In any crime scene investigation, clues may appear regarding the likely culprit(s) when motives surface. Was it Professor Plum in the library with a candlestick? Or was it professors in Ivy League halls with computers and mined data? While these latter suspects are probably complicit, high on the list of primary suspects are corporate CEOs in executive suits with checkbooks. Following the money (or money laundering) is a real challenge in this investigation since the professors and belief tanks that are ginning out so called research reports in remarkable volume have generally managed to shield the deep pockets behind them from transparency.
But, why the big push now? Here is a clue that came to light last December. During an NPR program, “Pension Plans Put Under The Knife,” Andrew Biggs from the American Enterprise Institute (and other belief tanks with which he has ties) said, “It will be unfortunate if a rising stock market tells people they don’t need to reform these plans.” Really? If these plans succeed at what they have claimed all along, that will be a problem? If your objective is to kill them, I suppose recovery is a problem. Looking at many of the so called “reform” initiatives, it is not a stretch to equate “reform” with “kill.” In other words, financial success by the plans will result in a crisis wasted by the killers, eh, reformers.
Movement to rid governments of the defined benefit plan culture is nothing new. For example, in an article in the April 2001 edition of The Nation magazine, Grover Norquist, head of Americans for Tax Reform, was asked to name an issue that might emerge as his next battleground:
Well, he says, there’s the matter of all those state and local pension plans. State by state, he’s planning to launch a campaign to dismantle and privatize state pension plans and their trillions of dollars of public funds held as investments for retirees. “Just 115 people control $1 trillion in these funds,” he says. “We want to take that power and destroy it.”
What power? Is it the power to vote proxies on securities held and take corporate executives and boards to task for behavior that is not viewed as being in the best long-term interest of shareholders? Arguably, if public employees had individual account plans where the money managers vote the proxies it is likely that those votes would be a lot more corporate friendly, particularly if those managers also have (or would like to have) those corporations as clients.
In the same magazine article, Mr. Norquist noted that hardly an agency of government is not worth being abolished saying, “My goal is to cut government in half in twenty-five years . . . to get it down to the size where we can drown it in the bathtub.”
Why are governments seen as such threats? For one thing, they are regulators – another thorn in the side of corporations. Reducing the number of regulators and making government service seem less attractive to high quality talent by eliminating defined benefit pension plans fall right in line with the bathtub scenario.
Corporations, however, are not the only suspects in the attempted murder of public DB plans. It turns out that these plans are not particularly fee friendly when it comes to business relationships with outside money managers. For example, in early 2000, legislation was pending in Florida to allow retirement plan members to move the value of their defined benefit to individual accounts in a defined contribution plan and to allow new employees to elect participation in a new DC plan. According to a May 5, 2000, article in the Wall Street Journal, between 50 and 75 lobbyists were lined up “Gucci to Gucci” prowling the halls of the legislature trying to make the case for the legislation, while representing the financial service providers who were circling overhead waiting to pounce on any dollars that might come their way through the defined contribution plan. This issue was summed up nicely in a June 3, 2000, Daytona Beach News-Journal editorial as follows: “The problem with the state's pension fund is simple: No one's making any money off it except the retirees.”
A co-conspirator in the Florida legislation was the American Legislative Exchange Council (ALEC), which shares the Norquist bathtub ideal. The following is from the same Wall Street Journal article that referenced the Gucci clad lobbyists:
“They see their friends in the private sector doing well in their 401(k)s,” and they want the same opportunity, says Matt Lathrop, task force director of commerce and economic development at the American Legislative Exchange Council, a Washington DC group that is distributing model laws to legislators keen on conversion.
Fast forward to May 14, 2013. In an editorial in the South Florida Sun-Sentinel, Mr. Rich Danker, who claimed to have coauthored ALEC’s model DC plan legislation, said the following:
“What's a better way to promote pension reform? The principle of fairness: Why shouldn't government workers get the same type of pension as everybody else? Most companies that offer pension plans switched from the defined benefit to defined contribution model decades ago. Therefore just about everyone in state and local government has access to a nicer pension than their peers in the private sector.”
In 2000, the party line was that public employees should have DC plans so they can be as well off as those in the private sector. In 2013, the party line switched to public employees should be forced into DC plans so they will be as bad off as those in the private sector. It would be refreshing if they just said, “We just want public sector DB plans to go away” rather than trying to justify the position with time specific inconsistent logic. Perhaps they think the widely recognized national retirement income security problem can be solved by having the public sector join the private sector in a race to the bottom. More likely, however, is the idea that creating private sector pension envy will assist them in their goal of weakening government.
With regard to the private sector retirement income security problem, I can readily side with the proponents of less government regulation. There is a lengthy list of issues, that doesn’t merit repeating here, which supports a finding that federal lawmakers and certain federal agencies are in large measure to blame for the demise of private sector DB plans. Those plans have been forced to follow funding schemes that defy a reasonableness test and have effectively been regulated out of business. With that said, there are Wall Street beneficiaries of the private sector DB to DC switch from a fee income perspective, even with expanded fee disclosure requirements—more money to follow in the quest for culprits.
Are there other suspects? Yes there are. It seems that some people don’t care much for public education and would like to see it privatized. Defined benefit plans for our K-12 educators create an obstacle to privatization. It should come as no surprise that the proposed “reforms” would tilt benefits in favor of short service employees at the expense of those with long service, thus increasing the talent pool from which private schools could recruit. That shouldn’t require any further explanation.
Then there are the bond rating agencies. Life would be much easier for them if defined benefit plans did not exist. Their approach appears to be to make liabilities seem much larger than would be the case based on reasonable long-term return expectations. They are adopting an “error on the side of caution” approach by a considerable multiple which should prevent them from being sued by bond holders, like they are vulnerable to now from their earlier sub-prime mortgage rating debacles.
Not to be left out are the public sector accounting standard setters who ran the risk of being stripped of their authority by Congress unless they did something. That lesson was learned from what happened to the private sector accounting standard setters when the federal government established the Public Company Accounting Oversight Board. Their fear was reinforced when federal legislation was introduced that would have required governmental entities to determine liabilities on the basis of a so called risk-free rate in connection with bond offerings. As an interesting aside, the legislation was supported using what were listed as “run-out dates” determined by a Stanford professor and widely reported as when public funds were going to run out of money. Eventually, the U.S. Government Accountability Office reported that the dates were not really that at all, but it only appeared in a footnote of one of their reports and got no traction.
Whether it is the result of a well-orchestrated conspiracy by the suspects mentioned or just a matter of coincidence, everyone should expect a good deal of confusion regarding public sector DB plans when a broad range of liability numbers start being reported. There will be numbers for financial reporting, numbers for funding, numbers for bond ratings, and the best academic numbers money can buy (fabricate) coming from belief tanks, AKA Institutes and Foundations. (Anticipate reports from the latter with bombs on the covers.) It’s safe to assume that the numbers used will be those that are most likely to further the agendas of the suspects in this investigation. When one or more of the reported numbers reference use of a “risk-free” discount rate, take it with a grain of salt. It’s a clear indication that the report can be traced to someone who has a fundamental lack of understanding of defined benefit plan risk.
I did not intend to overlook the deep-pocketed organizations in Washington D.C. that represent the interests of corporations—I just assumed that went without saying.
None of this is to say that there is not room for constructive change in benefit plan provisions but that does not appear to be the objective of public plan critics. My biggest concern revolves around the probable end result of the absence of a well thought out national retirement income policy. If the “reforms” being called for become a reality, I fear that we should be prepared for one of two predictable outcomes. One would be a welfare society of epic proportions imposing the highest possible cost on workers to support the elderly. The other would be what could be called senilicide where we simply stop caring for the elderly and resort to the ice flow solution.
When you connect the dots, there is a fair amount of evidence to suggest that public employee loss of retirement income security is viewed by the dots as being acceptable collateral damage. While the dots may have differing agendas, they do have the common characteristic of being well positioned with respect to their personal financial security during retirement. Go figure!
To everything there is a season . . . a time to heal . . . a time to build up . . . a time to cast away stones . . . a time to embrace . . . a time to sow . . . a time to speak . . . and a time of peace. Retirement policy was not an issue when those words were written because life expectancy was probably well less than 30 years, but they seem fitting for what is needed now—an end to rhetoric from demagogues and the beginning of thoughtful consideration to lasting comprehensive retirement income policy solutions.
Gary Findlay has for 20 years been the Executive Director of the Missouri State Employees Retirement System and has been involved with public employee retirement plans for more than 40 years. His personal income is in no way dependent on the preservation of public employee defined benefit pension plans nor on his continuing advocacy of sound retirement income security policy.
Note: The views expressed are those of the author and do not necessarily reflect the stance of Asset International or its affiliates.
« DC Participants Favor Fixed Income in February