Yes, Pensions Are Collapsing, And Progressives Can’t Remain in Denial

Doug Henwood and Liza Featherstone January 29, 2018

On May Day 2012, taxi drivers participated in an Occupy Wall Street protest. (Julie Dermansky/Corbis via Getty Images)

This piece is a response to Max Sawicky’s cri­tique of the authors’ fea­ture, Wall Street Isn’t the Answer to the Pen­sion Cri­sis. Expand­ing Social Secu­ri­ty Is.” Read the orig­i­nal here and Sawicky’s rebut­tal here.

Max Saw­icky seems to think we’re against gen­er­ous pen­sion plans. We’re not. He also seems to think that if you just close your eyes and believe hard enough, state and local gov­ern­ment pen­sion plans are in good finan­cial shape. They’re not.

Max doesn’t real­ly argue why it’s rea­son­able to assume that pen­sion funds should return 7 – 8 per­cent a year over the long term. U.S. stocks have done that in the past, but there’s absolute­ly no good rea­son to believe they will in the future. The Con­gres­sion­al Bud­get Office projects that U.S. GDP will grow an aver­age of 1.8 per­cent a year over the next decade, the result of 1.3 per­cent growth in pro­duc­tiv­i­ty and 0.5 per­cent growth in the labor force. Why should stocks should grow more than four times as fast as the econ­o­my? Were that to hap­pen, after-tax cor­po­rate prof­it would rise from just under 7 per­cent of GDP today to 12 per­cent in ten years and 20 per­cent in 20. We’d run out of mon­ey to pay wages, which already seems to be in short sup­ply. Or if that didn’t hap­pen, stock val­u­a­tions would have to increase from very high by his­tor­i­cal stan­dards (where they are now) to astro­nom­i­cal (where they’ve nev­er been).

Maybe the CBO’s pro­jec­tions are wrong. Maybe GDP will grow more like its 1970 – 2007 aver­age of 3.2 per­cent. You’d still have to explain why stocks should con­sis­tent­ly grow at a rate more than twice that of the over­all econ­o­my, and mere­ly defam­ing more con­ser­v­a­tive esti­mates as Uni­ver­si­ty of Chica­go-style free-mar­ket econonom­ics isn’t an argument.

Recent his­to­ry offers no sup­port for the idea that mag­i­cal stock mar­ket prof­its — rather than actu­al con­tri­bu­tions — can save the pub­lic pen­sion sys­tem. Stock prices more than tripled between their low in March 2009 and the end of the third quar­ter of 2017, but accord­ing to Fed­er­al Reserve sta­tis­tics, this great bull mar­ket has done lit­tle to close the fund­ing shortfall.

That’s because instead of spon­sors con­tribut­ing to the funds, man­agers have been sell­ing assets since 2009: $291 bil­lion, accord­ing to the Fed stats.

Since stock prices are very unlike­ly to triple over the next decade — that would require con­sis­tent annu­al gains of almost 13 per­cent, near­ly twice the fan­ci­ful assump­tions that Max shares with com­pla­cent pen­sion man­agers — it’s hard to see how that gap is going to close.

It’s fun­ny Max should bring up the Gov­ern­ment Account­abil­i­ty Office (GAO). We looked at a cou­ple of recent GAO reports rel­e­vant to the top­ic and found more wor­ry than he recalls. One, from 2014, con­trasts assump­tions about the invest­ment returns of pri­vate pen­sion funds and pub­lic ones. Pri­vate funds, which are reg­u­lat­ed by the fed­er­al gov­ern­ment, are required to use the low bond rate; state and local gov­ern­ment funds are free to make fan­ci­ful assump­tions. GAO inter­viewed a num­ber of experts, some of whom were fine with high­er pro­ject­ed returns, but some of whom were wor­ried that assump­tions were too opti­mistic.” GAO itself finds the use of his­tor­i­cal returns sta­tis­ti­cal­ly prob­lem­at­ic; there’s just not a long enough his­to­ry of long-term stock mar­ket per­for­mance to speak with math­e­mat­i­cal con­fi­dence. Nor are his­tor­i­cal returns eas­i­ly applic­a­ble to the mov­ing tar­get that is a pen­sion plan: mon­ey goes in and goes out at vary­ing rates, mak­ing actu­al per­for­mance a com­plete­ly dif­fer­ent ani­mal from a sta­ble stock-mar­ket index. Pen­sion plans in Britain, Cana­da, and the Nether­lands all use sig­nif­i­cant­ly low­er return assump­tions, the GAO found, and reg­u­la­tors require under­fund­ed plans to get into shape. No such over­sight exists in the U.S.

2012 GAO study of state pen­sion funds found increased under­fund­ing, with a grow­ing gap between assets and lia­bil­i­ties. Funds will be able to cov­er ben­e­fits for at least the next decade, but after that, they face chal­lenges.” And a 2017 report on the state of the country’s retire­ment sys­tem found that state and local gov­ern­ments may still need to take steps to man­age their pen­sion oblig­a­tions by reduc­ing ben­e­fits or increas­ing con­tri­bu­tions.” So we wouldn’t look to Max’s for­mer employ­er for support.

Math aside, Max doesn’t engage with any of our polit­i­cal points at all — noth­ing about how the stock mar­ket is a mech­a­nism for upward redis­tri­b­u­tion. One need look no fur­ther than the stock market’s reac­tion to Trump’s elec­tion. Skep­ti­cal of the errat­ic bil­lion­aire dur­ing the cam­paign, Wall Street came around when it came clear that he’d be deliv­er­ing some of their favorite things: a rich dereg­u­la­to­ry agen­da and tax cuts for cor­po­ra­tions and the wealthy. The mar­ket has tacked on 34 per­cent since his elec­tion (though the fat expan­sion of prof­its — up 75 per­cent after tax­es — dur­ing the Oba­ma years pro­vid­ed a nice foun­da­tion to build on). Wage growth and job qual­i­ty are dif­fer­ent stories.

Nor does he engage with the malign work of pri­vate equi­ty (PE), which is great­ly enabled by pub­lic employ­ee pen­sion funds. When you buy a reg­u­lar stock, you’re almost always buy­ing it from some oth­er stock­hold­er; the com­pa­ny gets no mon­ey out of the pur­chase. When you invest in pri­vate equi­ty you’re direct­ly pro­vid­ing mon­ey to the PE man­agers to do their down­siz­ing mischief.

And it’s fun­ny he men­tioned Cana­da. We’ve been talk­ing with Kevin Sker­rett, a researcher with the Cana­di­an Union of Pub­lic Employ­ees who is the co-edi­tor of a book just out from Cor­nell Uni­ver­si­ty Press, The Con­tra­dic­tions of Pen­sion Fund Cap­i­tal­ism. He takes a line very sim­i­lar to ours: End pri­vate pen­sions and make them gen­er­ous and pub­lic. (In Britain, local gov­ern­ment work­ers get their pen­sions from a pub­lic, Social Secu­ri­ty-like sys­tem.) Things are even worse up north in some ways, Sker­rett says. Pen­sion funds have been push­ing for the pri­va­ti­za­tion of pub­lic ser­vices so they can invest in the fresh­ly cre­at­ed enti­ty. Recent­ly, a British child care chain owned by the Ontario Teach­ers’ Pen­sion Plan’s pri­vate equi­ty arm bought a small Cana­di­an child-care chain, prompt­ing fears of the big-box­i­fi­ca­tion of care.

Pen­sion funds are some­times called work­ers’ cap­i­tal,” which is mis­lead­ing, since work­ers have no con­trol over how their funds are spent. The term is espe­cial­ly inac­cu­rate when the funds are used to pur­sue a direct­ly anti-work­er agenda.

Max’s clos­ing lament that anoth­er world is pos­si­ble, but it is not yet around the cor­ner” is what’s real­ly what’s doing the Right’s work here. You don’t get any­where in pol­i­tics by demand­ing less.

Doug Hen­wood is the edi­tor of Left Busi­ness Observ­er and the author of Wall Street: How It Works and For Whom and After the New Econ­o­my: The Binge … And the Hang­over That Won’t Go Away. Read more of his writ­ing for In These Times here.Liza Feath­er­stone is the author of Sell­ing Women Short: The Land­mark Bat­tle for Work­ers’ Rights at Wal-Mart. Read more of her writ­ing for In These Times here.
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