By now you have perhaps read – or at least been told about – the recent cover story in Time magazine titled “The Broken Promise.” The promise - one of retirement benefits and health coverage – has been broken by employers, with the complicity of government, according to the story’s authors. And, in fairness, if one is looking for trouble in the nation’s private pension system, there is trouble to find. Some of those “troublemakers” have been taken to task in this very column.
It isn’t just workers who have had “promises” reneged on, of course. Lawmakers have made significant changes to the laws regarding these programs over the years and, unlike the portrait painted by Time, they have frequently served to discourage both the funding of existing programs as well as the formation of new defined benefit programs. Generally, as in the current wave of “reform” legislation, they are targeted at the bad behaviors of a few – but come into effect well after those targets have skipped town. In effect, they punish those still trying to play by the rules for the misdeeds of others, which simply accelerates the rush to the exits.
Have you wondered how pension funding got to be such a big problem seemingly overnight? The problem with pension funding isn’t generally due to poor employer funding policies or lousy market returns, though both play a role. No, most of the “damage” to the system is a direct result of the elimination of the issuance of the 30-year Treasury bond – a decision that effectively undermined the rational basis upon which pension liability calculations had been predicated since the advent of ERISA. While this may have appeared to be good economic policy at the time, its impact on pension funding calculations has been enormous, unanticipated, and imposed upon employers without regard to its impact on those calculations. Congress was late to focus on the issue – and we’re still dealing with “temporary” replacements for this calculation.
As for retiree health care, lawmakers have refused to permit employers the kind of funding flexibility necessary to set aside funds for those obligations. Little wonder, given the dramatic double-digit increases in costs over the past several years – and the accounting changes imposed more than a decade ago - that a growing number of employers feel they simply cannot continue to support the expense. An expense that, certainly in some cases, seems relentlessly driven higher by the complacency of workers with a co-pay-only accountability for the financial implications of those decisions. Little wonder, too, that employers might look to offset their financial obligation by the amount of Medicare coverage, in much the way that they have for pension offsets with Social Security.
But the most significant “betrayal” of the pension promise, IMHO, comes from the accounting community – more specifically the Financial Accounting Standards Board (FASB) – which, in the “interests” of accuracy and transparency, have transformed the long-term nature of these commitments into short-term obligations. This space is too short to debate the merits of that approach – but one cannot credibly dispute that the accounting treatment of pension and retiree health-care obligations has undergone significant change since ERISA was passed, certainly since many of these promises were made. In a very real sense, employers made their pension promises based on a specific set of financial terms and conditions - that were totally, and dramatically, rewritten a decade later by the accounting profession.
None of that context addresses the very real plight of retirees who find themselves without the financial resources they had hoped for, or counted on, at the end of their working lives. For years employers have been expected to simply absorb the impact of these dramatic changes in policy, while changes in the underlying programs are widely pilloried as a betrayal of worker trust. Unfortunately, coverage like that in the Time article sheds no light on the root causes of the problem. Rather, it attempts to create a villain by caricature – the greedy employer – which it seeks to hold accountable for the challenges that confront us.
But by glossing over the real culprits and causes of the crisis it seeks to perpetuate, it contributes to the problem, rather than the solution.