July 2012, Week 1


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The Real Causes -- and Real Solutions -- to the U.S. Pensions Crisis

by Jack Rasmus

Talking Union
A Project of the DSA Labor Network
July 3, 2012

A pension crisis of major dimensions is growing in the
US across all three forms of defined benefit plans
(DBPs) - public, private single employer, and private
multi-employer plans.

Corporate America and its political friends have begun
to use the economic crisis that commenced in 2007 as an
opportunity to initiate and expand yet another offensive
aimed at further undermining defined benefit pensions in
the U.S. Having already begun in 2009-10 with a new
attack by governors on public employees' pension plans,
the Corporate Offensive over the subsequent eighteen
months has expanded to include new coordinated attacks
on private sector multi- employer and single employer
DBPs as well.

Contrary to corporate, press and politicians' claims,
the crisis in pensions has had nothing to do with
pension benefit increases for the workers. In many cases
pension benefits have been frozen or actually reduced
over the past decade and especially so since 2008.

Rather the crisis is directly attributable to government
and corporate policies that have been implemented over
the past thirty years - including, but not limited to,
two decades of government encouraged management
practices reducing pension funding, stagnant jobs and
wage growth since 2001, massive speculative investment
losses by pension funds, the collapse of the economy,
jobs, and pension contributions after 2007, and the
failure of the US economic recovery to restore jobs and
wages the past three years, 2009-12. Brief Overview of
the Pensions Funding Gap

Multi-employer defined benefit pensions in the 1990s
averaged shortfalls in funding (i.e. ratio of assets to
liabilities) of only a very manageable $30 billion
throughout the decade.

A 2009 Report by the Pension Benefit Guarantee
Corporation, the quasi-government agency responsible for
ensuring pension funds stability and solvency in the
private sector, had a funding shortfall of $355 billion.
A similar scenario applies to ratios and shortfalls in
funding for single employer pensions, with funding
shortfalls of approximately $407 billion. The highly
respected Pew Center's 2008 estimated public sector
pensions gap for 2008 of $452 billion.

But the shortfalls in all the defined benefit pensions
are overwhelming the result of economic conditions,
government policies, and corporate practices over the
past 12 years. In 1999, state public employee pensions
were 103% funded, according to the Pew Center.
Similarly, private pensions - multi-employer as well as
single employer - were in good shape at the beginning of
2000. Whatever has happened is therefore clearly a
consequence of events and policies since 2000.

Employers sense an opportunity today to falsify the
facts regarding the causes of defined benefit pension
shortfalls, and to use that falsification to attack and
dismantle what's left of defined benefit pensions that
now cover barely 18% of the workforce compared to three
decades ago when the percentage of coverage was two
thirds or more. What facts are being conveniently
ignored in this new corporate offensive? Corporate
Manipulation of the Pension Funding Gap

Corporations have not hesitated to take advantage of the
funding gap that they themselves have largely created,
with the help of compliant politicians.

On the multi-employer side, the employer new offensive
is evident in a series of banks' reports claiming the
funding gap is even greater than it is. By making
extreme low-ball assumptions on returns, banks' research
departments and corporations argue the gap for multi-
employer plans is significantly higher than even the
PBGC has estimated. Their conclusion is major reductions
in pension benefits are therefore required, even though
pension benefit payments are not the source of the

This strategy of overestimation of the funding gap,
cherry- picking the worst assumptions and then
extrapolating the losses in a straight line out for
decades, has been adopted as well by governors and state
politicians intent on cutting pension benefit payments
to resolve a crisis workers did not create.

A typical, extreme case is New Jersey governor, Chris
Christie, who over-exaggerates an estimated $2.5
trillion funding gap in 2010 - i.e. six times greater
than that estimated by the respected Pew Center.
Christie's answer to the shortfall in New Jersey is a
massive gutting of public employee pension benefits.
However, Christie conveniently hides the fact that his
state, New Jersey, only made 31% of the required
contributions to its employee pension fund in 2009, thus
contributing significantly to its relatively low funding
ratio of 66%. Like Christie, governors complaining the
most about State pension funding gaps are typically
those who created those gaps by refusing repeatedly to
make the required contributions to their pension funds
in the first place.

Single Employer Pension funds are also under a similar
direct attack, exemplified by the latest efforts of
American Airlines to project massive losses in its fund
as a way to justify dumping it on the PBGC and thereby
shedding $9 billion in contributions it should have
made, but didn't, for decades. American Airlines for
decades has been one of the most egregious practicers of
`pension contribution holidays', refusing year after
year to make legally required contributions to its fund,
and thereby ensuring it would be under-funded.
Fundamental Causes of the Pension Funding Crisis

The deterioration in defined benefit pensions over the
past decade has had virtually nothing to do with
providing more generous benefits for workers. Nor is it
the case that workers are retiring in greater numbers
all at once. The causes of the pension shortfalls are
due to reductions in employer contributions to the
pension funds for multiple reasons, to speculative
investments gone bad and massive losses in pension funds
over the preceding decade, a major collapse in jobs
since 2000 due to repeated and protracted recessions,
jobless recoveries, and shifting of jobs offshore that
have further undermined total pension fund
contributions, and government policies since 2008 that
have ensured pension fund returns on investment are
reduced to below-normal historical rates of return..

The following is a partial summary short list of a dozen
true causes of shortfalls in defined benefit pension

 1.  Two recessions since 2000 and two bouts of `jobless
 recoveries' (2002-05 and 2009-12) resulting in sharp
 reductions in contributions to the funds

 2.  Structural unemployment due to offshoring and free
 trade that has in addition to #1 progressively reduced
 jobs and therefore contributions, especially in tech
 and manufacturing industries

 3.  Government allowed `pension contribution holidays'
 that permitted suspension of employer contributions for
 decades, thus further lowering the contributions base
 of the funds

 4.  Employer manipulation of actuarial assumptions,
 like phony overstated rates of return and projected
 hirings that never happen, that covered up the

 5.  Government rules that allow the diversion of
 pension funds to cover 20% of rising employer health
 care insurance costs

 6.  De-unionization of the workforce, resulting in
 employers suspending private pension plan participation
 for new workers, thus further reducing contributions.

 7.  Shift in U.S. job markets to part time and temp
 `contingency' jobs and workers by tens of millions, who
 are excluded from participating (and thus contributing)
 to DBPs

 8.  Legislation and court decisions over the past
 decade that have promoted 401k plans and conversion to
 `Cash Balance Plans', diverting contributions to what
 would have been to defined benefit pension funds.

 9.  Phony business bankruptcy policies that have
 permitted easy dumping of pensions on the PBGC, the
 Pension Benefit Guaranty Corporation that ensures DBPs,
 encouraging employers to underfund the pensions to
 create justifications for dumping the pensions.

 10.  Easing of restrictions allowing companies to leave
 multi-employer plans and for single employers exiting
 the PBGC

 11.  Pension Protection Act of 2006 that allowed
 pension funds to partner with high-risk speculators
 like hedge funds, resulting in pension funds' headlong
 rush into speculative investing in subprime mortgages
 and other high risk real estate and financial markets,
 the consequence of which was massive fund losses in
 2000-02 and again in 2008-12.

 12.  Low rates of return in general over the last
 decade on investments by pension funds, attributable
 largely to the protracted recession since 2008 and,
 even more so, to the Federal Reserve Bank's still
 continuing policy of zero interest rates for four
 consecutive years.

Fundamental Solutions to the Pension Crisis

Pension funds are financial institutions. They perform
much like commercial banks by lending to other non-
financial institutions.

In 2008-09, the Federal Reserve bailed out the banks to
the tune of $9 trillion by providing zero interest loans
to banks for the past four years. The Fed also bought up
bonds, especially mortgage notes, from the banks at
their full value instead of their real depressed market
values, thus further directly subsidizing the banks. The
Fed in this manner not only bailed out banks and
investment banks, but big conglomerates like GE and GM
and their credit arms. So why shouldn't it similarly
provide assistance to financial institutions like the
pension funds?

Given that the real causes of current pension fund
shortfalls are: insufficient contributions by employers,
bad investments by fund managers as a result of high
risk speculation and losses, government rules allowing
the undermining of pensions, and poor rates of return on
investments by funds due to government economic policies
since 2000 - real solutions to the crisis should tackle
the real causes.

Therefore, Congress, the President, and the Federal
Reserve should:

 *  Provide short term 2 to 5 year bridge loans as
 needed to pension funds temporarily whose funding falls
 below 70% - i.e. funding provided at the same rate the
 Federal Reserve has been bailing out banks for the past
 four years, at a rate of 0.25% interest.

 *  Allow pension funds to issue their own bonds, much
 like corporations now issue bonds, and the Fed purchase
 those bonds long term, 10 and 30 years, to provide
 additional funding as necessary to pension funds.

 *  Prohibit pension funds from partnering in
 investments with hedge funds and other high risk
 financial institutions and financial instruments.

 *  Cities and local municipalities should be reimbursed
 for losses due to banks' fraudulent and false promotion
 of derivatives and interest rate swap deals of the last
 decade, just as other institutional investors have been
 reimbursed for fraudulent subprime mortgages deals of
 recent years.

 *  Pension funding contribution holidays should be
 legally banned. Diversion of pension funds' resources
 to subsidize employer health plans should be further

 *  Corporate bankruptcy laws should be amended to
 prevent dumping of single employer plans. All non-
 pension assets in bankruptcy should be ruled
 subordinate to pension assets, requiring all other
 assets disposed of before pension funds are considered.

 *  Restrictions on employers exiting from multi-
 employer plans and from the PBGC should be

 *  Public employee plans' spending on consultants
 should be limited by law to no more than 1% of annual
 contribution levels.

 *  Employers should be prohibited from exempting
 `contingent' workers from participation in plans, and
 should be required make pension fund contributions for
 all part time and temporary workers proportional to
 their total hours worked.

 *  Restore jobs and wage growth. The most important
 long run source of restoration of pension fund solvency
 is the creation of jobs at an historically acceptable

 *  A sustained economic recovery - not the current
 `stop- go' economy - that would raise rates of return
 on normal pension fund investments to restore losses of
 recent years

The crisis in Defined Benefit Plans is a crisis that has
been brewing for decades, but that has appreciably
worsened since 2000 and significantly further
deteriorated after 2007. It is a crisis of falling and
insufficient contributions fundamentally and not a
crisis of excess liabilities or benefit payments to
workers. Employers, both private and public, are now
using the crisis they created that reduced contributions
for decades to attack benefits. Fundamental solutions to
the pension funding problems in DBPs must rectify the
source problems on the contributions side of the fund

[Jack Rasmus is the author of the April 2012 book,
"Obama's Economy: Recovery for the Few", published by
Pluto Books and Palgrave-Macmillan, which includes a
final chapter on `An Alternative Program for Economic


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