I’ve just returned from the latest CORPaTH Crystal Globe Awards & Banquet. Kudos to Ron Auer, Jacques Loveall, and everyone else associated with this tremendous organization. For those of you who may not know about CORPaTH, their mission is to protect, promote, and perpetuate defined benefit pensions. As followers of KCS know, CORPaTH’s mission is very much like ours, as KCS was established to help retirement plan sponsors address the challenges impacting their plans and ultimately, their participants with the goal to protect and preserve defined benefit plans as the primary retirement vehicle.
It is incredibly important to understand that promoting, protecting, and preserving/perpetuating defined benefit plans doesn’t mean holding onto the status quo without regard. There is tremendous inertia in our industry, but there are many individuals and organizations that continue to challenge the status quo in an attempt to help sustain these critically important plans. The CORPaTH conference presented an agenda filled with folks willing to share new ideas to help in this effort. We will report on some of those in coming blog posts.
The challenges to preserving these plans are many, but if pension plans are to be maintained, we must all work together to identify strategies that will help insure that the promised benefits are paid and at costs that are controllable for the sponsors. Lastly, the solution can’t be a defined contribution plan for the masses, as history (40 years now) has shown that these offerings truly only benefit higher income participants, who can afford to contribute a meaningful sum that will insure a dignified retirement.
DB pension plan funded ratios have been hurt through the last 15+ years by declining interest rates inflating the present value of plan liabilities (FASB and not GASB accounting). With stronger economic growth exhibited earlier this year and a Federal Reserve that began tightening, the hope was that long-term rates would begin to back up fairly consistently providing some relief on the liability side of the pension equation.
But, alas, economic growth seems to have moderated, and despite the Fed’s action regarding short-term rates, long-term Treasury yields (10-years) have actually fallen about 35 bps in the last month or so (2.9% as of this morning). We got another indication that rates might not be rising as rapidly as economists had forecast, as the CPI for November was flat. When removing food and energy from the calculation, the CPI was up 0.2% on the month and 2.2% YoY, but has stayed within an annual range of 2.1% to 2.3% during the last 12-months.
Couple the declining interest rates with falling asset values, and you have an environment that is applying further pressure to the defined benefit universe’s funded status. With regard to asset values, diversification has been an impediment in 2018, as most equities outside of large-cap U.S. equities are significantly underperforming.
Most plans can’t afford a significant hit to their funded status as contribution costs have consistently escalated during the last decade-plus and many state and municipal budgets are already stretched. The volatility associated with contribution costs is one of the primary reasons that corporate America has exited this arena.
Data: Factset; Chart: Lazaro Gamio/Axios
I’m sharing this chart with you as a follow-up to our post last week. This picture tells a much better story then I can!
MarketWatch is reporting on a Federal Reserve data release related to consumer credit growth, which climbed by 7.7% (seasonally adjusted annual rate) in October 2018. The growth in consumer credit was mostly fueled by credit-card usage which advanced at the fastest clip in 11 months. Furthermore, it is only the third time ever in which revolving credit eclipsed $1 trillion. Student and auto loans (non-revolving credit) grew at a 6.7% rate in the month, which was in line (6.6%) with the previous period.
The MarketWatch article is stated that although “credit-card usage can be perilous, economists generally welcome a rise, as it suggests a desire to spend.” Yes, consumer confidence has remained near decade highs amid a stronger job market, but “sentiment” is a concurrent indicator. Credit-card debt is only about 26% of all consumer debt, having been as much as 38% in 2008. However, we have seen a tremendous increase in both auto and student loan debt, so the 26% isn’t likely the result of leaner personal income statements, but because total debt has grown to greater than $13 trillion (including mortgages).
I don’t know about you, but I am concerned about the growth in mortgage debt, auto and student loans, and credit-card debt, which continue to grow fairly rapidly. At what point does this stop being an engine to economic growth and instead of a major impediment to future economic activity?
All of this debt being accumulated by the “average” American worker has to be impacting their ability to set-aside funds for their retirement through a either a company-sponsored defined contribution plan or a personal IRA.
The following press release was posted (11/29) on the website for the Joint Select Committee on Solvency of Multiemployer Pension Plans:
Thursday, November 29, 2018
Pension Committee Co-Chairs: ‘We have made meaningful progress toward a bipartisan proposal and work will continue’
WASHINGTON – Joint Select Committee on the Solvency of Multiemployer Pension Plans Co-Chairmen Orrin Hatch (R-Utah) and Sherrod Brown (D-Ohio) released the following statement today committing to continue their work to solve to the multiemployer pension crisis past Nov. 30. When the Joint Select Committee was created, it was expected members would vote on a package by this Friday. Hatch and Brown say that while they have made significant progress and a bipartisan solution is attainable, more time is needed and the committee will continue its work.
“The problems facing our multiemployer pension system are multifaceted and over the years have proven to be incredibly difficult to address. Despite these challenges and a highly-charged political environment, we have made meaningful progress toward a bipartisan proposal to address the shortcomings in the system to improve retirement security for workers and retirees while also providing certainty for small businesses that participate in multiemployer plans.
“While it will not be possible to finalize a bipartisan agreement before Nov. 30, we believe a bipartisan solution is attainable, and we will continue working to reach that solution.
“We understand that the longer that these problems persist, the more burdensome and expensive for taxpayers they become to address, and we are committed to working toward a final agreement as quickly as possible.
“We would like to thank all the members of the Joint Select Committee for their hard work and continued dedication to addressing the issues that plague the multiemployer system. It has not been an easy job and all of their contributions have been, and will continue to be, vital to our work.
Well, it has been a little more than one week since the above was posted. I haven’t heard anything about on-going discussions. Have you? I realize that the passing of President George H. W. Bush has distracted many in Washington DC, while the passing of a two-week stopgap spending measure probably had a few others taking their eyes off the ball. But, don’t you get the feeling that something will always take priority over passing critically important legislation to protect and preserve the pensions for millions of Americans?
Discussions related to this issue have been on-going for decades, and what is there to show for it? We got MPRA, which was anything but a fix for those in challenged plans. The employees who worked years while also contributing to their pension funds in anticipation of getting this benefit upon retirement deserve better. Waiting at this juncture is not an option! Earlier this year, we were talking about 114 plans that were defined as being in Critical and Declining status. Today, that number is 121. As those in DC struggle to come together more and more plans will begin to see their funded status deteriorate to the point that they will also be labeled as C&D. This is unacceptable. October and November have been challenging months for the markets. Please don’t wait for another Great Financial Crisis before doing something?
The Earth may be round, but the U.S. Treasury yield curve is certainly flat! The flattening trend has many industry participants fearing what this development might portend, especially if the yield curve inverts. Historically, an inverted yield curve has “predicted” a U.S. economic recession every time during the last 50+ years. Unfortunately, the period from inversion to the recession has taken as little as 14 months to as much as 3 years to occur. During the 18-months following the inversion, the U.S. equity market has returned nearly 15% on average.
According to Jonathan Golub, Credit-Suisse, we are experiencing the flattest period since June 2007. As a point of reference, “in early February, the yield curve (2-10 year spread) stood at 78 bps. Today it is only 12 bps”. However, despite this recent decline in the spreads, futures point to relatively little change over the next couple of years.
According to an analysis conducted by Ron Ryan, Ryan ALM, the Treasury yield curve was last inverted on February 27, 2007, which showed a -31 basis point differential between 2s and 10s. Furthermore, the 1s-30s spread was last inverted in January 2007 at -6 bps. The greatest differential in the 1s-30s spread occurred in March 1980 (I think that I was on Spring break in Virginia at that time) when the spread hit -281 bps. The lowest spread in the 2s-30s was -54 bps, which occurred in March 1989.
While the U.S. Federal Reserve has been successful in “normalizing” rates on the short-end (2.25% Fed Funds rate) the rest of the world is still sitting with negative real rates (Germany and Japan to name a couple). Can the U.S. remain the sole growth engine globally? Currently, U.S. recession indicators are muted, but there are signs that growth is slowing. We’ve recently seen indications of this in housing and commodities.
According to a recent study by Nationwide, 49% of adults who have been retired for 10 or more years rely primarily on Social Security for their income, while 43% of recent retirees are in the same boat. It is great that they have this safety net to fall back on, but the fact that so many of our retirees are so reliant on this benefit is clearly a reflection of the poor state of our retirement industry. An industry where defined benefit pension plans have mostly disappeared within the private sector and one in which folks are forced to depend on their ability to fund, manage, and disburse a retirement plan.
Worse than having so many need this benefit, is the fact that many in Congress, past and present, truly believe that monies “set aside” in the Social Security Trust Fund will not be able to meet future needs (see the chart below) and that significant changes must be brought about to “rescue” this vital program.
By thinking that the U.S. Government will not be able to meet future Social Security payments, Congress has been fretting about how to “save” this benefit for the generations of retirees to come. Some of those considerations include:
- Reducing benefits (always the most obvious fall-back position)
- Raising the Social Security tax rate (presently 12.4%, split between employee and employer).
- Raising the amount of income subject to Social Security tax (capped at $128,400 in 2018).
- Raising the full retirement age once again. It is currently either 66 or 67 depending on the year in which you were born.
- Reducing annual cost-of-living payouts (COLAs). Seniors are already short-changed through the use of CPI-U and not the CPI-E. A further hurdle in getting annual increases might just prove devastating to millions.
Given how critically important Social Security is to the livelihoods of so many Americans, it is almost inconceivable that Congress would act to dramatically alter this benefit. I would like to encourage them instead to spend some time reading Warren Mosler’s brilliantly insightful book, “The 7 Deadly Innocent Frauds of Economic Policy”, which clearly lays out the case that the U.S. Government can always meet its debt obligations, including Social Security.
As a reminder, the U.S. enjoys the benefits of having a fiat currency. The potential impact from spending what is necessary to meet future Social Security needs is to create demand for goods and services that exceed our country’s ability to meet that demand. Currently, that is not an issue as we have an abundant and underutilized capacity. Furthermore, and according to Mosler, “we know that the government neither has nor doesn’t have dollars. It spends by changing numbers up in our bank accounts and taxes by changing numbers down.”
Lastly, we have the capability and means to improve our retirement industry, and therefore the lives of our future retirees. Let’s challenge ourselves to look beyond the status quo before a greater share of our population is primarily relying on the Social Security system during their “golden” years!