The Real Causes—and Real Solutions— to the U.S. Pensions Crisis

By Jack Rasmus

Jack Rasmus

A pension crisis of major dimensions is growing in the US across all three forms of defined benefit plans (DBPs)—public, private single employer, and private multi-employer plans.

Corporate America and its political friends have begun to use the economic crisis that commenced in 2007 as an opportunity to initiate and expand yet another offensive aimed at further undermining defined benefit pensions in the U.S. Having already begun in 2009-10 with a new attack by governors on public employees’ pension plans, the Corporate Offensive over the subsequent eighteen months has expanded to include new coordinated attacks on private sector multi-employer and single employer DBPs as well.

Contrary to corporate, press and politicians’ claims, the crisis in pensions has had nothing to do with pension benefit increases for the workers. In many cases pension benefits have been frozen or actually reduced over the past decade and especially so since 2008.

Rather the crisis is directly attributable to government and corporate policies that have been implemented over the past thirty years—including, but not limited to, two decades of government encouraged management practices reducing pension funding, stagnant jobs and wage growth since 2001, massive speculative investment losses by pension funds, the collapse of the economy, jobs, and pension contributions after 2007, and the failure of the US economic recovery to restore jobs and wages the past three years, 2009-12.

Brief Overview of the Pensions Funding Gap

Multi-employer defined benefit pensions in the 1990s averaged shortfalls in funding (i.e. ratio of assets to liabilities) of only a very manageable $30 billion throughout the decade.

A 2009 Report by the Pension Benefit Guarantee Corporation, the quasi-government agency responsible for ensuring pension funds stability and solvency in the private sector, had a funding shortfall of $355 billion. A similar scenario applies to ratios and shortfalls in funding for single employer pensions, with funding shortfalls of approximately $407 billion. The highly respected Pew Center’s 2008 estimated public sector pensions gap for 2008 of $452 billion.

But the shortfalls in all the defined benefit pensions are overwhelming the result of economic conditions, government policies, and corporate practices over the past 12 years. In 1999, state public employee pensions were 103% funded, according to the Pew Center. Similarly, private pensions—multi-employer as well as single employer—were in good shape at the beginning of 2000. Whatever has happened is therefore clearly a consequence of events and policies since 2000.

Employers sense an opportunity today to falsify the facts regarding the causes of defined benefit pension shortfalls, and to use that falsification to attack and dismantle what’s left of defined benefit pensions that now cover barely 18% of the workforce compared to three decades ago when the percentage of coverage was two thirds or more. What facts are being conveniently ignored in this new corporate offensive?

Corporate Manipulation of the Pension Funding Gap

Corporations have not hesitated to take advantage of the funding gap that they themselves have largely created, with the help of compliant politicians.

On the multi-employer side, the employer new offensive is evident in a series of banks’ reports claiming the funding gap is even greater than it is. By making extreme low-ball assumptions on returns, banks’ research departments and corporations argue the gap for multi-employer plans is significantly higher than even the PBGC has estimated. Their conclusion is major reductions in pension benefits are therefore required, even though pension benefit payments are not the source of the problem.

This strategy of overestimation of the funding gap, cherry-picking the worst assumptions and then extrapolating the losses in a straight line out for decades, has been adopted as well by governors and state politicians intent on cutting pension benefit payments to resolve a crisis workers did not create.

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The Truth Behind the Public Pensions Funding Gap

by Jack Rasmus

Jack Rasmus

State governors across the nation, led by newly elected right wing Republicans (with several Democratic governors in tow), are whipping up anti-union sentiment by declaring public workers and their unions are the cause of state budget deficits.  They argue that various labor costs are driving up their deficits, but the lead cause of those labor costs is overly generous increases public employee pension benefits.

 

But increases in public employee pension benefits are not the cause of the States’ budget crises. There are, indeed, serious pension funding gaps in many states public pension plans. But a close investigation of these gaps shows clearly they do not exist because of states’ granting public employees exorbitant pension benefits.

The real reasons behind the pension funding gap are several.

First, weak and delayed recoveries from the recessions of 1990-91, 2001, and 2007-09 have meant feeble job creation and thus less contribution to pension fund balances. Here the phenomenon of ‘jobless recoveries’ plays a critical role. Each recession over the last half century in the US has resulted in a longer time period for jobs to fully recover to their pre-recession levels. After the 2001 recession it took 46 months just to get back to a level of jobs that existed before the recession. Estimates today are it will take 84-96 months, or 7 to 8 years, for jobs to recover to 2007 levels. That’s twice as long. And that means a projected larger pension gap.

But there’s an even greater reason why pension funds have ended up short of income today. And that greater reason has been building for more than a decade. It’s what is called the practice of ‘contribution holidays’; that is, pension managers refusing to put the necessary contributions into the funds—a practice in the public sector that has been going on since the mid-1990s and even before that in the private sector.

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