Posted tagged ‘pensions’

Retirement, What’s That?

May 13, 2013

John Bogle, founder of Vanguard, speaks of three “retirement” legs, Social Security, Defined Pension Plans, and Defined Contribution Plans.  The first two are broken but fixable.  The third is wounded and with continued misuse, won’t help either.  Boogle, however, remains optimistic.


So what is retirement?  Normally, many of us think of the “golden years” when we can put our feet up and relax.  Or move to Florida and sit in the sun… or take that cruise we always heard about but never got around to taking.

Retirement is also that time when our employer tells us we no longer fit in the company’s future.  So sometimes the next move is becoming a Walmart greeter or finding an open park bench.  But what does one live on?

Social Security, a pension, and savings are the three Bogle is thinking about.   But is that enough for everyone?

Social Security is heading for the junk yard unless some modifications are made.  Tax revenue must be increased or payments must be reduced if Social Security is to remain solvent.  Increasing the earnings subject to Social Security withholding and changing the inflation formula have been proposed as easy fixes.  No fixes, big future problems.

Pensions are even a bigger problem.  In the past pension were the defined benefit type.  Each employee was promised a certain amount of money when he/she retired.  This promise was based upon the employer putting aside a certain amount of money and investing this money at say 8% per year.  Financially this approach would produce the promised retirement benefit.  So what is wrong?

Businesses as well as public service employers (States and Localities) unfortunately do not always grow and stay healthy.  Sometimes they suffer losses and choose to defer payments into the retirement fund.  Even more deadly, public and private employers cannot find 8% investment opportunities or the ones they find are deemed too risky.  So, less contributions and lower interest (more like 3-5%) make the formula for defined pension unworkable.

Define contribution plans were originally tax advantaged savings plans.  Employees save and often employers contribute too.  Defined contribution plans (401Ks) are now becoming the primary pension plan vehicle.  These plans are not only subject to the market return but are also tied to how much employees actual decide to save and whether they decide to “borrow” against their 401K.  How much will be there at retirement is an unknown.

Hmmm.  Worried?

Consider this.  The US average earnings is about $50,000 per year.  Lets say this person saves 10% each year ($5,000) and his 401K averages 3% return each year.  At retirement, the 401K will have grown to $245,000.  Investing that at 3% will deliver about $7,000 each year.  So retirement looks like social security plus $7,000 for the year.

Keep in mind that most Americans save far less than 10% per year, and most employee sponsored 401Ks have some employer contribution.  Therefore, the “average” person might accumulate retirement savings of about $250,000.  (hmmm, I wonder about their children’s college education and any wedding expense…)    Social Security payments of about $1,000 per month are reasonable estimates.  That equates to a monthly income upon retirement of about $1,600 a month.


This example applies to the average.  It looks even bleaker for those earning less.  Playing with the numbers, one can see that a comfortable retirement means much higher income than the average of $50,000 per year.

So what’s the point of all this.

The US is a large country.  With over 300 million residents, there are a lot of people who will be looking at difficult circumstances in retirement.  Why then do we have a Congress that does not seem to see its role in engendering conditions where the average income can grow, and where rules governing the financial sector are enacted to ensure a fair shake for those dependent upon long term growth?

It is not Congress’ job to manage human behavior.  If people do not choose to save, this lies beyond the proper role of government.  What does not lie beyond, is the widening gap (as well as outright stagnation) of middle class income and that of the top 2%.  What also does not lie beyond Congress’ scope are sound Social Security and Pension systems.

This is not a left-right, democrat-republican, progressive-conservative issue.  For Congress, until America’s largest growing segment (the retired), are adequately protected from financial ruin, all other issues pale in comparison.


October 16, 2009

Over the past few months I have read and seen too many one sided, distorted, and down right ignorant criticisms of President Obama. But it is a free country and our Constitution protects free speech, so you have to take the bad with the good.

President Obama’s critics have targeted everything from his birth certificate to his support of non-existent death panels. In this milieu is also Obamanomics which critics purports will ruin America, our currency, and the future for our children. They cite the forecasted growth of the national debt as the prime example of irresponsibility. To be sure the debt projections are serious reasons for concern and if left unattended could in fact lead to undesirable outcomes. What the critics fail to tell Americans is what are the largest elements of the forecasted $ 10 trillion deficit.

About 80% of the debt will result from present law (Medicare, Medicaid, social security, and the Bush tax cuts).  If laws are not changed, the size of these expenditures will happen.  Without more government revenue, there will be deficits.  While cutting waste and unnecessary spending are critical elements, there are two steps that must take place in order reduce this deficit.

  • A progressive and prudent tax policy must be implemented which will raise taxes (probably to the level of Bill Clinton’s years where the country prospered).
  • A robust economy must emerge based on genuine value creation. This will in turn stimulate more tax revenue at any level of taxation.

To criticize the President is every person’s right. To make incomplete and misleading claims is dishonest, unethical, and a huge disservice to the Country. It will be interesting to see where these detractors come down on the retirement of Bank of America CEO Ken Lewis. Under pressure from the Obama Administration “pay czar”, Lewis voluntarily agreed to give back his $ 1.5 million 2009 pay package.

This BoA situation is another example of trying to close the barn door too late. Lewis is in line to receive over $100 million in retirement benefits (including stock) when he officially retires at the end of the year. My guess is that if the pay czar interferes, and in some way gets this amount reduced, critics will cry out about big government and unchecked powers. If the government blinks and Lewis retires with the loot, critics will then cry out about the Obama Administration being pals with Banks.

I just wonder why no one asks how anyone could be worth, or could need, $100 million retirement send off? I just wonder how this could happen in a publicly traded and regulated company? I guess it is just easier to throw snot balls than think about what is really happening.

GM and Chrysler Pensions

April 25, 2009

News reports have said that the Obama team has promised the UAW that their pensions and healthcare will be protected in whatever manner the current restructuring efforts end.  This is both troubling and admirable, depending upon the definition of “protected”.

GM and Chrysler have been asking the UAW to match the work rules and the union contract provisions (pay and benefits) that the non-union workers at Toyota (US) and Honda (US) enjoy in order to create an even playing field.  This will represent a “give back” for union workers.  This should be straight forward since these cost are present expenses and directly comparable to competitiveness.

Retiree pensions and healthcare are a little different.  GM and Chrysler’s obligations reflect years of bloated employment where cuts in employee levels was strictly prohibited by the UAW.  When the UAW finally consented to reductions, they negotiated very sweet benefits for their members.  Both the pension payment and the healthcare provided per retiree are more generous (and of course more costly) than normally found in like industries and far more than the US average.

On the other side of the coin, retirees were promised these benefits and have constructed their lives around these supports.  Further, for many, they have adjusted the style of living to these legacy benefits.  To have them slashed in half would likely cause a lot of hardship.

If fairness is too rule, however, both the pension payout and the healthcare cost must be reduced.  The size of the reduction should be mediated with the goal of reaching a parity with like industries, that is bringing the UAW benefits closer to other similar workers.  My guess is that would leave retired UAW workers with about 80% of their current benefits.  While troublesome, this level would be still more generous than the Federal pension insured level of about 50%.  Healthcare of a straight 80/20 and a similar drug plan will come as a shock to people who have known almost no healthcare costs.  (If the healthcare is transferred to the UAW responsibility as planned, the value of GM’s contribution should reflect this reduced amount.)  These agreements would, of course, be applied to the white collar employees too.

Following this agreement (or, if necessary, court order reductions), the GM Board and senior level management (company officers) of both car companies must be forced to resign.  The sacrifice of GM and Chrysler employees is the ultimate responsibility of inadequate company management.  There can be no winners and no losers but both management and the workers must contribute together to put these two companies back on a path to successful operations.

What’s In It For Me?

April 15, 2009

As the GM and Chrysler restructuring talks grind on, one is struck with the apparent slow pace of progress.  Each of the stakeholders seems anxious to resolve the question of whether the two auto companies will survive, but each seems reluctant to put any “skin” in the game… until the other guy does.  My, oh my, do we have a lack of trust here?

The car companies are suffering from

  • Too many brands (leading to dilution of effort and competitiveness in selling more cars and trucks)
  • Too costly and inefficient work rules and union contracts (leading to higher operating costs and subsequently higher selling prices)
  • Too much legacy pension and healthcare costs (leading to higher costs and higher selling prices of cars and trucks).
  • Too much debt (leading to a cash drain in order to pay interest and to refinance the debt, the cash being robbed from investments in product to pay debt holders)
  • Too many dealers in their distribution network (leading to highly variable customer service which too often to below foreign competition standards.

If there is no movement and the Government insists upon Chapter 11, all the stakeholders have a good chance of losing.  Quite possibly the UAW is thinking that its political pull will help it obtain favorable treatment but that is anything but certain.

Once again I return to the idea that there can be “no winners” in the settlement if there are to be “no losers”.  In other words, each stakeholder must surrender something and in return obtain a hope for something better in the future.  The most obvious solution is that GM and Chrysler need to issue new common stock, and trade blocks of it for willing give backs by their stakeholders.

For example if a dealer must lose his franchise because there are too many or their brand is being eliminated, then the dealer should receive common shares of stock.  At the current bargain basement prices, there will be a lot of upside for potential gain.  The same idea should be applied to the UAW, the retirees, and the debt holders.  With respect to management, a similar one time grant could be used in exchange for changes in remuneration packages.

The last step should be symbolic.  The CEOs and the Boards of GM and Chrysler as well as the UAW President should resign as a sign that there will be change in the way things are done in the future.  Then we can let the car people get back to doing what they know how to do, making cars people want to buy.