Did Congress Just Nuke Pensions?
More than 1 million Americans who were promised secure, predictable retirement income probably will see part of their monthly benefit checks evaporate as Congress moves to stabilize some private pension systems veering toward insolvency.Michael Fletcher of the Washington Post also reports, Congressional leaders hammer out deal to allow pension plans to cut retiree benefits:
The expected congressional action to allow previously promised private-sector pensions to be cut is another sign that decades-old assurances that workers were given about retirement income are rapidly fading.
The move comes after San Jose, Detroit and other cities have partially reneged on long-established contracts with government workers and retirees, shrinking benefit checks that were supposed to only increase over time.
Traditional political alliances have fractured as the pension measure — attached to a massive money bill needed to keep the government open — has moved toward a final vote.
Unions are bitterly split. Some are so panicked by the possibility that the entire system could collapse that they have joined with business leaders to implore Congress to act.
"This is the only realistic way to avoid insolvency and preserve as much of the promised pension benefits as possible," Joseph Hansen, international president of the United Food and Commercial Workers, wrote in a letter to lawmakers earlier this week.
Other unions and retiree groups, including the AARP, have denounced the plan as a betrayal of a promise, enshrined in federal law for four decades, that vested pension benefits would not be cut.
The retirees whose pensions are at stake are mostly blue-collar workers, including mechanics, truckers and construction workers, who participate in what are known as multi-employer pension plans.
The plans were designed to allow workers flexibility to switch companies with ease, guaranteeing them a stable retirement in fields where they were likely to move frequently between employers.
Retirees in all 50 states are affected, although the biggest of the pension plans in danger of collapse is the Teamsters-affiliated Central States Pension Fund, which has some 410,000 participants in the Midwest and South. The average pension for Central States members is $15,000 per year.
Federal officials have warned for years that multi-employer plans covering as many as 1.5 million workers were dangerously unstable. Shifts in the economy have left fewer workers paying into the plans, even as more retirees take money out of them.
Stock market losses during and after the financial crisis of 2008 worsened the problems.
Last month, federal pension officials reported the crisis had escalated, with a high likelihood that not only would the funds go broke within a decade, but the federal insurance program created as a backstop would crash along with them.
"This is the last chance that labor unions and their members have to gain some control over the future of their pensions," said Rep. George Miller (D-Martinez). A Bay Area liberal, Miller has reluctantly helped push a rollback of federal retirement protections after 40 years of fighting to get blue-collar workers more income.
"This reform would give them the tools they need to rescue themselves," Miller said during brief debate on the House floor Thursday.
For many workers, the medicine is bitter. The nonprofit Pension Rights Center warns that some workers could see their retirement checks cut by as much as 60%.
Some employees in the private sector have seen pensions shrivel before. Many airline pilots, for example, saw six-figure annual retirement payouts drop to $25,000 when their plans failed amid company bankruptcies. But the scale of the multi-employer plan problem is unprecedented in recent decades.
"These deeply distressed plans are likely to fail without congressional action," Mary Kay Henry, president of the Service Employees International Union, told lawmakers in a letter. "An insolvent fund cannot pay full benefits."
By contrast, the Teamsters are demanding Congress retreat. Talking points sent to members Thursday declared "this bill is the ugly side of political backroom dealings."
At the headquarters of the International Assn. of Machinists and Aerospace Workers in suburban Washington, D.C., union President Thomas Buffenbarger said he was bewildered to see some unions and liberals supporting the plan.
"I was on the phone with [House Democratic leader] Nancy Pelosi earlier this week, and I asked her, 'Why do the Democrats want to have their fingerprints on this?'" he said.
Buffenbarger said there is an alternative. The federal government could backfill the shortfall at a cost of about $100 billion.
"Let's measure this against other things the government has done," Buffenbarger said. "They bailed out Wall Street so those guys can keep their yachts. But we can't come up with the equivalent to bring solvency to the entire nation's pension systems?"
On Capitol Hill, however, the idea of a federal bailout is dismissed as impossible. Most Americans no longer are offered the security of a guaranteed pension, and using tax funds to bolster those who are is a political non-starter.
To avoid any need for taxpayer bailouts, private pensions are supposed to be backed by a federal insurance system administered by the Pension Benefit Guaranty Corp., which typically would pay pensions at a reduced rate to people covered by plans that fail. But the fund that insures multi-employer plans is too small to cope with the scale of the shortfall, both sides in the debate agree.
The Employee Retirement Income Security Act, passed in 1974, was supposed to protect pensions. To keep retirement funds from being raided by employers, the law doesn't allow workers and retirees the option to approve pension reductions.
The plan now before Congress would amend that law and allow members of distressed pension plans to vote on any reductions suggested by their plan's trustees. Pensioners older than 80 would be protected from any cuts. Those over 75 would have benefits cut less than younger retirees.
"We should give [workers] the opportunity and responsibility of trying to save their own pensions," Miller said. "These plans are losing altitude every day they cannot make adjustments."
The problems facing the Central States Fund illustrate the overall picture. In 1980, the fund had four workers contributing money for every retiree collecting payments. Now it has five retirees for every worker paying in, according to congressional testimony last year by Executive Director Thomas Nyhan.
Hundreds of trucking companies that were part of the fund have gone bankrupt, dissolving before paying their share of the pension costs. The recession severely compounded the problem, as the value of the fund's investments plunged. So did the number of workers paying into the fund, amid widespread layoffs.
With the federal pension insurance program unable to backstop the funds, Nyhan said the 410,000 participants in his pension plan confronted a "stark reality" without some congressional action.
"Even though they were told repeatedly their benefits were guaranteed," he said, "their pension checks could be eliminated entirely."
A measure that would for the first time allow the benefits of current retirees to be severely cut is set to be attached to a massive spending bill, part of an effort to save some of the nation’s most distressed pension plans.Reuters reports that late Thursday evening, the House of Representatives averted a government shutdown by narrowly passing a $1.1 trillion spending bill despite strenuous Democratic objections to controversial financial provisions.
The rule would alter 40 years of federal law and could affect millions of workers, many of them part of a shrinking corps of middle-income employees in businesses such as trucking, construction and supermarkets.
The measure is now before the House Rules Committee and is likely to be moved as an amendment to a massive $1.01 trillion spending bill, perhaps by late Wednesday. It is expected to pass the Senate by Thursday.
If passed, the change would apply to multi-employer pensions, where a group of businesses in the same industry join forces with unions to provide pension coverage for employees. The plans cover some 10 million U.S. workers.
Overall, there are about 1,400 multi-employer plans, many of which remain in good fiscal health and would be untouched by the deal. But several dozen have failed, and several other large ones are staggering toward insolvency.
As many as 200 multiemployer plans covering 1.5 million workers are in danger of running out of money over the next two decades. Half of those are thought to be in such bad shape that they could seek pension reductions for retirees in the near future.
“We have to do something to allow these plans to make the corrections and adjustments they need to keep these plans viable,” said Rep. George Miller (D-Calif.), who along with Rep. John Kline (R-Minn.) led efforts to hammer out a deal.
But the measure in Congress is also outraging retirement security advocates, who argue that allowing cuts to plans paves the way to trims for other retirees later.
“After a lifetime of hard work to earn their pensions, retirees don’t deserve to receive a bad deal, in which they have had no say, cut behind closed doors and excluding the very people who would be impacted the most,” said Joyce Rogers, a senior vice president for AARP, the lobbying giant lobbying group for older Americans in a statement.
The idea of cutting benefits is reluctantly supported by some unions and retirement fund managers who see it as the only way to salvage pensions in plans that are in imminent danger of running out of money.
“This bipartisan agreement gives pension trustees the tools they need to maintain plan solvency, preserves benefits for the long haul, and protects the 10.5 million multiemployer participants,” Randy G. DeFrehne, executive director of the National Coordinating Committee for Multiemployer Plans said in a statement. “With time running out on the retirement security of millions of Americans, moving this bipartisan proposal forward now is not only timely, but necessary.”
But it also has stirred strong opposition from retirees who could face deep pension cuts and from advocates eager to keep retiree pensions sacrosanct, even in cases when funds are in a deep financial hole.
“We thought our pension was secure,” said Whitlow Wyatt, a retired trucker who lives in Washington Court House, a small city in central Ohio. “That was always the word. Now they are changing that.”
Wyatt, 70, retired with a $3,300-a-month pension in 2000 after working more than 33 years as a long-haul driver. He could face pension reductions of 30 percent or more if Congress permits trustees of the hard-pressed pension fund to slash benefits.
The deal is aimed at helping plans such as the Teamsters’ Central States fund.
The pensions earned by truckers in the fund are among the best enjoyed by working-class people anywhere: After 30 years on the road, many of its participants are entitled to upward of $3,000 a month for the rest of their lives.
But now the fund, rocked by steep membership declines, an aging workforce and downturns in the stock market, is in dire financial straits, putting the retirement benefits of 400,000 participants in jeopardy.
In its annual report last month, the Pension Benefit Guaranty Corp., the federal insurance program that backs private-sector pensions, warned that the problems facing multi-employer pensions could cause the safety net that secures them to collapse within the next decade.
If that happens, retirees depending on multi-employer plans for their pensions would receive nothing if their plans failed. (A separate PBGC insurance fund covering single-employer private pensions is in much better financial shape.) Even if the insurance fund survives, maximum coverage for people in multi-employer plans is minimal — about $13,000 a year.
Although it has issued similar alerts in the past, the PBGC’s latest warning seems to have pushed Congress to move from studying a policy change to actively negotiating for one in recent weeks.
The abrupt action has alarmed some pension rights advocates, who are concerned about a decline in retirement security for all Americans. They also worry about a creeping trend toward trimming pensions, citing retirement benefit cuts for government employees in Detroit and elsewhere.
But managers of deeply troubled funds say that absent a federal bailout, which they call politically infeasible, cutting benefits is the only way to save them. Last week, more than 1,300 employers sent letters to members of Congress urging lawmakers to back the proposal to allow benefit cuts.
“The longer we wait to take action, the more severe the impact on retirees and workers in the plans in the worst financial shape will become,” business leaders wrote. “The longer we wait, the heavier the burden will become on employers struggling to fund and extend these pension plans.”
That is the situation confronting the Central States plan, which was notorious in the 1960s and ’70s for being used as a slush fund for organized crime. Since then it has operated under federal court supervision and with the help of professional fund managers. Yet that has not been enough to overcome demographic and other trends that have weakened its finances.
In 1980, the Central States fund had four active participants for every retiree. Now, there are nearly five retirees or inactive members for every worker, because many unionized trucking firms have gone out of business in the decades since deregulation, Thomas C. Nyhan, executive director of Central States, told Congress earlier this year.
The fund has about $18 billion in assets and pays out annual benefits of $2.8 billion to retirees. But it receives just $700 million each year from employers. Even given the strong stock market returns of recent years, that puts the plan on course to run out of money within the next 10 to 15 years, Nyhan has said.
The fund ran into trouble during the dot-com crash of the early 2000s. Also, United Parcel Service, once the largest firm in Central States, paid more than $6 billion to drop out of the fund in 2007. Much of that money was lost when the market tanked in 2008, leaving the fund in perilous condition.
Some see cutting benefits preemptively as the only way to keep troubled plans such as Central States afloat. Under the agreement reached by congressional negotiators, retirees over age 75 as well as those who are disabled would be shielded from any reductions. Also, any benefit cuts would be subject to a vote of plan participants.
Nonetheless, many retirees feel betrayed. “I never dreamed they would pull the rug out from under us,” said Greg Smith, 66, a retired shipping clerk who retired in 2011 with a $3,000-a-month pension after 42 years on the job. “I actually retired because I was worried about them cutting pensions. I thought I would be grandfathered in with protections. But I guess not.”
What do the cuts in private pensions mean? Mark Miller of Reuters reports, Congress’ No-Bailout Pension Plan Is No Solution for Retirees:
The cuts to promised benefits for current retirees would roll back a landmark law protecting pensions—and opens the door to further cutbacks.Peter Coy of Bloomberg also reports, Congress Says It Has to Cut Pensions to Save Them:
Wall Street banks, automakers and insurance giants got bailouts during the economic meltdown that started in 2008. But when it comes to the pensions of retired truck drivers, construction workers and mine workers, it seems that enough is enough.
The $1.1 trillion omnibus spending bill moving through Congress this week adopts “Solutions Not Bailouts,” a plan to shore up struggling multiemployer pension funds—traditional defined benefit plans jointly funded by groups of employers in industries like construction, trucking, mining and food retailing.
A bailout, it is not. The centerpiece is a provision that would open the door to cutting current beneficiaries’ benefits, a retirement policy taboo and a potential disaster for retirees on fixed incomes.
Developed by the National Coordinating Committee for Multiemployer Plans (NCCMP), a coalition of multiemployer pension plan sponsors and some major unions, the plan addresses a looming implosion of multiemployer pension plans. Ten million workers are covered by these plans, with 1.5 million of them in roughly 200 plans that are in danger of failing over the next two decades. Two large plans are believed to be much closer to failure—the Teamsters’ Central States fund and the United Mine Workers of America fund.
The central premise is that Congress won’t—and shouldn’t—prop up the multiemployer system.
“The bottom line is, we’ve been told since the start of this process that there isn’t going to be a bailout—Congress is tired of bailouts,” says Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans (NCCMP).
The problem is partly structural. Multiemployer pension plans were thought to be safer than single employer plans, owing to the pooling of risk. As a result, the level of Pension Benefit Guaranty Corporation (PBGC) insurance protection behind the multiemployer plans is lower. But many industries in the system have seen declining employment and have a growing proportion of retirees to workers paying into the pension funds. And many of the pension funds still have not fully recovered from the hits they took in the 2008-2009 market meltdown.
These problems pose a major threat to the PBGC. The agency reported recently that the deficit in its multiemployer program rose to $42.2 billion in the fiscal year ending Sept. 30, up from $8.3 billion the previous year. If big plans fail, the entire multiemployer system would be at risk of collapse.
The fix moving through Congress would revise the Employee Retirement Income Security Act (ERISA) to grant plan trustees broad powers to cut retired workers’ benefits if they can show that would prolong the life of the plan. That would mark a major change from current law, which calls for retirees to be paid full benefits unless plan assets are exhausted; then, the PBGC steps in to pay benefits, albeit at a much lower level. The bill also would increase PBGC premiums paid by sponsors, from $13 to $26 per year.
The legislation does prohibit benefit cuts for vested retirees over 80, and limited protections for retirees over 75—but that leaves plenty of younger retirees vulnerable to cuts. And although workers and retirees would get to vote on the changes, pension advocates worry that the interests of workers would overwhelm those of retirees. (Active workers rightly worry about the future of their plans, and many already are sacrificing through higher contributions and benefit cuts.)
The big problem here is that the plan fails to put retirees at the head of the line for protection. When changes of this type must be made, they should be phased in over a long period of time, giving workers time to adjust their plans before retirement. For example, the Social Security benefit cuts eneacted in 1983 were phased in over 20 years and didn’t start kicking in until 1990.
“It’s a cruel irony that in the year we’re celebrating the 40th anniversary year of ERISA, Congress is trying to reverse its most significant protections,” said Karen Friedman, executive vice president of the Pension Rights Center (PRC), an advocacy group that has been battling with NCCMP on some of the proposed changes to retired workers’ benefits.
Friedman’s organization, AARP and other advocates reject the idea that solvency problems 10 to 15 years away require such severe measures. They have pushed alternative approaches to the problem; one that is included in the deal, DeFrehn says, is an increase in PBGC premiums paid by sponsors, from $13 to $26 per year. Advocates also have called for other new revenue sources, such as low-interest loans to PBGC by the once-bailed-out big banks and investment firms.
There are no easy answers here. But cutting the benefits of today’s retirees should be the last solution we try—not the first.
Joshua Gotbaum doesn’t like telling retirees that their pensions are about to be cut. After all, until August he was the director of the Pension Benefit Guaranty Corporation (PBGC), the federal insurance fund that’s supposed to safeguard pensions. But yesterday Gotbaum interrupted a vacation in Madrid to return my call asking about a bill working its way through Congress that would allow multi-employer pension plans to cut benefits. He’s a huge supporter of the legislation.I don't know why Joshua Gotbaum is so ecstatic. This bill deals a retirement death blow to millions of blue collar workers and will propel the United States of Pension Poverty to the top spot of countries with the worst retirement system among developed nations.
“The alternative is that the plans would collapse. It’s reorganize rather than die,” says Gotbaum, a former Lazard investment banker who is now a guest scholar at the Brookings Institution.
On Dec. 9, lawmakers agreed on pension reforms as part of a $1.1 trillion spending bill to keep the federal government from shutting down. Inclusion in that bill almost ensures the provision’s passage. The bill applies to roughly 10 million participants in multi-employer pension plans, typically found in construction, trucking, and other industries in which several employers, often small businesses, negotiate collectively with unions to cover a group of workers in a region. They tend to be in much worse condition than single-employer plans, because many of the companies in them have gone out of business, leaving the survivors to pick up the slack for workers who never even worked for them. About 1.5 million of those participants are in plans that could run out of money in the next two decades if nothing is done.
The legislation would allow the plans’ trustees to cut benefits without having to shut down and be taken over by the PBGC. The bill is bipartisan and supported by some—but not all—labor unions. As explained by Bloomberg News, “The provision reflects an agreement by House Education and the Workforce Committee Chairman John Kline, a Minnesota Republican, and senior Democrat George Miller, a California Democrat.”
Allowing these plans to cut benefits is strongly opposed by the Pension Rights Center, an organization backed by foundations and unions. It’s “a huge breach of Erisa,” the Employment Retirement Income Security Act of 1974 whose 40th birthday was celebrated in September, says Karen Friedman, the center’s policy director. “We’re totally outraged by this legislative deal, which was done in the middle of the night.” She says it sets a precedent that could weaken the protections of single-employer pension plans and even Social Security.
As Friedman notes, it’s been a tough year or two for pensions. In October, a federal bankruptcy judge ruled that the California Public Employees’ Retirement System doesn’t deserve special protection when cities turn to bankruptcy court. Retired city workers in Detroit took benefit cuts in that city’s bankruptcy.
Alicia Munnell, director of Boston College’s Center for Retirement Research, says the change to multi-employer plans “is letting the genie out of the bottle. Once it becomes legal to cut accrued benefits, then it’s a different world. It’s really precedent-making change.” While not opposed to giving trustees flexibility, she said, “It needs to be applied very, very judiciously.”
Gotbaum and others say that there was no alternative to letting trustees of trouble plans cut benefits. “To me, it’s the natural and predictable evolution of a long-running problem,” says Olivia Mitchell, executive director of the Pension Risk Council at the University of Pennsylvania’s Wharton School. “The fact is the PBGC has never had any government backing, and it’s never been set up so [that] the premiums are sufficient. The Erisa Act of 1974 didn’t price the insurance right, and this is the result.”
Multi-employer plans are in particularly poor shape. Mitchell says the PBGC reported assets for them of $1.8 billion and liabilities of $44 billion. The worst off among the major plans, the Teamsters’ Central States pension fund, has just one worker for every five retirees or inactive members collecting benefits, a dramatic reversal from the four-to-one employee-to-retiree ratio it had in 1980, the Washington Post reported.
The bill in Congress has some safeguards built in for retirees. Those older than age 80 would be spared cuts, and workers 75 to 80 would suffer only part of the cut. Retirees and current workers have the right to reject cuts, although Friedman said that veto can be overridden by the plan’s trustees. Trustees would not be allowed to cut benefits to less than 1.1 times the minimum provided by plans that are taken over by the PBGC. So employers will bear some of the pain: Their premiums will double to $24 per worker per year.
Says Gotbaum: “When I started doing this, no one thought this bill could pass. I’m ecstatic. It’s great.”
And never mind all the political posturing, both Democrats and Republicans voted in these changes with little or no regard to the plight of these workers. It's basically more of the same, bailouts for Wall Street and austerity for Main Street.
Having said this, there is no question that these multi-employer plans were poorly managed and were in desperate need of reforms. The problem is that instead of implementing more sensible reforms to try to bolster these plans or try saving them -- like maybe have the state public pension funds manage them or just bailing them out like it did for Wall Street back in 2008 -- Congress took out the guillotine and chopped them, effectively spreading the message that the pension promise is worthless.
Think about it, these people worked thirty or forty years and thought their pension benefits were safe and secure, allowing them to retire in dignity. Instead, they got the royal pension shaft as Congress just pulled the rug under their feet.
In a personal finance survey published yesterday, 18 percent of American respondents said they expect to be in debt for the rest of their lives. That is double the percentage who expected that in May 2013, the last time the survey was conducted. That's one fifth of Americans who don't plan on paying off their debt because they can't afford to.
And now Congress is basically telling them that they can't count on their measly pension benefits during their golden years. At any point in time, their benefits can be drastically cut.
Let me once again state my solution to this big mess which I discussed in the United States of Pension Poverty:
My solution is to bolster defined-benefit plans for all Americans, not just public sector workers, and have the money managed by well-governed public pension funds at a state level.Finally, Matthew Cunningham-Cook and David Sirota wrote an article for the International Business Times, Pension Fund Run By Wall Street Cited In Push To Cut Retiree Benefits:
I emphasize well-governed because a big part of America's looming pension disaster is the mediocre governance which has contributed to poor performance at state pension funds. I edited my last comment on the Pyramis survey of global investors to include this comment:
The other subject I broached with Pam is how the governance at the large Canadian public pension funds explains why they make most of their decisions internally. Public pension fund managers in Canada are better compensated than their global counterparts and they are supervised by independent investment boards that operate at arms-length from the government.Of course, good governance isn't enough. States need to introduce sensible reforms which reflect the fact that people are living longer and they need to introduce some form of risk-sharing in these state pension plans.
As far as 401(k)s, RRSPs, and other forms of defined-contribution plans, you know my thoughts. They might help people save but the brutal truth is they're not pension plans with guaranteed benefits to help people retire in dignity and security. This is why despite their existence, America's new pension poverty keeps growing.
It's high time U.S. policymakers start tackling the domestic retirement (and jobs) crisis. It's time to move beyond public sector pension envy and go Dutch on pensions, introducing a major overhaul of the retirement system which will provide adequate retirement income for all Americans. There will be major resistance but the benefits of defined-benefit plans far outweigh the costs.
Moreover, the real cancer of pensions is that the status quo is a surefire path to destruction. As more and more companies exit defined-benefit pensions, they leave millions of workers fending for themselves in these crazy markets. It's a looming disaster which will severely impact the United States of Pension Poverty and unless policymakers address this issue, it will come back to haunt the country (in the form of increased social welfare costs and lower government revenues).
Six years after the financial crisis, the economic aftershocks are still rattling the halls of Congress -- this time in a debate over an esoteric pension provision tucked into an end-of-year budget bill. Though that legislation, known as the “cromnibus,” is supposed to be about annual appropriations for government agencies, lawmakers have inserted language that would give private pension plans the power to cut benefits to thousands of current retirees whose pension savings were decimated by investment losses from the financial collapse of 2008.
If the initiative is enacted, experts say, it would be the most consequential change to retirement policy in the United States since the passage of landmark pension legislation 40 years ago. Altering the 1974 Employee Retirement Income Security Act to permit benefit cuts could prompt a slew of efforts to chip away at formerly untouchable guarantees of income to millions of retirees.
The $1.1 trillion spending bill that includes the pension provision was made public Tuesday night and a vote is expected on Thursday. Lawmakers are under pressure to pass the cromnibus by Thursday at midnight to avoid a government shutdown, so there is little time for further changes or negotiations.
The debate over the bill's pension language centers around multiemployer retirement plans -- the large, union-backed funds created in the explosion of labor unions after the Great Depression. The government-insured plans cover an estimated 10 million Americans from the private sector workforce. Many of those funds now face unfunded liabilities.
Lawmakers pushing to allow benefit cuts are citing the example of the $18.7 billion Teamsters' Central States Fund, which has 410,000 members and is the nation’s second-largest multiemployer pension plan. There’s an estimated $22 billion gap between assets in the Central States Fund and promised benefits to the system’s current and future retirees -- a shortfall that legislators point to as a rationale to pass a new law permitting multiemployer plans to slash promised retirement benefits.
“We have to do something to allow these plans to make the corrections and adjustments they need to keep these plans viable,” said Democratic Rep. George Miller in pushing the plan.Cunningham-Cook also wrote a comment which Al Jazeera America published, The real threat to pensions is Wall Street:
But critics of the provisions say the plight of the Central States Fund is not a cautionary tale about unsustainable benefits but an example of Wall Street mismanagement. They note that Central States is the only major private pension fund where all the discretionary investment decisions are made by financial firms rather than by the fund’s board. Roughly a third of the pension system’s shortfalls -- or almost $9 billion -- can be traced to investment losses accrued during the financial industry’s 2008 collapse. Those losses were in addition to more than $250 million in fees paid by the plan to financial firms in just the last 5 years.
Many pension funds followed strategies that involved high fees for Wall Street companies while producing “financial returns that trailed plain vanilla investment strategies,” said Jay Youngdahl, a fellow with the Initiative for Responsible Investment at Harvard University. Central States appears to be a prime example, he said. “Before cutting benefits, we need to examine what exactly has happened.”
Financial firms came to manage the Central States Fund thanks to a 1982 federal consent decree that stripped the Teamsters of its power to oversee retirees’ money. In recent years, the decree divided a portion of the pension assets into low-cost index funds, and gave the rest of the fund’s assets to firms including Morgan Stanley, Northern Trust, JPMorgan Chase and Goldman Sachs.
From 2009 to 2013, Goldman Sachs and Northern Trust collected over $31 million in fees from the fund. In all, the fund paid more than a quarter-billion dollars in fees during that period. At the same time, firms like Goldman Sachs and Northern Trust have delivered investment returns that dragged down the fund’s performance.
“The 1982 consent decree created what is arguably the clearest conflict of interest in an industry that is riddled with them,” said Edward Siedle, a former SEC attorney and a leading expert on pensions. “The Wall Street fiduciaries have a clear interest in pursuing investment strategies that will generate fees for themselves.”
As with many cash-strapped pension systems, 2008 was the moment the Central States Fund found itself in crisis. That year, the fund’s portfolio dropped by more than 29 percent -- a bigger decline than the median large pension fund, and one that effectively converted a stable system into one on the brink of insolvency. In total, the fund lost more than $8.8 billion during the 2008 financial crisis.
The decline was fueled by huge losses in the assets managed by the financial industry at the center of that crisis. For example, the holdings managed by Goldman Sachs and Northern Trust lost more than a third of their value. Had the accounts controlled by Goldman Sachs and Northern Trust delivered returns similar to the median for large pension plans from 2008 to 2012, there would be at least $500 million more in the system.
Goldman Sachs and Northern Trust did not respond to IBTimes request for comment.
“The extreme underperformance of the Goldman and Northern Trust portfolios in 2008 alone has had a major negative impact on the plan that continues to this day,” said Chris Tobe, an investment consultant and a former pension trustee in Kentucky.
The financial firms that managed the Central States Fund not only raked in management fees from the fund, they also invested retiree money in their own companies.
In 2009, for example, the Central States Fund had purchased $20 million of Goldman securities, when Goldman shared in the running of the fund with Northern Trust. By 2010, Goldman’s last year as a named fiduciary, the Fund owned $43 million in Goldman stocks and bonds. Similarly, this past year, Northern Trust directed the Central States Fund to purchase $400,000 in Northern Trust corporate bonds.
While Congress responded to the 2008 financial crisis by rescuing the banking industry with an $700 billion bailout, there's no rescue on the way for retirees. Lawmakers are offering no bailout to close multiemployer plans’ aggregate $42 billion deficit. Instead, sponsors of the legislation want to empower pension trustees to make pension funds whole exclusively by cutting promised retirement benefits. Retirees and members would lose their right to contest such cuts in court. Though the proposed language in the cromnibus bill would give retirees the right to vote on any reductions in benefits, it would empower the Secretary of the Treasury to overrule them and to slash benefits if the secretary deems the plan to be “systemically important.”
The original consent decree that removed Teamsters representatives from the Central States Fund’s board came in the wake of corruption allegations, and was supposed to rid the pension system of self dealing. But Greg Smith, a Teamsters retiree who has analyzed the Central States Fund, said the opposite has happened.
“The fund pays out over $60 million a year in fees,” he told IBTimes. “The Justice Department seems only concerned about whether or not the pension fund is caught up in casino investments, like in the '70s. The Justice Department doesn’t seem interested in looking into whether or not Wall Street is on the take.”
Ken Paff, the national organizer for Teamsters for a Democratic Union, which has been pressuring the Teamsters union for a more aggressive stance against the “cromnibus” changes, says attaching the pension provision to a larger must-pass bill is an underhanded way to harm retirees.
“We regard this as a sneak attack for a major change to pension laws,” Paff told IBTimes. “The problems of the pension funds should not be solved on the backs of people who worked their whole life and earned these pensions.”
Democratic Sen. Tom Harkin, the chairman of the Senate Health, Education, Labor and Pensions Committee, issued a statement Tuesday opposing the pension language.
“More than one million people could see their pensions cut,” Harkin said. The legislation “asks retirees to take potentially enormous cuts to benefits that were earned and promised, without effectively preserving the pension system going forward.”
If you believe what the Pew Foundation or Brookings Institution has to tell you or The New York Times or The Wall Street Journal, unfunded pension liabilities threaten to sink state and local governments nationwide. Liabilities are painted as the issue the public needs to know about when it comes to retirement.I don't agree with everything in Cunningham-Cook's article, especially that unfunded public pension liabilities aren't such a big deal and the assumed rate of return doesn't need to be lowered, but he raises several excellent points.
Estimates of the debt facing public sector pension plans range from $2 trillion to $4 trillion. Those seem like big numbers — and they are — but those obligations are to be paid out over the next 30 years. It’s for good reason that only one public sector pension fund has run out of money since the Great Depression. Yet editorial pages across the country use the unfunded liability argument to advance a right-wing agenda of cutting people’s benefits.
In Detroit, public sector retirees have lost cost-of-living adjustments, meaning that they will get poorer as they age. In San Jose, California, pension reform there has led to massively increased turnover as experienced public sector workers depart for parts of the state where their pensions will be secure.
What the obsession with unfunded liabilities misses, however, is the actual and current emergency facing pension funds: Wall Street grifting. Valued at more than $5.3 trillion, public pension funds have for decades been a cash cow for finance. Pensions buy up shares in private equity and hedge funds, complex derivatives and foreign currency at prices higher than what they are worth — earning Wall Street billions in profits, according to Edward Siedle, a leading expert on public pensions. Leading banks have recently been caught in scandal for manipulating foreign exchange prices for their pension fund clients.
The most underreported data point in this regard is a 2007 dispatch from the Governmental Accountability Office (GAO), Congress’ investigative arm. It examined 24 pension investment consultants, by far the most influential actors when it comes to where pension assets are invested.
The report found that 13 of the 24 — including the largest players in the business — had significant conflicts of interest, largely consisting of accepting fees and other considerations from investment firms the consultants recommended. Those 13 had, at the time, over $4.5 trillion in assets under advisement. The GAO found that the average return by the pension funds advised by conflicted consultants was 1.3 percent lower than other plans.
The report’s enduring salience prompted Rep. George Miller, D-Calif., the top Democrat on the House Education and Labor Committee, to request in June that the Department of Labor further investigate conflicts of interest among investment consultants.
Besides underperformance caused by conflicted investment consultants, management problems are widespread. The mortgage-backed securities and complex derivative products that caused the financial crisis were bought in massive quantities by public pension funds, which were left holding the bag when the schemes imploded.
There’s also the problem of overcharging. The top 25 hedge fund managers make an average of $1 billion annually, much of that drawn from the outsize fees paid by public pension funds. Fees for hedge funds, private equity and real estate managers are typically 2 percent of assets committed and an additional 20 percent on profits earned, as opposed to fees as low as 0.01 percent on assets for index funds. Yet hedge funds typically fail to offer superior performance, and most of the studies that show good results for private equity suffer from significant problems.
A slew of scandals has hit public pension funds, from the former comptroller of the state of New York, who was sent to prison, to the former CEO of the country’s largest state-based public pension fund, the California Public Employees’ Retirement System. Both were implicated for their roles in placing investments in highly opaque alternative investments such as private equity and hedge funds at the pension funds they oversaw.
Yet not even these scandals have drawn sufficient attention to the problem. The New York Times, despite having multiple reporters on the pension and investment beat, declined to cover Miller’s campaign. Pew, which has a huge pension practice (much of it funded by hedge fund manager John Arnold), has never written anything about conflicts of interest among investment consultants — or any of the other issues facing pension investments. Brookings crows about unfunded liabilities but likewise has not published anything about public pension funds’ abusive relationship with Wall Street.
And of course, the politicians most eager to cut pension benefits — notably Illinois Gov.-elect Bruce Rauner and Rhode Island Gov.-elect Gina Raimondo — have clear conflicts of interest when they clamor about the necessity of addressing their states’ unfunded pension liabilities. Rauner and Raimondo have large holdings in the private equity firms they previously managed, and the firms — GTCR and Point Judith Capital, respectively — manage millions for public pension funds in the two states.
Wall Street wants public discussion on pensions to focus on unfunded liabilities to deflect attention from the real problem: Nearly every major bank, hedge fund and private equity firm makes big money off pension funds. For a fund to run out of money is exceedingly rare. It is the mother of all red herrings — a carefully crafted plan to keep the public distracted while Wall Street walks to the bank.
The bludgeon of unfunded liabilities is then used to cut retirement benefits to teachers, firefighters and transit workers.
Pushing to cut benefits to public sector workers would be counterintuitive for Wall Street if that led to less money in the pension funds that managers make so much money on. But moves to cut benefits almost always coincide with manipulations to make pension funds seem worse funded than they are. In Detroit, the first major city to cut pension benefits in bankruptcy, the emergency manager lowered the assumed rate of return, which made the pension funds appear less funded, and mandated an additional infusion of cash from the city.
This double movement of lowered assumed rates of return and cutting benefits means that Wall Street can have its cake and eat it too, with more money in pension funds for managers to grift from and less paid out in benefits.
Fundamentally, by obsessing over long-term obligations, the corporate media and influential foundations distract from the core of the problem: Wall Street has its hand in the pension kitty. Hard-won benefits are not the problem; Wall Street is.
In particular, he discusses the symbiotic and parasitic relationship between Wall Street and public pensions and highlights the inherent conflicts of interests from useless investment consultants to ambitious politicians pandering to alternative investment managers.
There is a lot of information in this comment but I urge you to read it carefully and understand the politics and implications of Congress's cut to private pensions. When it comes to politics in Washington, it's more of the same from both major parties, they basically shamelessly pander to their Wall Street masters and leave Main Street out to dry.
Below, Karen Friedman, Executive Vice President and Policy Director of the Pension Rights Center discusses the implications of the pension cuts. Listen to her expose how Congress just nuked pensions with little or no regard for millions of workers that now face pension poverty.
And if you have never seen it, watch the late, great George Carlin discuss The American Dream (warning: profanity). Carlin was absolutely right, "it's called the American dream because you have to be asleep to believe it."