Moral Hazard versus Moral Obligation

I’ve been extremely fortunate to be a part of the team working on the Butch Lewis Act (BLA) proposed legislation to create the Pension Rehabilitation Administration (PRA).  As regular readers of this blog know, KCS was formed in August 2011 with the Mission to protect and preserve defined benefit plans.  The opportunity to help the team bringing the BLA forward allows us to pursue that critically important objective.

As a reminder, there are millions of Americans who will be negatively impacted when their pension plans collapse under the weight of funding deficits and burgeoning contribution expenses.  There will be grave social and economic implications from this failure. As such, now is not the time to hand out blame for the impending demise of these plans.  However, it is the time to take aggressive and necessary action to insure that the roughly 3.5 million plan participants in pension funds designated as “Critical and Declining” (currently 114 pension plans) get the promised benefits. Doing the same old, same old is not an option at this time.

During our presentations in Washington DC, one attendee referenced the moral hazard associated with this legislation, questioning why the American taxpayer should “bailout” these pension plans given that they were mismanaged? I wasn’t surprised by this question given that we’ve heard and read this before, especially as it relates to public pension systems. It is important to point out that the BLA proposed legislation is not a bailout, but a PRA loan to these plans that must be repaid in 30 years.  

Also, It should be noted that the PRA loan has a 25 bps profit margin so the PRA should be a profitable agency and not a burden on taxpayers. The proposed BLA legislation secures Retired Lives and lowers the ROA (return on assets) hurdle rate for current assets to fund Active Lives + the 30-year loan. The plan participants have made payroll contributions to these plans, and they have a right to expect a benefit upon their retirement… indeed, a moral obligation of the pension plan.  It certainly isn’t through any action on their part that these plans are struggling.

The United States economy is a consumer-driven economy with roughly 70% of GDP coming from consumption. What would likely happen if millions upon millions of Americans no longer had the financial wherewithal to remain active participants in the economy? Would GDP growth come close to 3%? Heck, no! So, is it a moral hazard or a moral obligation to pay the promise to these workers so that our economy doesn’t act like the proverbial house of cards and come crashing down in the next several years when Pension America fails to deliver on their promise of a secure retirement benefit?

We understand that a majority of workers in the private sector are no longer participating in a defined benefit plan.  We do appreciate the fact that this development is truly unfortunate.  Please remember that we are all negatively impacted if the economy suffers under the weight of benefits that aren’t paid as promised.  The Butch Lewis Act mandates that benefits remain at current levels, while forcing plans to de-risk through a defeasement strategy, improving the likelihood that they survive well into the future. Furthermore, I do believe that we have a moral obligation to the plan participants in the pension funds designated as “Critical and Declining”.  These plans can and must be saved. In-action at this time will likely force millions of Americans to “live” below the poverty level.

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