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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsThe collapsing middle class- now they are going after pensions.
The story as reported.On July 6th, President Obama signed the "Moving Ahead for Progress in the 21st Century Act", also known as MAP-21. Headlines chronicling the event focused on the extension of lower interest rates on student loans. Second billing on this bipartisan legislation went to the reauthorization of federal funding for transportation programs, which was touted by the administration for creating jobs. The law also dealt with various unrelated matters, including taxation of roll-your-own cigarette machines and changes in pension regulations...
Typical coverage of the bill here: http://www.cnn.com/2012/06/29/politics/congress-highway-bill/index.html
The very last paragraph of the article includes a single sentence on pension funding: "During negotiations this week, legislators decided the revenue to pay the $6 billion cost should come from changes to the way companies fund pension programs..." The media focus on student loan rates meant that the change in pension funding went mostly unnoticed and unremarked.
Pension fund "stabilization."
An AP article in the Money section of USA Today gives the new pension legislation more coverage, including this summary of its content and effects (emphasis added): http://www.usatoday.com/money/industries/story/2012-07-09/New-law-gives-companies-pensions-break/56114600/1
...
The bill Obama signed into law on July 6 renews transportation programs and extends low interest rates on student loans. It was partly paid for by changing pension laws. It would raise around $10 billion over the next decade by gradually boosting the premiums companies pay the government to insure their pension plans, and another $9 billion by changing how businesses calculate what they must contribute to their pension funds.
That computation change will let companies estimate their pension fund earnings by assuming the interest rate will be near the average of the past 25 years, rather than the past two years when interest rates have been extremely low. Since they will now be able to assume that their pension investments are earning higher profits, they will be required to contribute less money from corporate coffers to make up the difference.
The government makes money because companies will make fewer pension contributions, which are tax deductible.
The cover story.
The Pension Fund Stabilization provision in the new law is a compromise primarily designed to serve two purposes- to provide more revenue for existing government programs and to reduce annual pension contributions for companies. From the New York Times: http://www.nytimes.com/2012/06/29/business/tweak-in-a-pension-rule-could-finance-roads-and-student-loans.html
Pressure has also mounted this year to find a way to keep the interest rate on Stafford loans from doubling on Sunday, when a five-year rate relief program is set to expire. The current rate, 3.4 percent, will rise to 6.8 percent without an extension, affecting more than seven million students who are expected to take out such loans for the next academic year.
Lawmakers tussled over other sources of money, with Republicans and Democrats shooting down each others proposals, until pensions came into focus, both as a possible revenue source and a much-needed piece of bipartisan common ground. Lawmakers of both parties are inclined to find ways to help companies operate their pension plans...
Low interest rates may help the economy overall, but they are a hardship for the companies that offer pensions to their workers. When interest rates are low, the funding rules call for companies to put more money into their pension plans, on the assumption that the money will compound more slowly. And this year, because the economy is still weak, companies with pension plans were back on Capitol Hill once again, asking for additional help. But this time they proposed a new way of calculating pension obligations, by adjusting the interest rates they use to calculate contributions.
Estimates of the near-term savings on corporate contributions vary. According to Jacques Goulet, US leader of Mercer's Retirement, Risk & Finance, "...relief could be in the range of $40 to $50 billion for S&P 1500 plan sponsors for 2012 and could total well over $100 billion through 2014." The Society of Actuaries, quoted in the AP article in USA Today, estimates that the reduction in contributions will be $35 billion this year and will peak at $73 billion next year.
Just three days after the bill was signed, the first shoe dropped when AK Steel announced it was cutting its planned pension contribution for 2013 from $300,000,000 to $200,000,000.
What it means.
While the legislation was tailored to suit the needs of Congress and corporations, it did so by shortchanging the needs of pension plan participants and, quite possibly, taxpayers. Congress and the companies got a quick cash infusion while the public got more risk and less solvent pension plans. The loosening of funding standards comes at a particularly bad time as far as the plans are concerned. Milliman, Inc. reports on the condition of the largest pension plans: http://www.businessinsurance.com/article/20120709/NEWS03/120709911
Defined benefit plans offered by the 100 U.S. employers with the largest pension programs were an average of 75.6% funded as of June 30, down from 77.9% at the end of May 31.
In all, the funding deficit jumped $77 billion last month. At the end of June, the value of aggregate plan assets was $1.283 trillion, while the value of plan liabilities was $1.698 trillion. That resulted in a $415 billion deficit, up from $358 billion at end of May.
"With the help of the lowest discount rate in the 12-year history of our study, corporate pensions last month saw their funding deficit increase, to a near-record $415 billion,'"John Ehrhardt, a Milliman consulting actuary in New York and co-author of the analysis, said in a statement.
This is a continuation of the recent trend as shown in the chart below (also from Milliman):
It is difficult to believe that relaxing contribution requirements at this time will not exacerbate the trend toward pension fund insolvency. Perversely, the cash injection into corporate coffers comes at a time when companies are already sitting on record amounts of cash. From the Wall Street Journal: http://online.wsj.com/article/SB10001424053111903927204576574720017009568.html
Nonfinancial companies held more than $2 trillion in cash and other liquid assets at the end of June, the Federal Reserve reported Friday, up more than $88 billion from the end of March. Cash accounted for 7.1% of all company assets, everything from buildings to bonds, the highest level since 1963.
In short, this is money that many companies don't need. But in a business culture in which the only acceptable motive is profit, leaving money on the table is viewed as weak, foolish, or irresponsible, and greed trumps decency.
If the economy continues to wallow in a long-term recession, the Fed is likely to extend its zero interest rate policy (ZIRP). As it is, the Fed has already announced that it will extend ZIRP through late 2014. Facing continuing low returns on their pension fund assets, companies will surely want to extend their benefit contribution holiday. Given the bipartisan support for MAP-21, it is difficult to imagine that companies would not get an extension if they lobbied for it. Recent history reinforces this point. The Pension Protection Act of 2006 tightened pension funding requirements. The provisions of the PPA were supposed to be phased in gradually, including a stipulation that any "funding shortfall" would be amortized over a seven year period starting in 2008. Additionally, the act provided for accelerated funding requirements for "at risk" plans- where "at risk" is defined as less than 80% funded. Sadly, the good intentions of these reforms disintegrated with the passage of MAP-21.
Artificially inflating the "expected" return on existing pension fund assets serves no useful purpose except to reduce current employer contributions. The contribution shortfall is then replaced by projecting increases in asset appreciation and interest income which are counted on to make up the difference. Sound financial practice is abandoned and replaced with an appeal to wishful thinking or the power of prayer. This is exactly the sort of thing that someone with questionable motives might do with other people's money. Nobody in their right mind would do it with their own money, especially if they were relying on those funds for retirement.
For those interested in the subject, more reading:
http://www.investopedia.com/university/financialstatements/financialstatements9.asp#axzz20ejQiuKf
http://www.pensionrights.org/issues/legislation/pension-provisions-hr-4348-%E2%80%93-moving-ahead-progress-21st-century-map-21-act
http://www.heritage.org/research/reports/2012/04/pension-funding-issues-hidden-in-transportation-highway-bill
http://blog.ebeclaw.com/2011/02/summary-of-pension-protection-act-of.html
cyberpj
(10,794 posts)and distract us from attacking (sometimes, even FINDING) the means to pay for that benefit.
I hope this gets some real attention in the media, and that current and future pensioners can gather and protest loudly on this one.
I haven't been an AARP fan but they better be on the right side of this one and I intend to call them to find out.
Sweet Jesus I'm tired of having to fight the government that was formed to protect me and my constitution!
woo me with science
(32,139 posts)hay rick
(7,605 posts)Defunding pensions is just the latest phase of the looting of Americans on behalf of the rich. Sadly, the pension contribution holiday is an appropriate bookend for the payroll tax holiday. One will gradually undermine the solvency of defined benefit pensions while the other undermines the long-term viability of Social Security.
And the assault is bipartisan.
HiPointDem
(20,729 posts)woo me with science
(32,139 posts)We are living it.
bvar22
(39,909 posts)[font size=5]Paulson with Co-Conspirators
Now THIS is "Bi-Partisanship".[/font]
You will know them by their WORKS,
not by their excuses.
[font size=5 color=green]Solidarity99![/font][font size=2 color=green]
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woo me with science
(32,139 posts)Wake up, America.
n2doc
(47,953 posts)They live in absolute luxury. The rest of us work until we can't, then die. Back to the dark ages.
Zalatix
(8,994 posts)Make the Plutocrats as poor as everyone else that they're preying on. Destroy all their power and put their skin in the game.
The alternative is exactly what you said... the dark ages, for the 99% that is.
99Forever
(14,524 posts)Nothing short of that will have an effect. This battle is as old as history, and it always comes down to the same thing, greed vs. humanity and compassion. We MUST not lose this and leave it to our children.
Response to hay rick (Original post)
Post removed
lovuian
(19,362 posts)no amount of drones military or police with stop the worker from rising up
History is testimony of this
if the plan is to reduce the worker to starvation and death ....then someday the worker is going to figure out
he can die fighting or can die in a ditch
its his choice
they ultimately choose to die fighting
they can't build enough prisons to hold them
I'm absolutely amazed at the stupidity of the 1% because the ultimate turning point from Brutal capitalism is socialism
HiPointDem
(20,729 posts)HiPointDem
(20,729 posts)kicking for importance
Romulox
(25,960 posts)Who needs a pension, when you get Sirius radio?
dionysus
(26,467 posts)Romulox
(25,960 posts)dionysus
(26,467 posts)Romulox
(25,960 posts)As it stands, you do little more than echo the sentiment of some of the more articulate posters.
woo me with science
(32,139 posts)You are quite the ardent defender.
dionysus
(26,467 posts)it's little kid shit.
if someone went into threads where you weren't posting in and posted shit about you, i'd think it was childish then, too.
bvar22
(39,909 posts)!
NickB79
(19,233 posts)Good.
Romulox
(25,960 posts)Romulox
(25,960 posts)Never heard of you.
dionysus
(26,467 posts)NickB79
(19,233 posts)Where you were acting like a dick, IMO. Then, while I was reading a different thread, I saw you just couldn't let it go so you had to carry your grudge over to a completely different topic.
Classy.
mckara
(1,708 posts)Pension funds have been under attack for decades in the War of Speculators v. Savers
randome
(34,845 posts)I need to clean my glasses.
We are Devo
(193 posts)PufPuf23
(8,767 posts)Excellent and informing post. Recced.
dixiegrrrrl
(60,010 posts)First, that is an excellent post. Detailed, and an important topic.
Thank you. Will bookmark and rec.
second, there are stories coming out of Spain in which banks holding retirement savings of people have
"sequestered" that money, preventing the owners of the accounts from accessing their savings.
Also:
by keeping interest rates low, the Bernak is keeping Soc Sec. funds underfunded, thus enduring the fund will go broke at least a decade earlier than predicted.
Soc. Sec. and most pension/retirement funds were originally based on an average return of 8%.
Which has not happened for years now.
Sadly, I have friends in their late 50's who absolutely refused to believe their retirement funds are facing any problems, even as towns and cities declare bankruptcy and cannot pay into the same funds.
hay rick
(7,605 posts)As you point out, the low interest rates are also having an adverse effect on the solvency of Social Security. Both defined benefit pension funds and Social Security are caught in the same kind of pincer- lagging earnings coupled with reduced contributions. Social Security receipts are further diminished by high unemployment and static wage levels.
Poor boomers. They have lost equity in their homes or lost them entirely to foreclosure. In many cases they have lost their jobs. And now their retirement incomes are up for grabs.
dixiegrrrrl
(60,010 posts)the word "austerity" does not need to be used here.
"policy" is what is killing us.
aquart
(69,014 posts)It's ridiculous to pretend it isn't mass murder.
liberal N proud
(60,334 posts)Mine was frozen in 2005.
My father who has been retired since the early days of the Regan Regime has seen them wittle away at his pension and they keep threatening to stop paying what they promised altogether.
freshwest
(53,661 posts)And they were threatening, more or less, to terminate the plan as they are no longer being paid in the same amount as they are sending out. They were sending the notices out more regularly and I figured it meant that my company pension would not be coming, after all.
It was one of the terms of the negotiated contract, that if the corporation (which kept changing its name and headquarters) was bringing in less income than was being paid to current retirees out of the accumulated trust fund, the amount would be reduced for everyone.
I don't see how this had to do with profits as the OP says, because they need the profits from current business to keep going, don't they?
The trust fund currently supports about a 100K people, their dependents and medical care. Iit is anticipated to support over a quarter million in the next three years. They indicated if incoming was reduced to a certain percent, since it was already 25% less than outgoing, they would send a lump payment and that would be the end of their obligation. Depressing, but there's not as much money flowing around as there was.
They began to refer to our rights to seek full or partial payments of what they would not be able to pay through the federal program, the Pension Benefit Guaranty Corporation. It has a deficit from having to guarantee the pensions of people whose corporations have come on hard times, been sold out, gone out of business or otherwise are not making their payments.
Suddenly my pension has been returned to the exact same company name I started with, at the same city I worked in, after all these years. It says this notice of the plan 'replaces and supersedes all the summaries of material modifications' that had been sent, that said we might have to go to the PBGC. The talk of turning us over to the PBGC has been deleted and also the talk of terminating the plan suddenly stopped.
If Obama or this legislation had anything to do with it, I'm grateful, because I need that pension. It mentioned several times about additional coverage for people who were disabled. So I truly don't know if the sky is falling or not here. Better informed people than me will say.
Good luck for your family in getting theirs. Frankly, I won't really believe it until I get that first check...
hay rick
(7,605 posts)United Airlines?
liberal N proud
(60,334 posts)hay rick
(7,605 posts)Not that it is my business, but if you want to share your story, I think it's valuable to provide context. Yes, pensions have been under attack for a long time- particularly in the airline and steel industries. Bankruptcy courts have played a part. The politics of PBGC funding has been a factor. And now politicians of both parties are rolling over and playing dead while companies make lame excuses and intentionally underfund pensions. In short, it's going from bad to worse.
liberal N proud
(60,334 posts)I still work there and need a considerable number of years before drawing what is in there. The company is consumer products "holding" company. When they became a holding company they froze pensions. It freed up money to by more businesses.
They just followed all the others and froze our pensions, new hires don't get one at all.
hay rick
(7,605 posts)You got me to look up "freezing pension plans" and I came to this link: http://www.pensionrights.org/publications/fact-sheet/pension-freezes
Looks like companies have considerable discretion in freezing pension plans. The only constraint seems to be that employees can not be denied benefits which they have already earned.
This is obviously a hardship for people who have too many years invested in the job to quit (and not enough time left to start over). Even worse- the new hires who are doing the same kind of work for less and with even poorer retirement prospects.
LiberalLoner
(9,761 posts)The plutocracy in charge wants us dead. Resources are becoming ever more scarce and they don't want to share with us. Within a couple of decades we will be seeing conditions like famine-stricken Korea, and most of us here will die.
NNN0LHI
(67,190 posts)Hey, if its good enough for Toyota to do its good enough for my employer to do too.
Don
Initech
(100,063 posts)Romulox
(25,960 posts)nichomachus
(12,754 posts)I knew the fuckers would find a way to steal it
Swede
(33,233 posts)Or as much as you could. Saves on taxes. But it is the best and safest way to control a pension.