Retirement Profit and Peril
Strikes, Pensions, and 401(k)s
Should management or labor bear the risks and reap the benefits of retirement investments? Recent strikes at Boeing and with Teamsters at a variety of locations arose largely because of attempts to terminate defined benefit pensions and replace them with defined contribution Individual Retirement Account (IRA) or 401(k) retirement plans. The conflict boils down to three issues: who bears the risks involved in investing, who pays the cost of insuring against those risks, and whether management views labor as a trusted long-term partner or a fungible commodity.
Risk. The difference between a defined benefit pension and a defined contribution investment account is who controls the investments. In a pension, the employer sets aside money for a worker’s retirement and invests it, guaranteeing a scalable benefit, usually based on salary and years of service. In a retirement investment account, the employer pays into the worker’s investment account, which the worker directs to secure their retirement. The worker’s ultimate benefit depends on how prudently the worker invests over time. Most private employers have moved away from pensions entirely. Public employers, including the federal government and the State of Oregon, have moved to mixed systems with a smaller pension and a larger defined contribution plan.
This trend shifts both the risks and rewards of investing onto workers. Workers who invest well might enjoy a richer retirement than if the equivalent amount had been invested in a pension system. Workers who invest poorly may receive less. This is true of employers as well. Some legacy retirement plans have netted large gains during bull markets. From its retirement plan, Kodak recently reaped over $500 million in excess investment above the amount constituting full funding of the plan; it is considering paying the plan out entirely to workers, rather than continuing its legacy pension system. This would allow it to reap additional investment gains, reduce insurance payments on the pension, and eliminate future investment risks.
Insurance. Private companies must insure their pensions. Studebaker terminated its pension plan in 1963, leaving most of its workers with little or no retirement. In response, in 1974, Congress created the Pension Benefit Guaranty Corporation (PBGC) to prevent workers from being left high and dry when their employers failed to fund their pensions. Private employers with pension plans must pay the PBGC between roughly $50 and $800 per year per worker, depending on the nature of the plan and its level of funding, to insure the first $85,000 in pension benefits per worker. To address the consequences of 5,000 past private pension failures, the PBGC currently pays about 900,000 workers’ pensions and will pay future benefits to another 450,000.
Public pensions vary widely in their funding ratios, from below 5% to over 130%. State and local governments do not have to insure their pensions, leading some to chronically underinvest in their pensions. While states theoretically have no ability to declare bankruptcy and localities may only do so if authorized under state law, they may still become insolvent and unable to pay both current operating costs and pension costs. Compounding the potential damage, public employers may waive Social Security for their employees if they offer a comparable pension plan, whether or not that plan is actually funded. Before the current stock market boom, the low funding ratios of many states (including Oregon, at the time) led to speculation as to whether a federal bailout would be required. From a certain perspective, this puts public employee pensions at greater risk than private pensions.*
Employees: Long-term Investments or Fungible Commodities? Proponents of defined contribution plans promote the ability of workers to gain benefits beyond those available from a pension through wise investing, the inherent portability of these plans, and the lack of any vesting period for the benefits. Further, as employers do not have to pay the PBGC to insure a defined contribution plan, they may pay more directly to workers (at least in theory). Unions supporting pensions often point out that their members are ill-equipped to make investment decisions and ill-prepared to face the consequences of poor investment decisions, and that the intent of Section 401(k), enabling defined contribution plans, was to allow highly-paid executives to gamble with their retirements, not blue collar workers. More fundamentally, employers that sponsor pension plans invest in workers on a long-term basis, while those that only sponsor defined contribution plans view their workforce as more fungible. Labor mobility is a fact of modern life, whether or not it benefits workers to the same degree it benefits employers.
Conclusion: Whither Social Security? The push and pull between defined benefit and defined contribution plans occurs against a backdrop of uncertainty over the future of Social Security. While Social Security was never intended to be a full pension, it is the sole form of income for 40% of seniors and provides a critical retirement income supplement for most workers. Without action by the federal government to shore it up through new revenue or increased funding, Social Security benefits will suffer a 21% cut in 2033. Neither party has a credible plan for fixing Social Security that can pass Congress, making the stakes much higher for workers in the pension versus 401(k) debate.
Other News
The International Criminal Court (ICC). The recent arrest warrants from the ICC for two Israelis and one Hamas member have come under widespread criticism from advocates for one side or another. Lost in the argument is the fundamental rationale behind the ICC: people who commit genocide, crimes against humanity, grave breaches of the Geneva Conventions, or the crime of aggression should be subject to prosecution regardless of their political “side.” I encourage all of my readers to first inquire as to the facts, not the politics, before making a judgment regarding the appropriateness of any actions by the ICC. The alternative is to subscribe to the belief that these crimes aren’t crimes when people on “our” side commit them.
A Plea for the Importance of Facts and Expertise. Boise State’s women’s volleyball team recently forfeited the NCAA tournament semi-final game against San Jose State University’s team over San Jose’s fielding of a trans woman player. Title IX of the Civil Rights Act of 1964 prohibits discrimination in higher education on the basis of sex. In practice, this does not mean that trans women always must be allowed to play in women’s sports, but rather that such discrimination must be supported by an important government interest and enforced using a means substantially related to that interest. The NCAA has sport-specific guidelines that address where trans women must be in the transition process to compete in women’s sports. These include an almost-total prohibition on the participation of trans women in women’s track and field. In this case, the relevant requirement is that the trans women must have been taking hormonal treatments for at least a year to reduce their level of testosterone, which the player met. Of particular interest here, even some of the SJSU player’s teammates did not know she was trans and she had played in high school and three prior seasons in college as a trans woman. If there’s one thing that over a quarter century of practice as a lawyer has taught me, it is that facts and expertise matter more than uninformed opinions. Do you disagree because “the differences between the sexes are obvious”? Then I challenge you to find the trans women in this team photo. I sure can’t and neither could several of the players in the photo.
The Impoundment Control Act - The Most Important Law You’ve Never Heard Of. In an attempt to reduce federal government spending, Elon Musk and Vivek Ramaswamy have indicated that the incoming Trump Administration will simply refuse to spend money appropriated by Congress for purposes they disapprove of. The Impoundment Control Act of 1974 (ICA) prohibits this in most circumstances. For instance, if the incoming President wished to spend less than the amount appropriated by Congress for the EPA, he would have to send a notice to Congress regarding his plans. He would then receive authorization to pause these expenditures for 45 legislative days. If Congress did not then pass an act authorizing his rescission, he would be forced to spend the money, despite his objections. As I explained to my students, when my mom sent me to the store to buy a gallon of milk for $1.50 (it was the ‘80s), if I’d returned with a half gallon and 75 cents, she would not have been pleased. The duty of the President is to faithfully execute the laws of the United States, not pick and choose the ones he likes.
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*Full disclosure - I am a future beneficiary of a military pension. That system is considered to be 96% funded based on reasonable accounting assumptions.