When Benefits Become Deficits
Boy, do I feel smart now. I worked for a big company for a few years right out of college, and took my retirement money in dollars rather than stock. Jon Entine writes at reason that pension funds are soon to implode:
If the stock market remains in a funk for even a few more months, corporations that oversee union pension funds and state and municipal leaders responsible for public retirement pools may be faced with difficult choices. First on the docket might be postponing cost-of-living increases and reducing health care coverage for retirees. Over the longer term, benefits for new employees will have to be shaved and everyone is likely to see an increase in personal payroll contributions. Corporations will have to resort to more cost cutting and layoffs of their own just to guarantee the solvency of their pension funds. And things could go from bad to terrible if the managers of those funds do not quickly revise their investment practices.During melting markets, all pension funds come under siege. If you're covered by a "defined contribution" plan, contributions are invested, usually by your employer and usually in the stock market, and the returns are credited to the employee's account. Your retirement savings grow if the market rises or, as is the case now, bleed when it crashes. You carry the risk on your shoulders.
The risk shifts to the employer under "defined benefit" plans, in which future outlays are guaranteed. That seemed like a great idea for business as recently as 2007, when the market was rising and the pension funds of America's 500 largest companies held a surplus of $60 billion. Now they're at a deficit of $200 billion, with fund assets dropping like a lodestone.
The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, and those dire numbers are increasing.
Whoops, maybe it's a little soon to feel smart. Also, as Entine writes, maybe those companies should have been a little more interested in the fiscal welfare of those enrolled in their funds, instead of social causes:
Many union funds and larger state pension plans screen stocks and investment opportunities based on what are known as "socially responsible investing," or SRI, principles. Instead of focusing solely on maximizing value, fund managers have used the economic clout of concentrated stock holdings to make a statement by divesting from companies that don't make it through certain "sin screens." These included companies involved with weapons, nuclear energy, tobacco, alcohol, natural resources, and genetic modifications on agriculture, many of which did well over the past decade. Stocks of public companies deemed to have poor records on labor, environmental issues, women's rights, and gay rights are also frequently screened out, as are corporations that do business with regimes that activists consider unsavory. In some cases, investments have been withheld altogether from some of the markets expected to best weather the current financial storm, including China and India, because of perceived transgressions.Socially responsible investing now claims a market of more than $2 trillion, according to the Social Investment Forum, the trade group for social investors. There are dozens of mutual funds and investment advisory companies that incorporate ideological screens. Most of them are liberal, although there are now a few conservative funds and some based on religious principles, such as Islamic law. Activist treasurers and pension fund managers in numerous states and municipalities, most notably in California, New York, and Connecticut, have incorporated social screens into their investment strategies.
Many of these funds prospered in the 1990s, when the basic material stocks that they frowned upon swooned, while the favored sectors--mostly technology and financial stocks, which were considered "clean investments"--did great. But the technology and communications bust of 2000-02 knocked out one of SRI's pillars, and now the crash in financial stocks has destroyed the other. Despite much hype to the contrary, socially responsible stocks, as measured by major broad-based SRI stock funds, have significantly underperformed the market this decade, and some of the most aggressive pension funds that use "responsible" screens--such as the California Public Employees' Retirement System--have taken some of the largest hits.
"Investing in socially responsible stocks just because they are socially responsible is not--underline not--a valid investment thesis," says Steven Pines, a senior investment consultant for Northern Trust. Many of the largest socially responsible mutual funds, including a leading benchmark, the Domini Social Index, have been laggards for years. The Sierra Club's high-profile social fund, which had regularly trailed the benchmark S&P 500 index by about 6 percent a year, liquidated in December, a victim of its poor performance record. As recently as last November, 76 out of the 91 socially responsible stock funds were underperforming the Dow, according to the investment research company Morningstar.
Thanks, but I'll send money to social causes of my own choice.
I worked for a company a few years ago that offered Christmas "bonuses" of a ham, a turkey, or a certificate that would one to buy something like a nice piece of smoked salmon.
Or, the employee could let the company donate the "value" of the bonus to charity. I took the bonus. Why should I give up something, albeit of not great value, to allow my employer to take a tax benefit? I'd be the one actually giving something up yet the bosses would reap the gain of a tax deduction. Bump that.
I also get royally pissed off when movie theaters screen an anti-cancer ad before the feature, then send an usher up the aisles to collect money from the patrons. As soon as you give me a receipt that the IRS will accept, I'll put a dollar in the bucket. But if you want to make corporate contributions, take it out the $8 I paid for a damn ticket.
BlogDog at January 14, 2009 6:48 AM
Well. I was *wondering* what the next bailout would be. This will be another transfer of wealth from young, working people to old, non-working people who believed unrealistic promises. We pay for their SSI, taxes to bail out their pensions, and what is left for us? A shrinking 401K? Why are these people entitled to 30-year retirements at someone else's expense?
Pirate Jo at January 14, 2009 7:11 AM
That "socially responsible" investing is such a crock of shit. As you may have noted from current financial news, finding a stock that gives decent returns is a little challenging. Why would you want to make it even more difficult by limiting yourself to choices of companies that are "socially responsible". In fact,a good barometer of when to get out of a company is when they start emphasizing how "socially responsible" they are. One expample is WFMI (Whole Foods). A few years ago they made a big deal about putting solar panels on their store roofs. (Which is fine with me if it saves them money) It generated a hysterical quote from one of their senior manegement. Something along the lines of "We think this is an importaant step for our environmentally conscious customers. This will give them a reason to drive past other supermarkets and come to Whole Foods for their food shopping." Huh? driving past stores to get to WFMI? Wouldn't that generate Co2? Another example is SBUX. That was a great growth stock when they were selling coffee. When they started concentarting on saving the world, not so much.
sean at January 14, 2009 7:33 AM
Well, Pirate Jo, somebody elects the guys who make these promises with our money.
On the pension front, I'm going to disagree a bit. Mine was part of my compensation, which I earned even if I didn't have to contribute. I had opportunities to work elsewhere for more money, but elected to stay precisely because of the pension. It's not huge, but it's something I earned, am owed, and am collecting. It can no more be un-done than your salary can be retroactively lowered for the past few years.
The big problem, as I see it, is that politicians are ever ready to blame business for everything. I don't see anybody driving a Federal car, or watching a Washington TV, or eating a DC hamburger. The government allowed these businesses to pull money out of their over funded pension plans not long ago. Why? Did they think there would never be a downturn?
I never had the option of taking a pension as a lump sum, so Jon Entine's explanation is a bit off. The actual problem the act was trying to address was that of a company going bankrupt and not being able to meet its future pension obligations.
If this scares you, consider that Social Security will shortly be unable to meet its obligations from current income. At that point, they'll "dip into the surplus" which has already been spent. The pension funds will look really good then.
MarkD at January 14, 2009 10:42 AM
MarkD, my problem with pensions is that they were never realistic promises to make to employees in the first place, for precisely the reason you mention: did they think there would never be a downturn?
I mean seriously, how is a company supposed to stay in business if the biggest chunk of its expense equation is payments to people who no longer even work there and contribute value? If a company promised to take care of me forever, from the age of 65 until death, I think a couple of alarm bells might start ringing. When a company makes promises it can't keep, it should go bankrupt and the promises should not be kept at the expense of the taxpayer. That's like me expecting the government to bail me out if I take a vacation and then don't pay the credit card at the end. You can't get blood out of a turnip, but if your generation is big enough, I guess you can get it out of the taxpayers.
Younger people (from Generation X on down) don't have pension funds, nor will we get social security. We'll just have to pay for everyone else's, and then have nothing to retire on ourselves. If retirement was never more than a pipe dream to begin with, why should one generation have it handed to them (via the government) at the expense of another? Yes, as you said, people elect these guys - people like you. Because you outnumber the people who are actually going to end up footing the bill for your pension.
Pirate Jo at January 14, 2009 12:20 PM
"Mine was part of my compensation, which I earned even if I didn't have to contribute. I had opportunities to work elsewhere for more money, but elected to stay precisely because of the pension. It's not huge, but it's something I earned, am owed, and am collecting. It can no more be un-done than your salary can be retroactively lowered for the past few years."
Odd, I don't recall being invited to negotiate how much *I* had to pay to *your* retirement benefit. Yet here you are, now telling me I must pay you for something you and another party agreed to.
Hmm. Not sure I am convinced I should pay. Oh, what is that, you have a tax collector who will do the work for you? Oh, well, in that case, I need to go fishing rather than spend my day in the office. Might as well enjoy my time if I will not enjoy the income I earn by selling said time.
Spread that decision across the economy, and I hope you see what your view of things leads to.
Spartee at January 14, 2009 1:58 PM
Social investing is a pile of crap. If your customers want you to have "green" products, then the only way to get there is to maximize profits in order to reinvest in your business.
I also don't really have a problem with pension funds per se. As long as they are voluntary and defined contribution. Why the hell should a company be responsible for the returns of the market? And bailing out defined benefit pension funds makes us all responsible for market returns. That's even more outrageous.
Charles at January 14, 2009 2:06 PM
"I need to go fishing rather than spend my day in the office. Might as well enjoy my time if I will not enjoy the income I earn by selling said time."
A-freaking-men. If you live cheap enough, you can dodge all this silliness by reducing your earnings. It is income that the federal government taxes you on, after all. Just stop playing the game.
Pirate Jo at January 14, 2009 3:05 PM
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