Friday, December 09, 2011

So Many Kinds of Pension Mess

There's a fascinating, if somewhat indeterminate, thread over at Lawyers, Guns and Money, where all sorts of folks voice their bewilderment, perplexity and dismay over disappointments with the pension system.  Hard to quarrel with the premise here; there is a lot to be disappointed about.  Indeed that may be part of the policy problem: sorting out which kind of problem you're dealing with.  Let me see if I can catalog a few:

  • The promisor may go broke.  Who would have guessed that crown jewel of corporate America--like, say, Studebaker--would just dry up and blow away and leave its retirees (present and potential) holding a bunch of empty IOUs?  
  • Somebody may steal all the money.  As, it appears, the friends of Jimmy Hoffa did with the funds of the Teamsters Union. 
  • The giggle test.  Self-dealing pension schemes may make (and honor) promises that don't pass it. The canonical figure here would be the cop who retires on disability at 45 and goes off to run a gym in Florida (the pension policy equivalent of the welfare queen). This works best in places like, say, The City of Vallejo, or the State of Rhode Island, where the blue-collar voters with a high tolerance for unions let the pension scheme tank up on obligations they never should have taken on in the first place.
  • The market may not behave.  Market misbehavior can take many forms.  Example: inflation can turn gold into base metals, dependable income into paper.  Example:  As more and more money chases fewer and fewer investment opportunities, even diligent managers find that they can't get the returns they are supposed to.   Even conscientious or well-intentioned planners can get in trouble here.  The lazy or the corrupt, oh boyoboy.
  • We promised what?  If the pension fund is a "public obligation" (rather than a "fund"), the voters may just change their mind.  Pensioners and pensioners will howl that they are breaking a promise, nay a sacred trust.  The voters, un- or underemployed and trying to figure out how to deal with their nondischargeable student loans,  aren't paying attention.
  • Mañana.   I suspect maybe "the tomorrow factor" underlies every one of these problems, perhaps others as well.  Freud says it is impossible to imagine our own death.  It is almost as impossible for a 25-year-old to imagine that he'll ever need a pension. Indeed a kid that age who fully funds his IRA--he looks pretty weird.   Or a 30- or a 40-year-old, come to that.    One corollary is that they're not packing away enough.  But a more insidious truth is that nobody is watching: nobody is counting the beans, nobody is making sure the strongbox is locked.   You might say: that's why we have governments.  True; but it is also why we have to watch our governments.  They say that eternal vigilance is the price of liberty.  It also helps to promote solvency in the pension pot.
 I don't pretend to have offered any magic beans here, nor indeed any beans at all.  Pensions are another of our many economic train wrecks, and it is a good generalization about train wrecks that people tend to get hurt.  You can feel some of the hurt over at LG&M, and it is real.  


Ebenezer Scrooge said...

The key question is why so many pensions are broke, while this is much less true for life insurers. It's pretty much the same line of business.

This seems to mean that there is nothing inherently unworkable about pension finance. Pension administration, however, leaves much to be desired.

Buce said...

Useful point. Two possible/partial answers. One: a lot of pensions aren't managing investment portfolios; they are basically managing unfunded promises. Two, life insurers who went into pensions after WWII took a hosing when people started outliving the actuaries. They didn't notice or didn't care that their life portfolios were making out like bandits on the same miscalculation.

Ebenezer Scrooge said...

Good point on #1.

On #2, I think that the insurers consider it a feature not a bug. A life insurer hedges against short lives by offering annuities. An annuity provider hedges against long lives by offering life insurance. So it makes sense to be in both businesses.

The insurance industry has a reputation for being much stupider than banking. But it seems a lot less scary--no major meltdowns since the late 1980's. And the only insurer with a reputation for smarts was--you guessed it!--AIG.

(I thought that the big increase in adult lifespan didn't kick into gear until about 1970 or so. But I've been wrong before.)