July 22, 2003
From the desk of Jane Galt:The next S&L crisis?
From today's Wall Street Journal:
Of late, a wicked double whammy has hit defined-benefit plans. On the asset side, which is typically 50% invested in equities, values evaporated along with the sinking stock market. On the liabilities side, retirement promises, which are discounted based on 30-year Treasurys, ballooned as interest rates fell. Result: a gap that must be closed. Trouble is, taxpayer money may have to close it.The Pension Benefit Guaranty Corporation, a quasi-government agency, insures benefits for 44 million people covered under defined-benefit programs. Over the past year, bankruptcies in the steel, airline and retail sectors have not only vaporized the PBGC's $7.7 billion surplus, but pushed it into a $5.4 billion deficit. Though the agency still has a positive cash flow, the current pace of plan assumptions cannot be sustained. At some point, the PBGC would have to ask Congress for a bailout.
Posted by Jane Galt at July 22, 2003 7:36 AM | TrackBack | Technorati inbound links
isn't this a false gap??
interest rates aren't likely to stay this low (and if they do we're really screwed) for very long... they're likely to double or triple, which should see rapid closing of the gap (3% vs 1% makes a HUGE difference to discounting future values)
so... screw it and lets fix the companies... say defer "mandatory closing" for 5 years... then see where we are... I have a hunch that this'll be fine without corporate intervention, and that the bigger risk is from fixing it now, reducing demand and capital investment, and possibly forcing bankruptcies...
the ebst solution is ending defined benefit (which most people are doing) and not letting companies touch surpluses (or count them in their profits) or having to make up deficits, unles they're long term (say have existed for five or ten years)
its just too easy to game the system
IIRC, the WSJ has been covering this and attributed at least part of the problem to the propensity of companies needing an earnings boost to remove "excess assets" from the plans during the stock boom. If they had left the money there, the situation might be less dire.
Doesn't matter if the gap is real or cosmetic: It's perceived enough to justify gouging my generation to pay off the AARP constituents, so it will be responded to as real. When companies see a chance of a politically popular bail-out and a way out of their deeply moronic defined-benefits pension liabilities, they will happily shoot themselves in the foot to claim hardship and a slice of the bailout. Which I think we can all rely on happening.
I've resigned myself to the fact that I'm going to end up paying for all the risk-ignorant defined-benefit idiocies of the past, from the PBGC's vast moral hazard to Social Security's just-plain-dumb structure.
The question to me isn't how we can avoid having to pay for these mistakes: The bailouts will come and the public sector will assume the private sector's debt and we will have to take it and that's that. The question to me is what, if anything, we can do to euthanize defined-benefit programs and prevent them from ever happening again. I don't mind paying to shut down these programs, but I do mind that someone inevitably will want to keep them limping along to "serve" my generation again at the cost of yet another next one.
Of course, it would help if there were a political party that actually believed in accounting for risk and that sort of thing. But that's another vain hope. Absent that, is there any way to get a political lever into this problem?
--G
This in today's print edition, as well?
Oh this can't be right, Paul Krugman assured everyone it the Defined Contribution plans that have this problem.
anyone that advocates defined benefit plans should be shot (happily, this includes almost every union exec and member... what would life be like without any member of afscme? heaven! more happily, this includes krugman)
Gee whiz, does this mean that people might be better off with a hard asset, with full property rights, than a promise from a corporation, to be fufilled some decades in the future? Who'd' a' thunk it!?
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