“Why, sometimes I’ve believed as many as six impossible things before breakfast.” The White Queen was responding to Alice’s disbelief as to her alleged age. In today’s world, with its unfunded (or poorly funded) pensions, we are asked by corporate CEOs, union leaders, politicians and pension fund trustees to believe another impossible thing – that everything is hunky-dory in the world of pension and health obligations to retirees. Additionally, they seem blasé about the achievability of 8% per annum growth, when calculating expected returns.
Nevertheless, it is possible that a crack has appeared in that veneer. Congress may be concerned. Buried in the spending bill just passed by Congress and signed by the President was a provision that would permit benefit cuts for retirees in multi-employer pension plans. It is true that multi-employer pension plans represent only a small percentage of plans covered by the Pension Benefit Guaranty Corp. (PBGC), but the news is welcome for anyone concerned with fiscal responsibility. There are an estimated 1,400 multi-employer plans in the U.S., covering about 10 million people. Such plans, which can be carried from one employer to another, are common in industries such as construction, trucking and mining, where employees are typically members of a local union that, in turn, is part of a national one. The plans are jointly managed by unions and employers. The plans are guaranteed by the PBGC, and therein lies the rub. The PBGC, in its annual report, noted that its projected long-term deficit for multi-employer plans had widened to $42 billion from $36 billion a year earlier, despite hefty returns to stock and bond markets.
While the provision will certainly be challenged by affected pensioners, it is also possible that this may be a prelude to addressing all pension obligations, and acknowledging that more realistic return assumptions must be used. Take, for example, Social Security. It is common knowledge that, in its current form, it is not sustainable. Thirty-one years ago, President Reagan and House Speaker Tip O’Neill, in order to avert its insolvency, collaborated in getting the retirement age raised gradually from 65 to 67. Today, if the President and Congress were able to introduce means testing, change the calculation for CPI and raise the retirement age from 67 to 70, the program would remain viable. If they do not, it will not.