Employment

Multiemployer Pensions, the Tragedy of the Commons, and the “Last Man Standing” Rule

by Ivan Osorio on April 4, 2012

in Bailout Watch, Economy, Employment, Labor, Regulation

The “tragedy of the commons,” as described by the late ecologist Garrett Hardin, generally refers to the depletion of a finite resource caused by individuals rushing to take as much of it as possible before others do the same. In the case of multiemployer pension plans, it aptly describes the perverse incentive for individual companies to contribute less than needed to keep plans fully funded.

While corporate pensions have recovered somewhat since the onset of the financial crisis, multiemployer plans remain dangerously underfunded. “According to BNY Mellon Asset Management the funded status of the typical U.S. corporate pension plan stood at 76.2 percent at the end of February,” reports Institutional Investor. “The story is totally different, however, for multicompany plans. A new report issued by Credit Suisse Securities found the funding levels for these plans currently stands at a disturbing 52 percent.”

One reason pension underfunding has become a major issue is a change in accounting rules by the Financial Accounting Standards Board (FASB), which now requires firms to disclose multiemployer plan liabilities. For an individual company, those liabilities can be much greater than what it owes its own employees, due to the “last man standing” rule, under which multiemployer plans operate. Under this rule, every company in the pension plan is responsible for all pension liabilities of every other firm in the plan. Thus, firms that go out of business leave their liabilities behind for those still left in the plan.

The moral hazard in this arrangement is obvious. Lawmakers and agency officials who want to pursue real pension reform should look for ways to disincentivize firms joining multiemployer plans. That is bound to run into opposition from labor unions, for which the promise of a secure retirement provides a good way to attract new members. The problem is that multiemployer plans, as currently construed, are not sustainable, so the prospect of a secure retirement based on them is a mirage.

The new FASB reporting rules are a good first step. By making pension liabilities visible to investors, it gives companies good reason to address them.

Yet the dangerous nature of multiemployer plans should be reason enough not to join them. Credit Suisse warns, “Keep in mind that larger companies could end up taking on more of the multiemployer burden as the ‘last man standing’ in the plans, if smaller companies were to fail.”

Finding out who that “last man” would be is a game no one should have to play. The “last man standing” rule needs to go.

For more on pensions, see here.

Economic “Recovery” Is Slow and Weak Due to Obama Administration Policies

by Hans Bader on April 2, 2012 · 4 comments

in Deregulate to Stimulate, Economy, Employment, Healthcare, Labor, Regulation

Typically, after the economy suffers an unusually severe recession, it bounces back in an unusually rapid recovery — what some economists and others refer to as the “rubber-band effect.”  But not now. Despite the huge worldwide recession in 2008-09, the economy has experienced only a weak recovery, with fewer people employed in America today than when President Obama took office. “At this point in the typical post-World War II recovery, the economy was growing at an average pace of nearly 5 percent. The Obama recovery has managed just over 2 percent.” As James Pethokoukis notes in the New York Post,

A Federal Reserve study from late last year looked at the behavior of recoveries from recessions across 59 advanced and emerging market economies during the last 40 years. The Fed found, to no great surprise, that recoveries “tend to be faster” after severe recessions, such as the one we just had. . .The deeper the downturn, the more robust the rebound — unless government messes things up.

For example, during the 1981-82 recession, output fell by 2.7 percent and then rose by 15.9 percent over the next 10 quarters (at an average pace of 6.0 percent). During the Great Recession, output fell even more, by 5.1 percent. But during the 10 quarters since, total economic output is up only a paltry 6.2 percent. Score one for Reaganomics.

But what about the depressing effect of Wall Street’s near-death experience back in 2008 and 2009? Well, that same Fed study found that bank or other financial crises “do not affect the strength” of subsequent recoveries. . .[What] might explain half of the Obama recovery’s underperformance versus the Reagan recovery. . .? Maybe we can attribute that to policy differences.

While one president cut long-term marginal tax rates, the other tried a massive burst of federal spending. One empowered private enterprise; the other empowered government.

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Rhode Island Pension Reform Shows Boldness Pays

by Ivan Osorio on March 26, 2012 · 2 comments

in Economy, Employment, Labor

Across the nation, large and growing budget deficits have forced politicians from across the political spectrum, including some Democrats, to seek to bring public employee compensation under control. This has required them to take on government employee unions, which has created considerable friction between the unions and their traditional Democratic allies (a point I’ve noted elsewhere).

Many Democratic lawmakers’ reform proposals have not been as far-ranging as those put forth by their Republican counterparts, but deep-blue Rhode Island is a notable exception. In fact, the Ocean State’s  pension reforms are the boldest in the nation to date.

This weekend’s Wall Street Journal features an interview with Rhode Island State Treasurer Gina Raimondo, who designed the state’s pension overhaul. It is well worth reading. Rhode Island’s pension reforms confirms the characterization of pension reform by Utah State Senator Dan Liljenquist, who led his state’s successful pension reform effort: ”This is not a conservative-versus-liberal issue, this is a reality issue.”

Indeed. Liljenquist is a Republican, and therefore unlikely to get union support. Raimondo is a Democrat, but her state’s pensions faced a financial situation so dire that tackling the problem became a priority, even if it risked a union backlash. As the Journal‘s Allysia Finley notes:

The new law shifts all workers from defined-benefit pensions into hybrid plans, which include a modest annuity and a defined-contribution component. It also increases the retirement age to 67 from 62 for all workers and suspends cost-of-living adjustments for retirees until the pension system, which is only about 50% funded, reaches a more healthy state.

Several states have increased the retirement age or created a new tier of benefits for future workers, but reforms that only affect not-yet-hired employees don’t save much money. A lot of “people say we’ve done pension reform when all they’ve done is tweaked something,” Ms. Raimondo points out. “This problem will not go away, and I don’t know what people are thinking. By the nature of the problem, it gets bigger and harder the longer you wait.”

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In April, she convinced the state pension board to cut the discount rate by which the state calculates its pension liability to 7.5% from 8.25%. She claimed that 7.5% was a more honest number since the actual investment return rate over the last decade was 2.28%.

Of course, not all state pension reforms will be as comprehensive as Rhode Island’s, but for many states doing nothing is not an option. Today, a Journal editorial posits that New York Governor Mario Cuomo may have missed an opportunity in reforming his state’s public employee pensions.

The piecemeal reforms are a step in the right direction and would be more encouraging if the Governor hadn’t then declared pensions a closed issue. The legislation offers the relatively few non-unionized employees the option of 401(k)-style pensions, which they can take with them if they leave government service. It also raises the retirement age to 63 from 62 and trims today’s generous annuities—typically about $50,000 to $60,000 a year for career civil servants—by between 4% and 8% for new employees.

The state projects the reforms will save $80 billion over 30 years, which isn’t chump change. Even so, state and local governments will pay about as much on pensions in the next five years alone. Since these reforms apply only to future workers, pension costs will continue to grow, albeit at a slower rate. The savings are also dependent on lawmakers not goosing benefits once the economy recovers and the public isn’t looking. That’s what happened in 1983 after a pension fix seven years earlier.

Mr. Cuomo’s original pension plan was bolder, though still timid compared to the reforms New Jersey and Rhode Island Democrats passed last year that affect current workers and retirees.

Their need for political support from unions could make more Democratic politicians shy away from pursuing an aggressive pension reform agenda. But then they might face the wrath of voters who have to deal with, in Raimondo’s words, “[b]udgets that don’t balance, public programs that aren’t funded, pension funds that are running out of money, schools that aren’t funded …”

For more on public pensions, see here.

Some Good News on Pensions, for a Change

by Ivan Osorio on March 21, 2012 · 1 comment

in Bailout Watch, Economy, Employment, Labor

Over the last four years, state governments across the nation have been trying to bring their labor costs under control, especially pensions, which are now imposing huge unfunded liabilities. This has been an uphill battle, as reforms generally face opposition from government employee unions. Yet, despite that opposition, lawmakers in most states have been able to enact some reforms, of varying boldness. A new report from the National Conference of State Legislatures (NCSL) has some encouraging news.

The NCSL report states, “From 2009 through 2011, 43 states enacted major changes in state retirement plans for broad categories of public employees and teachers to address long-term funding issues.” Reforms enacted include:

  • Increased employee contributions;
  • Higher age and service requirements for retirement;
  • Reduced commitments to post-retirement cost of living benefit increases; and
  • Changes in formulas for calculating benefits.

The last change is especially significant, because in many jurisdictions public employees have been gaming the system through a practice known as pension spiking. This is made possible by pension systems setting retirement benefits based on an employee’s final year earnings. That allows an employee nearing retirement to rack up a large amount of overtime, which then gets calculated into the pension payout.

Some pension systems set benefits based on an average of an employee’s last few years of service. This helps to alleviate the costs from spiking, but it can only do so effectively by covering a long enough period. California Governor Jerry Brown recently has proposed basing pension payouts on a final three years’ average — much too narrow a time window. A more effective reform would use either a career average or a considerably longer time period. Some states, wisely, do use longer time periods; more should.

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National Debt Skyrockets Under Obama, Far Faster Than Under Bush

by Hans Bader on March 20, 2012 · 2 comments

in Economy, Employment, Politics as Usual, Stimulus to Nowhere, Zeitgeist

CBS News finally reports the obvious: the national debt increased more in President Obama’s first three years in office than in the entire eight years of the Bush administration. Earlier, the Congressional Budget Office predicted that Obama’s policies would increase the national debt by $9.7 trillion. National and state debt figures are massively understated by their failure to include unfunded pension obligations and healthcare entitlements. Americans now owe $189,000 each in national debt and unfunded entitlements. That’s 885 percent of our economy’s size (or GDP), exceeding Greece’s debts and unfunded liabilities, which amount to 875 percent of its economy (although Greece is worse off than the U.S. now since its economic growth is lower due to factors like greater corruption and a more rapidly-aging population, and its borrowing costs are higher). In the 2008 campaign, then-Senator Obama promised a “net spending cut,” but as soon as he was elected, he proposed substantial spending increases, resulting in the largest budget deficits in history.

Massive budget deficits and mushrooming pension and health-care entitlements increased the federal government’s long-term obligations by $4.2 trillion in 2011 – more than three times the $1.3 trillion official figure for the federal budget deficit, noted a Washington Post article. Obama’s $800 billion stimulus package, which benefited the public-employee unions that receive lucrative unfunded pensions and health benefits, will actually shrink the size of the economy in the long run, the Congressional Budget Office says, although it temporarily pumped up employment among government employees. (By contrast, two economists argue that it wiped out the jobs of a million private-sector employees by diverting money from the private sector to the public sector.)

Bill Clinton’s Economic Nationalism

by Ryan Young on March 15, 2012 · 3 comments

in Economy, Employment, Energy, Features, Immigration, Stimulus to Nowhere

Post image for Bill Clinton’s Economic Nationalism

Over at RealClearPolicy, I recently reviewed Bill Clinton’s latest book, Back to Work: Why We Need Smart Government for a Strong Economy. You can read the review here. It’s a thought-provoking book, so there’s plenty I didn’t have room to say. Hence this post. Where the review focused mainly on Clinton’s philosophy and rhetoric, this post is mainly about Clinton’s economic policy proposals. I’ll still take him over Bush or Obama, but some of his policy ideas make an economist’s head shake.

Two things are worth pointing out before we dig into the weeds of policy. One is that Clinton seems to believe that you are for something if you want to increase government spending on it, and against it if you want to cut government spending on it. The logic does not necessarily follow. Many people think the federal government should not be involved in the automobile industry. Therefore, they are against American-made cars. Yes, the logic is that weak. This bit of tunnel vision is not unique to Clinton, but it weakens many of his arguments.

The other point is a surprising one. Nationalism pervades the book; this is the belief that one person matters more than another if they are a citizen of one country instead of another. One expects this from Republicans. But it’s surprising to hear from a Democrat, let alone the man who passed NAFTA. It’s as though after decades of stump speeches telling voters that they’re better than everyone else, he started to truly believe it. Many of Clinton’s policy proposals leave no possibility but to believe that he is an American nationalist; let us explore.

Trade as a Battle

Clinton repeatedly refers to other countries as “the competition.” We have to beat them, or they’ll beat us. It’s as though he believes that for China and India to have more, America must have less. This simply isn’t true, according to global GDP data. Besides falling for the zero-sum fallacy, this reveals an ugly mindset.

Suppose we beat our competitors in Clinton’s zero-sum world. Rich Americans would be redistributing wealth away from the global poor and giving it to themselves. This kind of reverse redistribution is hardly progressive.

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Student Loans: America’s Next Debt Bomb

by Hans Bader on March 13, 2012 · 2 comments

in Bailout Watch, Economy, Employment

I understated things earlier when I wrote that the student loan bubble “may” explode in taxpayers’ faces, as law professor Glenn Reynolds pointed out. An explosion seems increasingly likely. The Washington Post recently concluded that student loans could be America’s next “debt bomb”: “Bankruptcy lawyers have a frightening message for America: They’re seeing the telltale signs of a student loan debt bubble,” notes the Post. “Bankruptcy lawyers have seen a substantial increase in the number of clients seeking relief from student loans in recent years.”   Many of the “parents or guardians who co-signed the student loans face the prospect of losing their life savings, cars or homes to collection agencies.” In recent years, student loan debt has skyrocketed from $100 billion to $867 billion, “surpassing the $704 billion in outstanding credit card debt,” says UPI. There has been a massive “spike in” student loan debt owed to the Education Department over the “last three years.” Will these skyrocketing financial burdens lead to a clamor for massive bailouts at taxpayer expense?  (A growing and substantial fraction of graduates are failing to repay their student loans).

This massive student loan debt is not buying much of an education for many students. At Minding the Campus, Mary Grabar discusses the slanted, error-filled writings used to teach English majors in America’s politically correct universities, where ignorance of history is apparently a selling point. Texts for English students celebrate Obama’s speeches, like his Cairo speech that contained multiple historical errors, and treat them as if they were on par with the Gettysburg Address and Martin Luther King’s “I Have A Dream” speech. As Grabar notes, in the English texts that venerate Obama’s speeches, “Obama’s historical inaccuracies in” his Cairo “speech go unchallenged,” like falsely “attributing the invention of printing to Muslims (it was the Chinese) or crediting Morocco with being the first to recognize the United States (No–Russia, France, Spain and the Netherlands did it earlier).” As Grabar points out, “Obama’s claims in his Cairo speech are presented without any skepticism” by English textbook writers, despite the factual errors, and the fact that even the liberal Huffington Post noted the speech’s “lack of substance.”

As USA Today noted earlier, college students learn less and less with each passing year, according to recently-released research. “Thirty-six percent” of college students learned little in four years of college, and students now spend “50% less time studying compared with students a few decades ago, the research shows.” Thirty-two percent never take “a course in a typical semester where they read more than 40 pages per week.”

Actions by the Obama administration have increased college costs and driven up tuition. The administration has discouraged vocational training needed for high-paid, skilled factory work, contributing to a severe shortage of skilled factory workers — thus making it harder for factories to expand their operations and hire workers, including the unskilled workers among whom unemployment remains highest.

If PBGC Cannot Go On Taking Over Pensions, It Will Stop

by Ivan Osorio on March 12, 2012 · 1 comment

in Bailout Watch, Economy, Employment, Labor

Herbert Stein’s law — “If something cannot go on forever, it will stop” — is being proven right once again. This time, what cannot go on is the Pension Benefit Guaranty Corporation (PBGC) taking on responsibility for more bankrupt companies’ defined benefit pension funds.

Ford Motor Co. has announced that it will offer lump-sum pension buyouts to salaried employees beginning in July. This comes on the heels of American Airlines’ announcement last week that it would freeze pensions for flight attendants and ground workers, rather than turn them over to the PBGC — a move the agency had opposed. The PBGC already faces a $26 billion shortfall. Taking on more pension obligations would only add to that deficit.

A freeze allows workers to keep their existing pensions, but not earn additional benefits. While, as The New York Times reports, “The Transport Workers Union, which represents American’s mechanics and other ground workers, described the compromise as a victory,” that “victory” may be short-lived. Yes, unionized American Airlines employees will keep their full pensions, but that is likely to accelerate other firms’ transitions from defined benefit pensions to defined contribution retirement plans.

That would take away a big union selling to potential members: a guaranteed secured retirement. Individual workers who control their own retirement savings don’t need unions to negotiate on their behalf in that regard. The possibility of passing on pension obligations to the PBGC allowed companies to delay making changes to their pension plans. As that becomes more difficult, we should expect more announcements like Ford’s.

For more on the PBGC, see here and here.

Higher Education Bubble May Explode in Taxpayers’ Faces

by Hans Bader on March 9, 2012 · 5 comments

in Economy, Employment, Zeitgeist

“61 percent of folks with a student loan are not paying,” notes Andrew Gillen, Ph.D., of the Center for College Affordability and Productivity. Many of the non-payers are still in school, but many others have long since graduated, but are failing to make payments on their student loans. “To give you sense of how unhealthy this is, consider that after the worst housing price crash in our history, 28% of mortgages were underwater.” In short, it looks like there is a huge higher education bubble about to explode in taxpayers’ faces.

Gillen notes that there is a whopping “$870 billion outstanding balance” on student loans. Only “$85 billion” is technically classified as “past due.” But that’s because there is a “massive contingent (47%) in deferment (mostly current students) or forbearance (mostly unemployed or under-employed?).” That’s in addition to at least 27 percent who “should be repaying but aren’t,” since they aren’t in deferment or forbearance.

No one really knows exactly how many people with student loans have effectively defaulted, even though the number appears to be skyrocketing, because the government’s data is such a mess that it seems designed to obfuscate rather than illuminate the problem. Until recently, government data lumped together completely-unrelated loans into

a bucket of random obligations called “Miscellaneous”, which included things like utility bills, child support, and alimony. And it turns out that if you went burrowing in that miscellaneous debt, there was actually a pile of weirdly-categorized student loans in there. [AG: And these mis-categorized student loans were not included.] Meanwhile, the official cohort default rates from the Department of Education were even more useless. Until recently, only the two-year rate was reported. Moreover, those in forbearance or deferment were counted as repaying their loans, and it took 270-360 days of not making payments to be classified as in default. When combined with the grace period, this means that to a first approximation, the “cohort default rate” was not a default rate in any meaningful sense of the term, but rather a measure of how many students never made any payment at all.

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Structural Factors of the Municipal Pension Crisis

by Ivan Osorio on March 8, 2012 · 2 comments

in Bailout Watch, Economy, Employment, Labor

Public employee pensions are sinking local governments. Over the last four years, they have even pushed some municipalities into bankruptcy – from Vallejo, California, to Central Falls, Rhode Island. Now Stockton, California, threatens to join the bankrupt cities’ ranks.

While distressing, this shouldn’t be surprising, since many of the causes for the pension crisis are structural. Steven Greenhut, of the Manhattan Institute, explains in The Washington Examiner:

Stockton’s situation epitomizes the reality of local government in California today: City governments don’t exist to provide services to the public, but function mainly to dispense high salaries and pensions to the people who work for the government.

Ninety-four of Stockton’s retirees, for instance, receive six-figure pensions, placing them among a rapidly growing list of 15,000 California public retirees in the $100,000 pension club.

No wonder that 81 percent of Stockton’s general-fund budget goes to pay for employee costs, including a generous health care plan that pays the entire medical costs for city employees and spouses for life.

As is typical in California, the city’s police and firefighters can retire at age 50 with 90 percent of their final year’s pay, cost-of-living adjusted — and that’s before the pension-spiking gimmicks that often push their retirement pay above the pay they received while working.

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