence but this portion from their annual report is worthy of notice:

Our 10-year and 20-year forecasts indicate additional plan failures and even higher deficits. On September 30, 2012 when the Single-Employer Program (SEP) deficit stood at $29 billion, we forecast it to grow to $32 billion by 2022. For the same period, we forecast the deficit in the Multiemployer Program (MEP) to reach $26 billion, up from $5 billion as of September 30, 2012. Projections show the multiemployer program will run out of money entirely within the decade. On September 30, 2013, the combined single employer and multiemployer deficit was $36 billion.

Inadequate Premiums.
PBGC is self-financing. We do not receive any taxpayer dollars nor do we control either the benefits we pay or the premiums we charge. Congress has repeatedly raised PBGC‘s premiums, but they remain too low to fund our obligations. The Administration again proposed risk related premiums for PBGC in its 2014 Budget. This would provide the PBGC Board authority to adjust premiums and make the premium structure fair to all premium payers. PBGC will continue to work with policy makers to determine how best to address pension funding challenges. 

It has always struck me as peculiar that so much of US government expenditure (65%) is described as “Mandatory Spending”. Three of the main beneficiaries of this largesse are Medicare, Medicaid and Social Security. Mandatory is the kind of word that brooks no equivocation and helps to emphasize that these programs represent major political hot potatoes for anyone seeking reform.

Nevertheless, as an increasing number of people reach retirement, the ability of these programs to meet their obligations is highly questionable and will need to be addressed. It will no longer be a point of discussion whether the retirement age will rise because the money will simply not be there to pay pensions at younger ages, not least as people live longer. The application of efficiency gains from technological and healthcare innovations and lower energy prices will be integral to the success of the USA in meeting these challenges.