May 15, 2012

Press Doesn’t Notice $110 Billion April Rise in National Debt Despite $59 Billion Surplus

Here’s a word which the Associated Press’s Martin Crutsinger only used once in his coverage last Thursday of Uncle Sam’s April 2012 Treasury Statement: “debt.” And when he did, he was quoted someone about Europe’s situation.

To his credit, the AP reporter wasn’t particularly impressed with the fact that the government was able to run a single-month surplus of $59 billion in April. To his detriment, he didn’t note that somehow, the national debt also went up by $110 billion:

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‘Union Pension Bomb’ Has Been Doomed to Explode From the Start

Filed under: Economy,Soc. Sec. & Retirement,Taxes & Government — Tom @ 10:58 am

Monday evening, a Wall Street Journal editorial laid out the massive problems with the nation’s 1,400 multiemployer retirement plans, wherein “companies across an industry pay into a single asset pool.”

They’re in bad shape, as the Journal notes by referring to a detailed report worked up by Credit Suisse:

Multi-employer plans in the U.S. are underfunded by some $369 billion. An estimated $43 billion of that off-balance-sheet liability belongs to the 44 S&P 500 companies that are exposed to multi-employer plans. The other 88% of the $369 billion is borne by small, mid-cap or private firms that may be even less prepared to cover the obligations. The report says Safeway’s $6.9 billion in liabilities amount to 76% of the company’s market cap, for example.

All of this ought to be especially embarrassing to Washington, which requires annual filings to the Department of Labor on multi-employer plans and measures their financial health. But Labor uses an “actuarial” reading of the numbers, which envisions an average (and hefty) 7.5% rate of return on investments, smoothed over five years. Even under that generous view, about 500 plans—or 37%—are less than 80% funded and thus considered financially troubled.

7.5% is a barely defensible rate of return in a well-managed portfolio heavily weighted with equities, which isn’t (or shouldn’t be) the mix found in a prudently run pension plan.

But the problem with these plans — and any defined benefit plan in any industry or at any company, even in the public sector — is far more fundamental than that. In hindsight, everyone who set these plans up in the first place in the two decades after World War II should have known better. But we’ve really known for at least 30 years that they can’t work for one overarching reason: The world never stays the same.

A defined benefit plan inherently assumes at its start that the sponsor paying into the plan — the company, the industry of the government entity — will always be at least as big as or bigger than it was when it was set up, and at least as financially well-off or better off. If the sponsor and its employee base does grow, it then must stay at least that large indefinitely, and it must maintain the same or greater levels of employment.

In the real world over the long-term, this never happens (even in government, as we will eventually learn).

Thus, at some point:

  • In an industry plan, if the industry shrinks, the smaller (and fewer) companies which remain and their relatively small workforces are in essence forced to pay the pensions (and often health benefits) of hordes of retirees from the industry’s heyday. Even this assumes that any new companies joining the industry will get involved with the multiemployer plan, which is certainly not a given.
  • Looking at an individual company, sustainability is an even bigger problem. First, a company has a better chance of failing in the short run than its entire industry. Second — and this is crucial — even if a company remains successful while growing modestly, over time, because of productivity gains forced by competition, it will need fewer workers to produce its products and services. Thus there will be fewer workers to support legions of retirees even in a “successful” scenario.
  • In government plans, there are additional perverse incentives. Unconstrained by competition in the short-run and possessing the power to tax its customers, it makes its pension plans ever more generous until they become unsustainable, even if employment holds steady. Compared to direct wage increases, making pension plans more generous is a less visible way to increase compensation while avoiding taxpayer ire. But there are limits to taxpayers’ patience (and the size of their pocketbooks), and these plans are also hitting the wall around the country.

I can’t say that I have a lot of good answers here, other than the one newer employers have been putting into practice for several decades: If you’re thinking about starting up a defined-benefit plan — think again, and don’t.

Latest PJ Media Column (‘Social Security’s Implosion Continues’) Is Up

Filed under: Economy,Soc. Sec. & Retirement,Taxes & Government — Tom @ 9:08 am

It’s here.

It will go up here at BizzyBlog on Thursday (link won’t work until then) after the blackout expires.

Tuesday Off-Topic (Moderated) Open Thread (051512)

Filed under: Lucid Links — Tom @ 8:20 am

Rules are here. Possible comment fodder may follow later. Other topics are also fair game.

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Positivity: Rick Santorum, on Bella Santorum’s Fourth Birthday

Filed under: Life-Based News,Positivity — Tom @ 5:57 am

Received from Rick Santorum’s campaign late last week:

Nearly four years ago, on May 13, 2008, Karen and I welcomed our youngest daughter, Isabella, into our family. As with the birth of any child, it was a joyous time, but was also not without its share of heartache as we learned more about Bella’s condition – Trisomy 18 – and the impact it would have on her and on our family for the rest of her life.

The news from doctors was bleak, and the odds were stacked against Bella. Of the 10% of babies with Trisomy 18 who survive birth, 90% won’t make it to their first birthday. Ten days after her birth, we brought Bella home, and doctors prepared us for how she was going to die. Frankly, this made us angry; Karen and I were not going to just let Bella go, we were going to fight to give her the opportunity and the chance to do as well as she could.

We did just that. We celebrated her life every day, and took nothing for granted, rejoicing in every day we had withher.

And since those early, difficult days, an amazing thing has happened: Bella has defied all of the odds. Nearly four years later, Bella is a ray of sunshine at the center of our family’s universe, every day inspiring our family with her joyful spirit.