Companies controlled by PE firms use bankruptcy to shed pension obligations
washingtonpost.com
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At the store we had registers with an OS from the 80's, a common thing if you look around, but we never invested in developing anything beyond the 80's unlike our competitors. We didn't ever implement a JIT style logistics program, which with massive in store staff cuts led to poor merchandise orders which in a perishable business kills you. Management in general was _highly_ skeptical of new technology and prone to spending a bunch of labor hours on repetitive, easily automated tasks (by my accounting at the time, I could have automated more than a million dollars of labor costs with a week of effort - something I brought up with management and demonstrated but was ultimately shot down, I wasn't some super genius - we had folks literally copying and pasting for 8 hours a day).
Marsh was a good company with good people, several of those in the article I knew from my time in corporate. We had folks that would kill themselves working 60 hour weeks to keep a store afloat. It sucks to see what had happened to them.
A friend worked for a regional bank that had a strategy of purposeful obsolescence to maintain control with the core shareholders, who were mostly from one family. They were using 1980s era AS/400 systems with terminals as late as 2008, and had only 1 PC assigned to a manager in the branches, with connectivity via ISDN.
I don't know how much of this got sent out of Marsh and up to Sun though.
I've seen people waste millions on magical systems that did very little out of inertia. In one case, a system with something $10M in annual costs that managed terminal (as in VT-102 terminal) and line printer assignments. A decade after the printers were trashed and terminals moved to a (almost equally offensive) very expensive web-based system.
Only the executives’ plan, however, was fully funded under the sales agreement: With the completion of Sun’s purchase, Marsh’s top five executives were to be awarded $14 million in retirement payments, according to company financial documents. Among them: CEO Don Marsh at $7 million and corporate counsel P. Lawrence Butt at $2.2 million.
Meanwhile, the other two retirement plans — the worker pensions — were short millions of dollars.
When a municipality issues a bond, that bond has an indenture which is a contract. It has a very specific set of rules about what the municipality can and cannot do (covenants) and a very specific schedule for when and how the money must be paid back. Try skipping an interest payment and all the sudden you instantly find that there are serious consequences, like you find yourself in court, or threatened with involuntary bankruptcy, and your credit rating goes down, etc.
When a person obtains a mortgage, they too sign a contract specifying things they must do (eg get insurance) and a schedule for repaying principal and interest. Try skipping a month or two of payments and the bank starts calling, it affects your credit, and maybe you lose your house one day if you keep not paying.
But pensions have nothing like this...it's almost the reverse set of incentives. There's virtually no enforcement of prudent management. The Chicago teacher's pension fund skipped making contributions for a decade in what they euphemistically called "pension holidays". Instead, the money got diverted mostly to higher salaries. The people who ran the city were actually rewarded for this malfeasance. And that's in addition to routinely underestimating critically important assumptions such as healthcare costs, lifespan, investment returns, and interest rates, which are hard enough as it is. The problems take multiple election cycles to manifest, and it creates a massive moral hazard. You couldn't design a more toxic form of IOU if you tried...I've long argued that public pensions should be illegal.
There is a county in Georgia (Sandy Springs) that effectively went private. Rather than offering a state pension to their employees (other than ones they were legally required to), they calculated the value of the pension contribution they would make and simply tacked it on to employee salaries. I personally think this is a good approach (with some room for incentives that help protect people from themselves).
Note: not trying to mount a defense of PE - often people ask what is the purpose/role or value of PE in society. In a somewhat perverted sense, this is it. There are not many mechanisms that can almost instantly re-habilitate an enterprise that was mismanaged or made severely consequential long term false promises to employees. The alternative is a slow, timely and painful decline similar to Sears or Kmart and rather than this article we'd be reading articles about the towns that Marsh left behind.
Why is it that the "unfunded pension" crisis always makes people question the second term in the phrase instead of the first?
Some essentially boil down to human nature - short-term thinking, preferring politicians who make rosier promises ("assume high rate of return on pension investments and lower the taxes") against honest politicians ("increase taxes since current levels are unfunded"), etc
Some are about societal changes no one can honestly predict - avg lifespans increasing (avg life expectancy in the US was 61 when social security was enacted), pensions were promised in 70's / 80's before globalization wave hit forcing Western companies to either die or compete with leaner overseas firms, internet and e-commerce bringing b&m retail apocalypse, etc.
To find out true cost of funding a pension, try buying an annuity for the similar level of monetary coverage where seller has to do more due diligence. And that will show you the true cost, and my guess is that there is very little appetite to bear that cost in our society.
Shockingly the second causes more problems, because companies will take out a loan to fund the first but quietly under-fund the second for years until a small problem becomes a huge one.
Obviously it's a lot more complex in the case of a PE firm buying a struggling business. But at a high level, if the company has $X in debts, it is worth $X more to someone who thinks it's possible to weasel out of paying that debt than it is to someone who doesn't. And finding novel ways to make a company more valuable than its current owners think it is is kind of the whole MO of private equity. That's what's going on here - PE firms are finding novel ways to weasel out of paying pension debt, and pocketing the difference. And what people are complaining about is that in this case, the person who's out the money is not able to collect from the courts, despite the entity who ought to be responsible for the debt living in a mansion and not a cardboard box.
Under a government that allows pension debt to be discharged by bankruptcy, pensions are made to be ducked out on.
You also see this with big legacy companies that slowly get throttled by their pension schemes and are undercut but new companies full of young workers. Automakers for example. We have been underfunding pensions for a long long time because people weren't supposed to be living so long and because cuts to the pension program aren't immediately visible so they're a tempting target for unscrupulous management.
"What if your credit card company told you: 'You will charge a million dollars on your credit card during your life; please enclose the million dollars in your next bill payment'... Well, that’s what the U.S. Postal Service’s requirement to prefund its long-term pension and healthcare liabilities is like."[0]
One reason not to do this mentioned in the article is that pension investments can decline in value. There should be an expectation that a pretty bad year probably will happen every few decades, maybe a 20 or 30 percent loss, and it would be unreasonable to expect a firm to reimburse its pension fund for losses within a single year when the economy may be very weak. (All of this presumes an annual cycle of reporting and validation of the appropriateness of fund levels and contributions.)
The second reason is that when companies used to create or agree with their unions to create defined-benefit pension plans, the benefit formulas at retirement were usually based on years of service, not years of service under the plan, so the plans are born with a large unfunded obligation for the years of service that the current employees have already accumulated.
Back when I did pension math, over 40 years ago, the typical (and government approved) way to deal with unfunded liabilities from either of these 2 causes (or any other), was to increase the employer contributions a little bit, so that the unfunded amount of the liability would vanish after 30 years. Because investment results, longevity, retirement rates, etc, would fluctuate, the amount of the extra contribution would be re-figured every year, and a few good years might eliminate the deficit.
A shorter period of funding for the deficits, maybe 10 or 15 years, might improve the situation somewhat in some of these cases. But that is not a solution. Note the long discussion above about problems of state and local government plans. These are quite a bit different, because their are no greedy investors calling the shots for state and local governments, and IRS regulations about what plans qualify for tax deductions for the employer don't have traction in the public sector.
In the private sector, these stories will become increasingly rare, as workforce unionization is very low, and virtually all the non-union plans have been replaced by 401k plans and defined-contribution pension plans that do not include any concept of an accrued benefit or unfunded liability. That is America's real pension scandal, but it is another story.
The real problem is that the situation is too complicated. It is often very difficult to tell whether a company is being streamlined or being looted. Creating a comprehensive set of rules to prevent looting out from under a corporate or even multi-employer pension plan and a watchdog agency that could enforce them wisely for the benefit of workers would be a very ambitious project.
My grandparents had 401(k) retirement savings and were basically wiped out by the 2008 financial crisis. I think it would be no exaggeration to say that the crisis directly caused her death when she likely would have had many more good quality years of life had they not been forced to live in a deeply meager way after the value of their retirement fund plummeted at a moment when they needed it severely.
Asking average citizens to understand market volatility and diversification and to rely on the total abject falsehood that “markets just go up in value” is equally immoral.
The aspect of pensions, to me, that satisfies the primary moral constraint of the situation is that you are guaranteed income of a certain level, so that the organization granting the pension has to bear the risk of volatility in whatever funding instruments are used to back it.
The problem is more about determining why pensions became unfunded, what insurance products would be required to ensure that cannot happen (or at least cannot drop below some minimum insured level), and why government entities failed to budget and save accordingly, in an actuarial sense, to meet pension costs.
In my view, we are part of an unbelievably huge quality of life theft right now, a generational heist, pulling wool over everyone’s eyes to think that defined contribution retirement vehicles are somehow an acceptable alternative to defined benefit retirement vehicles.
Depending on an employer for your retirement is, in the modern market, a proven bad idea.
It's terrible what happened to your grandparents (to anyone else nearing retirement, take this as a cautionary tale and get your money in something safe). But hearkening back to the "glory" days of employer-paid pensions is not a viable solution.
Furthermore, the structure of most of those pensions was oriented around long-term (i.e. decades-long) employment at big, stable employers. Someone who moved around every few years would probably end up without much of a pension.
However, in a practical sense, your point doesn’t matter because all retirement plans accessible to the majority of people are employer-based. Most people only get access to 401(k) plans through an employer, and the only reason it’s worthwhile for them is for the employer match (asset growth won’t be meaningful, particularly compared with inflation).
Often there are also vesting issues as well. I worked for a company once where if your tenure at the company was less than 4 years, the company got all of its contributions back. Many other employers offer no matching whatsoever, and in that case you really have to ask yourself whether it wouldn’t be better to instead pay taxes up front and just invest retail into some low-fee broad-market ETF on your own, rather than to trap money away behind penalties and tax complexity in a 401(k) where you’re not even getting a company match.
So we are still equally reliant on employers as the facilitator of access to a retirement benefit. Functionally it’s truly not different than pensions, only the underlying financial instrument is different.
You do point out that depending on an employer for retirement is a bad idea, but in the absence of greatly expanded social security and nationalized health care, depending on an employer who at least has the chance to use its scale to mitigate risk in the retirement instrument is about the best you can do.
Expecting individuals with little or no access to meaningful financial planning services to manage the risk profile of their own retirement vehicle is ludicrously stupid by comparison. Individuals can be wiped out by unexpected legal bills, insurance technicalities, early death of a provider, etc. Infividuals are not the right level of entity to be juggling these risks.
Instead it points to a moral failure on the part of corporations, forsaking loyal workers in favor of complex strategies to extract labor without being compelled to absorb the risk of retirement financial solvency.
No, 401K pensions are 'defined contribution' systems; you put in X, your employer puts in X/2 (or whatever it is they decide. X/2 is common in my area, but as you point out, some lower-end employers contribute nothing at all, while others have weird vesting schedules on it.) - when you retire, you get out... however much that money has grow (or lost) - no guarantees, just a tax deferral on money you invest for retirement.
Usually when people talk about pensions, they are talking about /defined benefit/ pensions. These are essentially like an annuity that is only good if the issuing company doesn't go under; you work until you retire, and you get some fixed amount of income every month until you die (or the company goes under)
The idea that a defined benefit pension is very much like a lifetime annuity is key to understanding why pensions seem to work fine in some times and not so fine in other times; In the '80s, when my parents were getting jobs that got them defined benefit pensions, you could run out and buy T-bills and expect to make significantly more than inflation. annuities made a lot of sense. By the time it was my turn in the late 90s/early aughts? T-bills no longer returned significantly more than inflation. Safe investments became a lot less profitable, and thus defined benefit pensions became a lot more difficult.
It’s still just as tied up with employers as before, even though the instrument functions very differently (some might argue it operates far worse) than pensions.
Often if you lost a job or changed jobs after some years of service, you were eligible for partially vested pension amounts, so even the idea that you can “take your 401(k) with you” when you quit / lose a job is still pretty analogous with employer tie-ups in pensions. And there can be issues about vesting for an employer match or no match at all. Additionally, the employer chooses who your asset manager will be, and may not choose a large, low-fee, good customer service option like Vanguard or something. Just another way the employer dictates how this retirement vehicle affects workers.
I’m not saying 401(k) is the same as defined benefit at all. Only that the move towards defined contribution plans has not actually decoupled retirement plans from employer intervention in any meaningful way. Employer control is roughly just as it always has been, only now employees are forced to bear the risk of the underlying assets, instead of compeling the employer organization (which is far more capable of absorbing risk and riding out downsides) to bear that risk.
I mostly disagree? Mostly. If you don't make a lot of money, you are gonna have a hard time putting away more than the $5.5K or so that a conventional IRA limits you to. (and if you don't have an employer plan, setting up a conventional IRA or Roth IRA for that $5.5K is super easy)
If you make enough that you can put away much more than that, you probably either have an employer who gives you access to a 401K OR you have something like a business. If you have something like a business, talk to your tax professional. (if you make enough money that you worry about this stuff, you need a tax professional. I suggest looking a the 'enrolled agent' license) - There are tax advantaged retirement plans for the self employed that let you put away a lot more pre-tax than the $18.5K that a 401K will let you put away. Ask your tax person about the 'SEP IRA' - there are other plans, and I'm not qualified to guide you here, so ask your tax professional, but there are a lot of really good options for the 'self employed but making a lot more money than I need to live on' set.
(note, dollar amounts are approximate, and probably out of date. again, if you have a business that does significant monies, talk to a licensed tax professional, not a computer technician who burnt out running a business a while back)
>I’m not saying 401(k) is the same as defined benefit at all. Only that the move towards defined contribution plans has not actually decoupled retirement plans from employer intervention in any meaningful way. Employer control is roughly just as it always has been, only now employees are forced to bear the risk of the underlying assets, instead of compeling the employer organization (which is far more capable of absorbing risk and riding out downsides) to bear that risk.
I think the fundamental difference here is that with a 401K, I have to trust my employer a lot less. I agree, of course, with your point about risk, that with a 401K, I am taking on a lot of market risk, risk that a company is better setup to handle than I am. However, key here is that with a 401K, my fate is no longer tied to the companys fate. If the place I work for goes tits up after I leave (which has alrealdy happened to me a few times, I hope through no fault of my own) with a 401K, it's no skin off my nose. With a company defined-benefit pension... it is a much bigger deal for me.
(As an aside, I personally think a government old-age pension that isn't dependent on your income is the rawlsian thing to do here. I'm just pointing out that in the fight between the 401K and the private-company defined-benefit pensions, there are real differences and real arguments in both directions)
It's tax deferred, too, which is pretty important. Even if you don't think asset growth is significant (and it usually is significant... it's just not guaranteed or predictable) In your peak earning years, you are making a bunch of money (hopefully) and therefore paying a bunch in taxes. In your retirement, well, maybe you'll be making a lot of money, in which case, paying taxes isn't such a big deal, or maybe you won't be making very much money at all, in which case, you won't have to pay very much in taxes on that money.
At least if you are where I am, making good money (and paying good taxes) but don't have a huge amount stashed away, stashing pre-tax money has huge benefits over stashing post-tax money.
(If you do stash post-tax money, check into the roth IRA; it means you won't pay taxes when you take it out. Of course, you can only directly contribute to a roth ira if you don't make much money... but the 'backdoor roth' is something to ask your tax professional about... and if you earn enough that you can't contribute to a roth ira, you should have a tax professional. I personally recommend the 'enrolled agent' credential)
I think the only time you don't want to max out your tax-advantaged savings palan is if you aren't making enough money to max out your tax-advantaged plans and save enough short term money.
What is "something safe"? I was under the impression that 401ks are not really known as risky investments.
Within their 401k, most people hold a higher percentage of stocks (more to gain) earlier in their working life and transition to a higher percentage of bonds (more stability / safety) later in life as they approach retirement.
Good concrete examples of what to hold are Vanguard's funds which are low cost and own the whole stock market because they're index-based. VTSAX for stocks and VBTLX for bonds.
https://investor.vanguard.com/mutual-funds/profile/overview/...
https://investor.vanguard.com/mutual-funds/profile/overview/...
There are also target-date funds (also called target retirement date funds) which automate the transition from stock heavy to bond heavy based on a future retirement date, and you pay extra for this benefit, but BE CAREFUL as many of them charge significantly more fees than doing it yourself.
Vanguard is one of the best (lowest fee), so for example, their TDFs have a 0.13–0.15% expense ratio while the two index funds above have ERs of 0.04% and 0.05% respectively.
It is not uncommon for the more popular mutual fund providers to have radically higher expense ratios in the neighborhood of 1–2%+ (in addition to other more subtle fees). The difference might sound small but compounded over decades, the effect is massive. (There's a reason people working in finance are paid so well.)
Even working in quant finance and managing these portfolios for huge pension or retirement plans, you get astounded that the “technical experts” on the board of directors barely understand the concept of simple interest, and continuous compounding or any formulas would be untenably way, way too complicated.
So when you see people on Hacker News acting aghast that elderly people might have inadvertently been loaded up on high-beta equities right around the 2008 crash, you just know those commenters have no concept of the reality that most Americans live through.
In my grandparents case they even went to some local Edward Jones financial planner or something who just turned out to be deeply incompetent and acted like he was some hot shot day trader, putting them in equity-heavy niche portfolios with higher fees, when they should have been decorrelating themselves from market volatility generally.
He did nothing illegal, and my grandparents believed earnestly that someone competent was making prudent decisions about their money.
https://www.amazon.com/Simple-Path-Wealth-financial-independ...
One beef I have with the finance industry is that very few people, especially professionals, will give you the above info in an actionable manner to do it yourself. And given the way they are compensated, it's not a big surprise. I would like to see it more open and approachable like programming. But I do believe that the average person can understand the basic concepts of buckets, index funds, risk allocation, and reducing risk over time.
I do think that the weird high-fee niche investment case is unfortunately quite common. Perhaps one more big idea for most people to understand is that even most financial professionals can't beat the market, though it almost goes against their own compensation incentives to admit that.
But this description was very technical, another way to approach it is: keep in mind that there is no 100% safe way to save money, if you are looking to set money aside for retirement you may just put it a "retirement fund" based on the year you plan to retire (or a bit earlier to be conservative).
For example the "Vanguard Target Retirement 2010 Fund" lost 21% in 2008: https://investor.vanguard.com/mutual-funds/profile/performan... (but gained 19% in 2009 and 11% in 2010).
Edit: I agree that access to the information is a big problem for the common people. This is a valid general concern outside of just planning retirement though.
Yes. S.O.C.I.A.L. S.E.C.U.R.I.T.Y.
Look how well Americans will fight for and defend Social security benefits.
We really should just force an expansion of Social Security like most civilized countries.
2. Social Security isn't doing much better. It will be broke in ~15 years, paying out exactly as much as it takes in.
https://www.cnn.com/2018/06/05/politics/social-security-bene...
#2 - Social Security needs work, but it's not going to be "broke". It can't be "broke". It's a required expense by law. It will be funded from other sources. And, not all that long after it hits that break-even point, we'll start seeing the demographic adjustment--i.e., the Baby Boomers dying off in quantity--begin to adjust that back towards the other direction.
As usual, when one finds oneself repeating things said by people who want to destroy institutions, one should look deeper into them for truth.
Remove the income cap limit. ( https://www.fool.com/investing/2017/12/10/what-is-the-2018-m...)
All income over $128K is does not have a social security tax on it.
Remove the cap and there will be no problem.
This is how it works today; working people pay in, and our parents or grandparents get that money.
Any perceived financial trouble is because we've now got people living longer, and so we've got more retirees for the same number of workers. This... just means we need to raise taxes.
I mean, really, I think it's silly to say we have a special tax for social security; my understanding is that the money goes into the general fund anyhow (and it's been running a surplus for some time now)
We don't have a special tax for the army that you only have to pay on your first $128K/yr, why do we have that for social security?
To use the terminology of
https://www.reddit.com/r/mmt_economics/comments/7ciwqe/how_d...
if the "social security cookie jar" is empty and taxes marked for social security exceed payments, then it simply turns negative, as able to pay out as it was before.
That's the thing with investment advice. There is a lot of "should" and "would" advice in hindsight but not so much concrete advice about the now. Also, if you just have a major medial issue, all your well-laid plans will be moot.
We are engaging in a massive financial experiment over the last few decades. I know people who started working in the 80s and did extremely well. But they started from a low stock market, had massive housing appreciation and didn't have huge college debt. If you started working in 2000 with a Dow of 11000 the picture is less pretty. And for people who are starting now it's just plain ugly. Houses are already super expensive, they have college debt and the stock market is expensive. They won't see the growth the people who started in the 80s saw. But somehow they are still held to the same standards.
As I mentioned in another comment, my grandparents had gone to some retail financial planner like Edward Jones or something, small town, some guy whose family they knew, and he just turned out to be deeply incompetent.
Imagine being elderly and not personally competent to understand ideas like the relative risk of equity or bond portfolios, and your children are equally as incompetent and can’t really help you, and the local options for financial planners are also equally as incompetent.
That’s the picture for the vast majority of people counting on using 401(k) for retirement. They don’t know if they’re in high fee equity portfolios or low fee index replication or bonds etc. They don’t understand any of that very well. They just take what the employer gives them, unwittingly own a bunch of random crap, and hope they got lucky and everything went up enough, or that someone with decent financial skill gave them sound advice.
Note that this is also a big part of how unicorn companies externalize losses to the public. Jack up the price of Uber or Spotify or something, and a while after it has gone public, nearing the time when employee lockup periods are over, random retirees and teachers and firefighters or whatever all unwittingly end up owning shares of this stuff from broad funds they don’t understand via their retirement plan.
Then the unicorn undergoes a massive correction in valuation, but investors and choice employees were allowed to sell at the known inflated prices, meanwhile the buy and hold people unwittingly owning it via a 401(k) just eat the losses.
And how do you find a someone financially competent? Even a lot of the superstars blow up eventually. I think it's just a gamble.
There is a ton of cargoculting going on in financial advice. In the end nobody knows how to do it right long-term.
At the end of the day, it's all a defined contribution vehicle, because the future is unknowable. The question is whether you choose to deal with that reality up front or kick the can down the road.
Why? We expect people who drive cars to understand the basics of driving to the extent it is safe for them to drive. Simple diversification isn't a hard concept. Neither is risk/reward in determining where to put your money.
>The aspect of pensions, to me, that satisfies the primary moral constraint of the situation is that you are guaranteed income of a certain level, so that the organization granting the pension has to bear the risk of volatility in whatever funding instruments are used to back it.
But you aren't guaranteed it because things can happen. Immoral or even illegal things, or just having a run of bad luck. Regardless of the cause, there is a risk for the money not being there when you need it, a risk that seems to be worse than a 401(k) or equivalent. That risk includes governments not doing what you think they should've done, because no matter how much you think they should've done something they didn't do, it still wasn't done (in this case, companies weren't forced to fund and protect their pensions).
If you have your own money, you can at least protect against this by having diversified investments, and if you are an adult who is allowed to vote then you can understand the concept of not putting all your eggs in one basket.
People understand the concept of 'don't put all your eggs in one basket'. People understand the concept of 'no pain, no gain'. It is not difficult to apply these to stocks. This isn't about understanding accounting or understanding exactly how to measure the risk of a stock.
You don't need to understand physics to understand why a seat belt saves lives. You just need a very basic understanding of being ejected from a car. This isn't about getting them enough understanding to build a seat belt that saves lives, only about getting enough understanding to use the seat belt provided.
>The best I could do is try to lobby for laws that prevent attitudes like yours from applying regular people, because it would amount, quite literally, to preying on the incompetence of average workers who don’t have specialized financial decision making skills... which is largely what our whole banking and retirement systems are set up to do.
You will find that people do not like being treated as children and will avoid your regulations for the sake of making profit, often choosing far more unwise methods than the ones you are preventing. If your political stance is to treat adults, especially older adults nearing retirement as children, you will find yourself unable to enact any of the silly measures you think will help. We can't even get the elderly who no longer can safely drive vehicles to stop driving them, an action that puts the lives of innocents at risk. It will be taken, perhaps justly so, as trying to legally forbid the common methods from making a profit and forcing them to use worse options that will allow them to be taken advantage of, just like modern day pensions do.
I think superannuation (or 401K in US parlance) with a means tested pension backstop is the most likely to be successful, simply because it removes this sort of shenanigans, and at scale becomes a really boring industry where shonksters are less likely to exist (NOTE: LESS not ZERO) but still has a social backstop for people that just don't ever get it.
It seems unfair to me, as a taxpayer, to guarantee something that is the owner themselves aren't working to keep in good shape.
In my humble opinion, pension meltdowns will be the triggering event for massive unrest in the coming decade.
FWIW this is exactly how it works in the UK. After employer and employee contributions are made my employer has nothing to do with what it's invested in etc.
With a pension, you own a promise from the employer to pay you a fixed amount. How it does that is (theoretically) none of your concern.
Some consider pensions to be more pro-worker because you're entitled to the same payout regardless of market performance. But it seems to be turning out that the 401k is more worker-friendly, as there's no promise to be reneged.
I'm mostly in the dark about the US pension system, so forgive me if the question is a silly one: How is this 'promise' not a legally binding debt, to be repaid as much as possible by the selling of assets during bankruptcy?
a) The entity never had enough assets to begin with (public pensions).
b) The assets have lost their value (business failure).
c) The assets were directed elsewhere by management (private equity takeover).
Every city, county, local municipality, and school district over-promised on pensions while underpaying salaries.
The real risk is not in the present, the real risk is outliving your retirement savings.
You can predict how long a population will live, you cannot predict whether a single person will need 5 or 40 years of retirement savings. Collective defined benefit plans mitigate this risk and are the only thing that really make sense.
They also end up cheaper because instead of each person needing to save the amount needed until the end of retirement, the group only needs to save the amount that the average person will need.
Both social security and employer held pensions have to cut their payouts, but only one of them is democratic and has even a chance of being run in the interests of the beneficiaries.
"The group only needs to save the amount the average person will need" - the same is true if you buy an annuity. Or, give people preferential tax treatment for keeping money in their pension post retirement, don't let their family inherit it.
You're X years old? Statistically likely to retire at Y and live to Z? If we assume N% average rate of return, this is how much you have to pay every month until then to get a given payout at retirement. The risk theoretically belongs to the issuer, who has to eat the difference if they underestimated any of these numbers, and their reward comes from pricing conservatively and keeping gains beyond the promised return.
What has gone wrong were yeas of assumptions that weren't just inaccurate, but consistently inaccurate in over-optimistic directions. "We'll average 16% per year when 7 is more realistic." "Everyone will drop dead within 36 months of retirement." and seemingly "Nobody will plunder or slash contribution that were negotiated long ago."
I'm doing the latter and dumping it all into real estate, that seems to be the best bet at the moment.
Remember that banks, etc all have insurance on their debt, apparently that doesn’t matter - companies are simply stealing from money that is not theirs, and that’s apparently ok.
You should vote in your jurisdictions’ meaningful primaries, get involved with campaigns and causes that represent you and organise like-minded citizens.
> Either way the child is inheriting economic wealth they didn't produce
There isn't a whole lot. But you're missing the point of parenting. Hint: it's not financial support. You can't write a baby a check for $1M, plop it down in an empty house and expect it to live a good life. After you die you're not doing any of the stuff that actually makes having a parent valuable to a child relative to receiving the necessary financial support (which will not even be available to working class children under your proposed system).
Maybe if you were confident your children would be adequately taken care of if you died, you wouldn't have to work so hard saving up a nest egg and would actually have more time to be a parent.
Who determines what is fair?
And yes a company doing that is a completely different situation. Like it or not we pay into a pool that if you are a citizen you will receive benefits. You also pay into an account for your 401k that you own. Renouncing citizenship, you walked away from the former account.
Sears, Toys R' Us, Marsh .... all brought by PE firms. All drained dry by interest payments, until there is nothing left.
The vampires have already gotten all the blood out of the body before bankruptcy occurs.
It's usually part of a future worker's income. That is how they are underfunded. If the employee paid into a fund then these problems would happen less.
The problem is it's a promise to pay future money to today workers in the future, and when future money does not pan out, there is no reason one debt holder (pensioner) should have absolute precedence over another (lender, who sometimes lends enough to get the company past bad times).
For example, putting a pensioner absolutely first would make lenders stay away, and any companies that have a chance of being saved by lenders would then die, causing more pain.
Yes, there is a reason: people matter more than companies. Lenders can price that risk in. If that makes lenders "stay away"? Then the executive teams that get their golden parachutes get screwed too, and I'm frankly pretty okay with that.
And let's be real: pensions are virtually never (you might find one large example; you won't find ten) destroyed to save a business. They're destroyed to make their assets worth more in a flip. We need not be dishonest in this discussion.
And when is the last time one of these companies had their pensions cut, executives paid, then turned around the ship to be successful?
I mean, that's a great story on paper, but it's never the way this plays out. BEST CASE a PE firm buys up the company then sells off the assets at a profit to themselves. The workers NEVER come out ahead and almost universally would be better off if the company went under leaving them with whatever the partial pension funding was.
GM just did that during the recession, saving a huge number of jobs, and enabling GM to pay partial pensions. In fact, probably any company (and municipality, of which there are many) that went through or was near bankruptcy and turned around did so because of access to capital.
So you claim it never happens. I claim it happens in almost every case where some company was saved. Loans don't magically appear to help places without access to capital markets, which means in almost all cases PE.
That you don't see it, even in high profile cases like this, doesn't make it uncommon. Simply google and you'll find lots of examples counter to your claims.
If you want some academic studies, [1] shows that PE companies are better managed across developed and developing countries than non-PE, [2] shows that PE financed companies service debt at a lower cost to companies than non-PE firms (meaning that not taking PE, but using other sources, costs the company more), [3] shows that PE companies show more growth and employment than non-PE companies, and on and on. These are peer-reviewed journal articles that measure precisely what you likely have developed a feeling about from news and pop sources.
These articles are representative of a google scholar search on private equity research since 2015, and all appear on the first page. The rest of the page that addresses your claims reads similarly. Check it yourself.
[1] https://www.aeaweb.org/articles?id=10.1257/aer.p20151000
[2] https://www.cambridge.org/core/journals/journal-of-financial...
[3] https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2015.240...
I was operating under the understanding that what you have so wisely suggested is exactly how pensions are generally structured, plus contributions from employers. Have I been misinformed?
I was also under the impression that these contributions are vulnerable to problems like assuming an incorrect long-term discount rate, life expectancy jumps, and more.
Corporations get to deduct interest costs from their taxes. So PE firms are incentivized to load up the firms they attack with debt.
Additionally, PE firms are allowed to use a firm's own money as collateral for the loan used to take over the firm. This includes the pension funds.
So any public firm responsibly run is subject to attack. Its almost irresponsible for a firm to fund the pension fund as it will be used against the firm.
The solution:
1. Require that any loan be based on the assets currently controlled by the PE firm.
2. Eliminate tax deduction for debts that are not directly tied to capital purchases.
I don't know how to fix it, it seems a deeply entrenched problem at many levels and each level will vigorously deny they are the problem. Healthcare and education being two of the most egregious examples but similar problems exist in many areas in public and private institutions.
It's like a fungus or rot or something. A food source exists, a store of value which is supposed to provide energy to the social whole which gets infected by middle (and upper) management, consultants etc, pathologically twisting the flow of energy away from the original purpose and into their own pockets. I don't think it's "conspiracy" to notice this seems to have grown rampantly in the past few decades in the USA. So it's very easy to get cynical. But we either solve these problems and return to standards of non-kleptocracy and general justice and welfare or we die as a society. This has happened before in human history. It's not easy to roll back corruption and usually it doesn't happen, but the possibility exists.
"A People's History of the United States has been criticized heavily by historians from across the political spectrum. Critics assert blatant omissions of important historical episodes, uncritical reliance on biased sources, and systematic failures to examine opposing views."
https://en.wikipedia.org/wiki/A_People%27s_History_of_the_Un...
The banks of America's and Lehman bros get their money before the people who are working the business to survive do.
Without basic income you need a job to survive but at the same time you're being exploited while you work that job.
See also Radio Shack, Toys R Us, Maplin, and British Home Stores: https://www.theguardian.com/business/2017/feb/28/philip-gree...
(The astonishing thing there is that somehow the thief was shamed into returning the money.)
https://www.bloomberg.com/opinion/articles/2018-03-26/alden-...
What is it about our society that makes people oblivious to satire/cautionary tales as long as it's given a shiny cosmetic sheen?
Military is a whole different story. They need to incentivize people somehow and it ain’t going to be ping pong tables and beer fridge.