Why DB? This is Why!!!

There are people who have argued with me that there is no retirement crisis. Really? There are those that claim that because only about 40% of the private sector had been covered by DB plans at their peak that today’s 14% is no big deal. Really?  Let’s take a look at the latest information from the U.S. Census Bureau, and you tell me that there isn’t a crisis.

While the 401k is one of the “best” available retirement saving options for many workers, only 32% of Americans are currently investing in one, according to the U.S. Census Bureau. That is shocking given the number of employees who have access to one, which is estimated at 59%.

According to a Personal Capital-sponsored study conducted by ORC International, nearly 40% of Americans have saved nothing for retirement and 56% have accumulated less than $10,000. Are they foolish, guilty of consumerism, lazy, etc.? Heck no! In many cases lower- and middle-income Americans just don’t have the financial wherewithal to set aside a portion of their compensation to fund a retirement vehicle. Furthermore, why do we think that it is good policy in the first place to expect a significant majority of our population to become portfolio managers? It is NOT an easy problem for many of us to fund, manage, and then disburse a retirement plan.

Just how bad is the problem?

<25 $4,154.00
25-34 $22,256.00
35-44 $61,631.00
45-54 $116,699.00
55-64 $178,963.00
65+ $196,907.00

*Source: https://pressroom.vanguard.com/nonindexed/How-America-Saves-2017.pdf

These numbers are pitiful especially when one realizes that life expectancy for the average female is 86.6 years, while it is 84.3 for men. When asked how much one should have saved to have a “comfortable” retirement, 40% of Americans indicated that at least $1 million was necessary. Given that the average 65 year-old has accumulated <$200,000, I would suggest that there is a significant shortfall.  Just how are these retirees going to “live” on 5% of their meager balances combined with Social Security, which pays an average of just over $16,000? You barely can live in the Northeast as a homeowner and pay your property taxes with that small savings.

Defined Benefit plans are not perfect, but they are much better for the average American than a defined contribution plan. First, they are professionally managed. Furthermore, one cannot take an early withdrawal or a loan. They can’t stop contributing and benefits are usually paid out on a monthly basis in the form of an annuity. DC plans were NEVER intended to be anyone’s primary retirement vehicle. They were set up to be supplemental retirement vehicles for high earners. Where did we go off course?

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The Benefits of Bailouts

We reported yesterday that the TARP and Fannie and Freddie bailouts have resulted in more than $107 BILLION in profits for the U.S. Treasury. In addition to this profit, bailouts have been beneficial in that they preserved companies and jobs, wages and tax revenue, and pensions while protecting investors in bonds and stocks of those companies.

With regard to the preservation of pensions, and specifically DB pension plans, Diane Oakley, former Executive Director for the National Institute on Retirement Security (NIRS), spoke to the importance that benefits received by the participants play in contributing to a healthy economy. According to the NIRS, 40 million Americans were covered by a private (both single and multiemployer) pension plan in 2016, including more than 13.5 million retirees. The 13.5 million beneficiaries received just over $200 billion in benefits equating to just under $15,000 per participant (multiemployer recipients got about $12,000 on average).

With regard to the impact of just the multiemployer payouts on the economy, the NIRS has determined that “246,324, jobs were attributable to direct impacts (direct spending by retirees), 122,978 to indirect impacts (spending by merchants on businesses further up the supply chain), and 173,566 through induced impacts (additional jobs supported when employees whose jobs are tied to direct and indirect spending rounds spend their paychecks). These jobs collectively paid out an estimated $27.9 billion in labor income.”

The NIRS analysis also calculated that the $41.8 billion in benefits received in 2016 stimulated the economy to the tune of $89 billion in economic output. Lastly, the tax revenue produced by this economic activity is roughly $14.7 billion, with $8.4 going to the Federal government.

It is clearly past the time to put ideologies aside and get something implemented before the pension crisis magnifies and a solution becomes impossible. We need to protect our retirees before we not only damage their financial well being but the health of the U.S. economy in the process.

 

Bailout: Why is it an Ugly Word?

Representative Virginia Foxx (R-NC) was recently quoted as saying that H.R. 397 is nothing more than a “full taxpayer bailout of private-sector multiemployer pension plans”. In a blog post from yesterday, I questioned whether this particular loan program would, in fact, be described as a bailout given that the U.S. Treasury Department was actually going to make money (25 bps above the prevailing 30-year Treasury when issued) on the loans authorized to these Critical and Declining plans.

It seems to me that whether or not you believe this proposed legislation is a bailout or not, the word itself seems to carry an incredibly negative connotation, particularly among some of our politicians. I think it would be beneficial to review the history of the U.S.’s largest bailouts – those being TARP (Troubled Asset Relief Program) and Fannie and Freddie.  I suspect that many folks would guess that the U.S. taxpayer got hosed on this program, but the facts suggest otherwise.

Paul Kiel and Dan Nguyen, from ProRepublica, have been tracking the flows related to these bailout programs since their inception.  In their latest update (February 2019), they have determined that the “accounting for both the TARP and the Fannie and Freddie bailouts, shows that $632B has gone out the door—invested, loaned, or paid out—while $390B has been returned. The Treasury has been earning a return on most of the money invested or loaned. So far, it has earned $349B. When those revenues are taken into account, the government has realized a $107B profit as of Feb. 25, 2019.

The biggest beneficiaries of the government rescue programs were the banks and financial institutions at $245B, Fannie and Freddie at $191B, automakers at $79.7B and AIG at $67.8B. Mortgage modifications, toxic asset purchases, and state housing programs another roughly $48B completing the list of recipients. The U.S. has recouped assets through Warrants, returns, dividends, interest, and other proceeds. Not too shabby! Especially since there still exists more profit potential from a variety of sources.

Have all of these entities contributed to the profit total? No, of the 780 investments made by the Treasury 633 have resulted in a profit. The .812 batting average looks pretty impressive. As a reminder, of the 114 Critical and Declining plans that Cheiron reviewed, only 3 were in need of additional PBGC assistance. If however roughly 19% of the remainder needed some additional time or assistance, wouldn’t that still be a pretty good batting average and worthy of this legislation going forward. Again, Washington DC seems to be playing chicken with these critically important benefits. It isn’t fair to the participants who were promised a benefit and who contributed to those promises in lieu of salary increases. Enough is enough.

 

 

How Is H.R. 397 A Bailout?

There has been an immediate and positive response to our most recent blog post titled, “Talk IS Cheap, Rep. Foxx”. One of our followers asked the following question: “If the U.S. Treasury borrows (by issuing long-term debt) the funds and then loans it to the pensions that need it (at a profit spread 25 bps > then the prevailing 30-year rate) how does this translate into a taxpayer bailout?” Good question. We are equally confused.

In the analysis conducted by Cheiron (a wonderful actuarial firm) of the 114 Critical and Declining plans that existed at that time, all but three of those plans were able to meet current benefits and future plan liabilities, the interest on the loan, and the balloon payment in year 30. To me, this translates into a loan similar to any bank transaction such as a mortgage. Why do members of Congress feel it is necessary to label this a bailout, especially when many of today’s members were quite supportive of the bank bailout in 2008 and in some other examples that pre-date the GFC.

Let’s all understand that the loss of the promised benefits will not only impact the participant who was expecting to receive their monthly retirement check, but the businesses that benefit from those checks being spent in local economies.  Furthermore, the significant loss in monthly income forces nearly 1 million additional Americans onto the social safety net. This is an outcome that I hope no one wants to witness.  The estimated cost to provide a lifeline to these struggling plans was roughly $35 billion.  As an FYI, the net interest profit for the U.S. Federal Reserve in 2018 was about $65 billion. In roughly 6 months, the pension crisis could be eradicated.

 

Talk IS Cheap, Rep. Foxx

As many of you know, the “Butch Lewis Act” is back before the 116th Congress as H.R. 397: Rehabilitation for Multiemployer Pensions Act. The proposed legislation now has 177 cosponsors, including 8 Republicans. Importantly, by a vote of 26 to 18, the proposed legislation cleared the Education and Labor Committee, but only along party lines.

Rep. Virginia Foxx (R-NC), who as panel Chair, has come out aggressively opposed to this legislation saying that she doesn’t see a path to even a vote occurring in the Senate should the legislation make it out of the House.  Here are Rep. Foxx’s opening comments (in italics) and my thoughts regarding her concerns in bold and within parentheses.

“But the most stunning turn of events has been the announcement that we would, in fact, proceed with consideration of a full taxpayer bailout of private-sector multiemployer pension plans. (What is meant by a “full” taxpayer bailout? Do these plans not have significant assets accumulated to meet future liabilities?) When this markup was noticed and this particular bill, H.R. 397, was listed, I, along with every member of this Committee who understands how serious and complex this issue is, was shocked.

Lining this room are the portraits of individuals who have served as chairs of this Committee, Democrats and Republicans alike, going back several decades. All of them have managed this Committee’s vast and varied jurisdiction with an all-too-clear understanding that the issue of pension reform is one of the most difficult, high-consequence responsibilities that committee members must meet. (Pension reform is absolutely critical, but while Washington legislators fiddle, Multiemployer plans burn.) That is why, regardless of party affiliation or other pressing circumstances, they insisted that this committee proceed with extraordinary care, caution, and cooperation before touching the retirement security of so many hardworking Americans and retirees. (Sorry, but the retirement income of many Americans has already been touched through the government-sanctioned slashing of benefits under MPRA, and more than one dozen plans have “successfully” filed for such relief – appalling!)

They would be confounded by today’s markup. We’re actually about to consider a bill that is poorly drafted and outlandishly framed.

In 2014, many of us on this dais today, under the leadership of Chairman John Kline and Ranking Member George Miller, worked together to bring much-needed reforms (I don’t know about you, but draconian cuts to promised benefits that in some cases exceed 50% are tough to describe as much-needed reforms) to the multiemployer pension system, with an understanding that no amount of money would fix the structural problems in the system that put so many retirees and taxpayers at risk in the first place. The legislation before us today totally destroys that framework. (The legislation before Rep. Foxx and the others on the Committee is designed to extend a 30-year lifeline to these struggling plans and not force plan participants onto the Federal Government’s social safety net.) It is a sweeping, politically motivated ploy that is beneath the standards and the integrity of this Committee, which has historically modeled for the rest of Congress in practice and in policy how we should treat something so personal and so vital to Americans as their own hard-earned pensions. (Please stop with this rhetoric. If you honestly believed that hard-earned pensions were so personal and so vital to Americans, you would have NEVER supported MPRA in the first place and you certainly wouldn’t continue to push the pension crisis further down the road. The time to act is now.)

This isn’t just a taxpayer bailout. This is a lie. We are here to consider a bill that will meet certain death in the Senate. (That certain death is because of political bias and not the merits of this proposed legislation.) We will find ourselves back at the drawing board, and everyone here knows that’s what we can expect on an issue as complex as this one. Those of us on this Committee who were here in 2014 will recall the serious, bipartisan negotiations required to get a final product on which we could all agree. And those of us who served on the Joint Select Committee established during the last Congress to focus exclusively on this issue, know it’s not this easy—if it were, the Select Committee would have reported a bill. (The Joint Select Committee did float a test balloon, which blew up in their faces because it was so poorly thought out, including the potential to negatively impact even sound multiemployer plans).

But the workers and retirees who are going to be impacted don’t see it that way. They see Washington Democrats offering more false hope. (Should they just accept the fact that those in critical and declining plans will see a dramatic reduction in their promised benefits despite contributing significantly to this “benefit”?) They’re told by one special interest group or another that all we have to do is spend a hundred billion dollars of the taxpayers’ money and they’ll be fine, their pensions will be secure, and they can rest easy again. (Where are you getting the figure of $100 billion?)

We know that’s not true. (Correct, the proposed sum needed to extend a pension lifeline is much smaller than $100 billion.) We owe it to them to take this problem seriously. This bill is not serious. And treating unserious proposals as real solutions amounts to lying to the public. I’ve yet to see anyone who truly needs answers, who truly needs help, benefit from these empty promises. Democrats make lavish promises to students, to seniors, to hardworking mothers, to hourly workers, and here, now, to retirees. And the only people I’ve ever seen benefit from these empty promises are Democrats themselves, on Election Day.

On behalf of every American who will be left empty-handed today, we will continue to be truthful about what we are doing. We will continue to search for real solutions instead of shortcuts and paybacks to special interests. (Congress has had decades to find “real solutions” but nothing of merit has been brought forth until this proposal. H.R. 397 provides for low-interest rate loans to be extended to critical and declining plans for the purpose of ensuring that current benefits (retired lives) are paid, as promised, while also providing an extended investment horizon for future liabilities and the loan repayment to be met.  Rep. Foxx, did you support the $700 billion bank bailout in 2008? This legislation seems like a drop in the bucket given that it is designed to save those vital pensions for more than 1 million hard-working Americans!)

Talk is cheap. Bad bills are costly.” (It seems like Congress just wants to talk, and as the delay extends, more and more multiemployer pension plans fall into critical and declining status – shameful!)

Moving On Up and Over

Good morning. This is the last day that the KCS blog will be produced. However, you will soon be able to get similar insights from the Alan Biller website (alanbiller.com) where a new blog will begin soon.

I would like to thank everyone for your support during the last five or so years. It has been fun sharing my thoughts on OUR retirement industry while receiving from you critical feedback on the issues of the day.  We have a lot of good things to celebrate, but we have many challenges, too.  It is time to tackle those together.

More Rounded Support

We are pleased to bring to your attention the fact that Congressman Richard Neal’s proposed legislation, H.R. 397 – Rehabilitation for Multiemployer Pensions Act – is getting support from members of both parties.  In fact, there are currently 19 co-sponsors of this legislation, including 7 members from the Republican party. The legislation that will be considered seems to be getting a more favorable response this time around then those which were floated in the previous Congress (115th).

Obviously, we need to see significantly more support coming from the House, but it is a good start. We are at a point in time when further delays could be devastating to the future of many of the struggling multiemployer plans. As we’ve reported before, the universe of “Critical and Declining” (C&D) plans has already expanded from 114 to 121, and that was before the poor performance of markets during the fourth quarter.

There is no way that these C&D plans can earn their way to solvency given the significantly negative cash flow situations that these plans are in. The loan program that is once again being considered addresses the short-term liquidity needs while extending the investment horizon for the balance of the assets and future contributions to meet future liabilities, interest on the loans, and the balloon payment of the loan in year 30. They are a necessary bridge to future solvency. Please reach out to your representatives in both the House and Senate to garner their support for this critical legislation.