IMHO: "Broken" Record
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
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
, 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
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
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.
Nevin E. Adams