The CBO

The Congressional Budget Office (CBO) is a  federal agency within the legislative branch of the U.S. government that provides budget and economic information to Congress. The CBO was created as a nonpartisan agency by the “Congressional Budget and Impoundment Control Act of 1974” (Wikipedia).

There is a consensus among economists that “the CBO has historically issued credible forecasts of the potential impact of both Democratic and Republican legislative proposals.” The mission of the CBO is to produce “independent analyses of budgetary and economic issues to support the Congressional budget process.” Each year, the agency releases reports and cost estimates for proposed legislation, without issuing any policy recommendations. If true, why is the latest estimate of the cost of the Butch Lewis Act not being accepted as a realistic estimate?

Senator Sherrod Brown (D-OH) and Representative Richard Neal (D-MA) have said that the U.S. Congressional Budget Office (CBO) has estimated that the pension reform legislation known as the Butch Lewis Act would cost only $34 billion over the next 10 years, roughly one-third of the $100-billion figure cited in its preliminary analysis earlier this year.

This news should have inspired immediate action on the part of the members of the Joint Select Committee on Solvency of Multiemployer Pension Plans (JSC) to come to some agreement/resolution on legislation to protect these critically important pension plans. Yet, members are questioning the analysis and no legislation has been forthcoming as the time to do something is running out for the JSC.

Are our “leaders” really willing to jeopardize the retirements (and financial freedom) of so many American workers over $34 billion? The Butch Lewis Act is the only proposed legislation that provides loans, protects the PBGC, employers, and plan participants. The issuance of low-interest rate loans provides a 30-year (there may be a provision to begin repayment in year 20) lifeline to these struggling plans. The analysis by Cheiron has determined that 111 of 114 critical and declining plans will not need any PBGC support and can pay back the loan using a more modest return on asset (ROA) assumption of only 6.5%.

Without government help, these plans are doomed to failure and the social and economic toll will be startling. Can we finally stop playing politics and make saving the financial health of these participants the priority?

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Some Help For Seniors

COLA 2019 IAG social security

Finally, a little support for Social Security recipients, as there will be a 2.8% cost-of-living increase next year. Roughly 62 million Americans will benefit from this increase, but before we get too excited understand that we are talking about the average recipient receiving an additional $39/month bringing the average monthly payout to $1,461 or $17,532 yearly.

But we have no free lunch here as the taxable earnings threshold subject to the Social Security tax will increase from $128,400 to $132,900 in 2019 (a 3.5% increase). Furthermore, the Social Security Administration continues to base the COLAs on the Consumer Price Index for All Urban Consumers, as opposed to the CPI-E, which is a more appropriate measure of inflation for those over 65 years old. This needs to be addressed sooner than later, as many of those approaching retirement have anemic retirement account balances.

Nothing More Than Glorified Savings Accounts

Deloitte is reporting that 401(k) loan defaults have cost participants more than $2.5 trillion in lost retirement earnings. As shocking as that number seems to be it really isn’t. We’ve been referring to 401(k) plans as glorified savings accounts since our inception, as the permitting of loans, and in some plans, multiple loans, is improper if these are truly retirement vehicles!

According to the Deloitte study titled, “Loan Leakage: How can we keep loan defaults from draining $2 trillion from America’s 401(k) accounts?” 90% of 401(k) plans offer loans and roughly 40% of the participants have taken a loan to finance “their current consumption”. Unfortunately, about 10% of 401(k) loans default each year. For the plan participant that has defaulted they lose on average $300,000 of future retirement benefits.

Deloitte further reports that in 2018 alone, $7.3 billion worth of 401(k) loan defaults occurred and $48 billion worth of voluntary plan cash-outs, creating $155 billion in opportunity costs and an estimated $210 billion account leakage at retirement.

We highly recommend the creation of side-pocket accounts that would be payroll deducted and capped at some $ amount, such as $1,500. Money saved in these accounts could be used to meet short-term (and perhaps, emergency) expenses, while the balance of contributions would fund a long-term retirement account. We know through countless studies that most employees fail to save outside of an employer-sponsored fund. Having a payroll deducted side-pocket may be just the way to increase savings for America’s struggling working class while protecting retirement assets for long-term growth.

A Regressive Tax?

Student Loan Debt

I’m much less concerned about the federal government accumulating debt as a result of the growth in student loans, as I am American households, especially those at or below median family wealth. The growth in student loan debt is crippling the financial future for many younger Americans, and it is impacting their ability to purchase first homes, start families, and save for retirement.

In this age of do-it-yourself retirements (DC plans) not having the financial means to fund one’s retirement at an early age will make it nearly impossible for these participants to ever create a pool of wealth to provide for a decent, let alone, dignified retirement.

No More Games!

Private equity firms and public pension systems have enjoyed a symbiotic relationship for years, with the latter providing the capital (about 35% of private equity capital comes from public pension systems) to the former to invest with the hope that significant returns can be achieved. However, this relationship may be changing as a result of the perceived mistreatment of workers through the actions of private equity firms.

The NY Times is reporting on how former workers for Toys “R” Us have rallied support from public pension systems when their demands from private equity firms went unheeded. Roughly 30,000 workers lost jobs when the former retailer went bankrupt last year, and worse, they did not receive any severance.

Participants in both public employee and union funds loath to see their pension assets used to harm other workers. Having failed in their quest to be heard by the private equity firms involved in the demise of their company, former employees took their case directly to the public pension systems that helped fund the acquisition. During a 3-month period, these former employees and their advocates (Rise Up Retail and the Private Equity Stakeholder Project) met with 14 public funds in 12 different states to begin to exert some control over just how these pension assets can be invested – it is about time!

 

Corporate Pension Plans Show Improved Funding

S&P 500 companies with defined benefit pension plans continued to show improved funded status in September, as assets were up marginally along with rising discount rates, which reduce the present value of the plans’ future liabilities. Given the improved funded status, will corporate pension plans take some risk off the table? They should continue to reduce equity exposure in favor of bonds that can more effectively mirror the plans’ liabilities.

For public and multiemployer plans that discount plan liabilities at the ROA, the notion that rising interest rates are reducing plan liabilities is a foreign concept, which is why plan sponsors in those pension systems need to get more transparency regarding plan liabilities. With this enhanced knowledge comes the ability to have a more responsive asset allocation policy.

Ryan ALM Pension Letter

We are happy to share with you the third quarter Ryan ALM Pension Letter. For public pension systems and multiemployer plans that continue to value plan liabilities under GASB using the ROA, liability growth using the return on asset assumption (ROA at 7.5%) is +5.92% year-to-date.  However, if you use ASC 715 (FAS  158) or a true mark-to-market rate to (US Treasury STRIPS) plan liabilities have actually fallen by -5.1% and -5.3%, respectively.

With negative growth rates for liabilities, funded ratios can improve rather dramatically with even modest asset growth. Think that US interest rates might continue to rise from these levels? If so, having a true (and better) understanding of liability growth will assist you in making more informed investment structure and asset allocation decisions.

Despite the recent outperformance of assets versus liabilities, liability growth has outperformed asset growth by more than 120% since 2000.