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To me the bigger culprit is the unfunded pension as a tool of retirement planning. Unfunded pensions are failing or on the brink of failing almost everywhere th

To me the bigger culprit is the unfunded pension as a tool of retirement planning. Unfunded pensions are failing or on the brink of failing almost everywhere they are tried. It's a huge scandal and deeply immoral IMO. I read the other day that NYC alone has over $100bn in unfunded pension liabilities. There is simply no budget to pay that down. Unfunded pensions taking down numerous economies in Europe. There is a county in Georgia (Sandy Springs) that effectively went private. Rather than offering a state pension to their employees (other than ones they were legally required to), they calculated the value of the pension contribution they would make and simply tacked it on to employee salaries. I personally think this is a good approach (with some room for incentives that help protect people from themselves). Note: not trying to mount a defense of PE - often people ask what is the purpose/role or value of PE in society. In a somewhat perverted sense, this is it. There are not many mechanisms that can almost instantly re-habilitate an enterprise that was mismanaged or made severely consequential long term false promises to employees. The alternative is a slow, timely and painful decline similar to Sears or Kmart and rather than this article we'd be reading articles about the towns that Marsh left behind.

mlthoughts2018 8y ago
I don’t think it’s as simple as this, because alternative instruments for retirement, like 401(k) or “higher wages now” have a lot of severe problems too and typically have no legal recourse for affected people when those instruments experience failures. My grandparents had 401(k) retirement savings and were basically wiped out by the 2008 financial crisis. I think it would be no exaggeration to say that the crisis directly caused her death when she likely would have had many more good quality years of life had they not been forced to live in a deeply meager way after the value of their retirement fund plummeted at a moment when they needed it severely. Asking average citizens to understand market volatility and diversification and to rely on the total abject falsehood that “markets just go up in value” is equally immoral. The aspect of pensions, to me, that satisfies the primary moral constraint of the situation is that you are guaranteed income of a certain level, so that the organization granting the pension has to bear the risk of volatility in whatever funding instruments are used to back it. The problem is more about determining why pensions became unfunded, what insurance products would be required to ensure that cannot happen (or at least cannot drop below some minimum insured level), and why government entities failed to budget and save accordingly, in an actuarial sense, to meet pension costs. In my view, we are part of an unbelievably huge quality of life theft right now, a generational heist, pulling wool over everyone’s eyes to think that defined contribution retirement vehicles are somehow an acceptable alternative to defined benefit retirement vehicles.
- toasterlovin 8y ago
  > In my view, we are part of an unbelievably huge quality of life theft right now, a generational heist, pulling wool over everyone’s eyes to think that defined contribution retirement vehicles are somehow an acceptable alternative to defined benefit retirement vehicles. At the end of the day, it's all a defined contribution vehicle, because the future is unknowable. The question is whether you choose to deal with that reality up front or kick the can down the road.
- rubidium 8y ago
  If people want to set up annuities that is totally welcome. But they shouldn't be tied to the employer. It should be a separate company that exists solely for the purpose of paying the benefits at retirement. Depending on an employer for your retirement is, in the modern market, a proven bad idea. It's terrible what happened to your grandparents (to anyone else nearing retirement, take this as a cautionary tale and get your money in something safe). But hearkening back to the "glory" days of employer-paid pensions is not a viable solution.
  - pm24601 8y ago
    > It should be a separate company that exists solely for the purpose of paying the benefits at retirement. Yes. S.O.C.I.A.L. S.E.C.U.R.I.T.Y. Look how well Americans will fight for and defend Social security benefits. We really should just force an expansion of Social Security like most civilized countries.
    - theandrewbailey 8y ago
      1. "S.O.C.I.A.L. S.E.C.U.R.I.T.Y." isn't a separate company. It's a US government program. 2. Social Security isn't doing much better. It will be broke in ~15 years, paying out exactly as much as it takes in. https://www.cnn.com/2018/06/05/politics/social-security-benefit-cuts/index.html https://www.cnn.com/2018/06/05/politics/social-security-bene...
      - eropple 8y ago
sct202 8y ago
Interesting that you bring up Sears and Kmart, considering they are mostly owned by a PE firm that did almost the exact same thing as Sun did to Marsh; lease-backs, selling off divisions/brands, pension under funding, etc.
- kurthr 8y ago
  I read that as, the purpose of PE is to kill the sick business quickly and strip any valuble assets before dumping it in the legal fiction bankruotcy river where the remaining obligations and externalities are paid for by the public (PBGC, Superfund, water treatment).
  - d4rti 8y ago
    Perhaps it should be called Public Subsidy instead.
fatbird 8y ago
Why isn't it a solution to simply require pension funds to be fully funded, perhaps under a separate legal entity that's protected from raiding by PE firms? Why is it that the "unfunded pension" crisis always makes people question the second term in the phrase instead of the first?
- tome 8y ago
  I'd like to know the answer to that. I'm curious how it's legal to call something a "pension" without legal guarantees and professional oversight. Otherwise it's less a "pension" and more a "vague promise".
  - mundo 8y ago
    A pension is a lot like a loan - a promise to pay someone something with your future earnings. The problem is not that people sometimes fail to repay loans when they go broke, it's that they sometimes manage to weasel out of paying them despite not being broke, and then pocket the money they were supposed to use to pay the debt.
    - closeparen 8y ago
      The consequences for the prospective retiree are the same regardless of whether the company is actually broke.
      - mundo 8y ago
        Sure. And if you lend me $100 and I refuse to pay it, you're out the money regardless of whether I'm living in a cardboard box or a mansion. But there's a case to be made that the law should allow you to collect your $100 in the latter case. Obviously it's a lot more complex in the case of a PE firm buying a struggling business. But at a high level, if the company has $X in debts, it is worth $X more to someone who thinks it's possible to weasel out of paying that debt than it is to someone who doesn't. And finding novel ways to make a company more valuable than its current owners think it is is kind of the whole MO of private equity. That's what's going on here - PE firms are finding novel ways to weasel out of paying pension debt, and pocketing the difference. And what people are complaining about is that in this case, the person who's out the money is not able to collect from the courts, despite the entity who ought to be responsible for the debt living in a mansion and not a cardboard box.
pm24601 8y ago
Fully funded pension plans are assets that a PE firm uses as collateral for the loan to do a hostile takeover of the firm.
- ddingus 8y ago
  Those should not be allowed as collateral.
- lozenge 8y ago
  Shouldn't the assets of the pension plan be owned by the individual employees? A PE can't acquire a stock broker and just sell the stocks in people's accounts for profit. Why is a pension different? FWIW this is exactly how it works in the UK. After employer and employee contributions are made my employer has nothing to do with what it's invested in etc.
  - closeparen 8y ago
    With a 401k, you own the underlying assets, and a brokerage is just holding them for you. With a pension, you own a promise from the employer to pay you a fixed amount. How it does that is (theoretically) none of your concern. Some consider pensions to be more pro-worker because you're entitled to the same payout regardless of market performance. But it seems to be turning out that the 401k is more worker-friendly, as there's no promise to be reneged.
    - deogeo 8y ago
      > With a pension, you own a promise from the employer to pay you a fixed amount. How it does that is (theoretically) none of your concern. I'm mostly in the dark about the US pension system, so forgive me if the question is a silly one: How is this 'promise' not a legally binding debt, to be repaid as much as possible by the selling of assets during bankruptcy?
      - closeparen 8y ago
        They are. But in these cases, substantial repayment is not possible: a) The entity never had enough assets to begin with (public pensions). b) The assets have lost their value (business failure). c) The assets were directed elsewhere by management (private equity takeover).
ataturk 8y ago
The state of Illinois, the state of California, probably most other states, too, all in the same bad situation. If you look at the budgets for school districts, same thing--a lot of $$$ going to pension obligations, starving the rest of the organization. Our taxes keep going up, but no level of tax can fill this void. Pensions were pretty much a ponzi, they spent the money and what they invested failed to perform as projected. Every city, county, local municipality, and school district over-promised on pensions while underpaying salaries.
TuringNYC 8y ago
I think that just a big a scandal is that the PBGC (https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...) doesn't have stricter requirements for funding pensions -- the teeth i.e., we stop guaranteeing if you fail to meet these requirements. It seems unfair to me, as a taxpayer, to guarantee something that is the owner themselves aren't working to keep in good shape. In my humble opinion, pension meltdowns will be the triggering event for massive unrest in the coming decade.

mlthoughts2018 8y ago

I don’t think it’s as simple as this, because alternative instruments for retirement, like 401(k) or “higher wages now” have a lot of severe problems too and typically have no legal recourse for affected people when those instruments experience failures. My grandparents had 401(k) retirement savings and were basically wiped out by the 2008 financial crisis. I think it would be no exaggeration to say that the crisis directly caused her death when she likely would have had many more good quality years of life had they not been forced to live in a deeply meager way after the value of their retirement fund plummeted at a moment when they needed it severely. Asking average citizens to understand market volatility and diversification and to rely on the total abject falsehood that “markets just go up in value” is equally immoral. The aspect of pensions, to me, that satisfies the primary moral constraint of the situation is that you are guaranteed income of a certain level, so that the organization granting the pension has to bear the risk of volatility in whatever funding instruments are used to back it. The problem is more about determining why pensions became unfunded, what insurance products would be required to ensure that cannot happen (or at least cannot drop below some minimum insured level), and why government entities failed to budget and save accordingly, in an actuarial sense, to meet pension costs. In my view, we are part of an unbelievably huge quality of life theft right now, a generational heist, pulling wool over everyone’s eyes to think that defined contribution retirement vehicles are somehow an acceptable alternative to defined benefit retirement vehicles.

toasterlovin 8y ago
> In my view, we are part of an unbelievably huge quality of life theft right now, a generational heist, pulling wool over everyone’s eyes to think that defined contribution retirement vehicles are somehow an acceptable alternative to defined benefit retirement vehicles. At the end of the day, it's all a defined contribution vehicle, because the future is unknowable. The question is whether you choose to deal with that reality up front or kick the can down the road.
rubidium 8y ago
If people want to set up annuities that is totally welcome. But they shouldn't be tied to the employer. It should be a separate company that exists solely for the purpose of paying the benefits at retirement. Depending on an employer for your retirement is, in the modern market, a proven bad idea. It's terrible what happened to your grandparents (to anyone else nearing retirement, take this as a cautionary tale and get your money in something safe). But hearkening back to the "glory" days of employer-paid pensions is not a viable solution.
- pm24601 8y ago
  > It should be a separate company that exists solely for the purpose of paying the benefits at retirement. Yes. S.O.C.I.A.L. S.E.C.U.R.I.T.Y. Look how well Americans will fight for and defend Social security benefits. We really should just force an expansion of Social Security like most civilized countries.
  - theandrewbailey 8y ago
    1. "S.O.C.I.A.L. S.E.C.U.R.I.T.Y." isn't a separate company. It's a US government program. 2. Social Security isn't doing much better. It will be broke in ~15 years, paying out exactly as much as it takes in. https://www.cnn.com/2018/06/05/politics/social-security-benefit-cuts/index.html https://www.cnn.com/2018/06/05/politics/social-security-bene...
    - eropple 8y ago

sct202 8y ago

Interesting that you bring up Sears and Kmart, considering they are mostly owned by a PE firm that did almost the exact same thing as Sun did to Marsh; lease-backs, selling off divisions/brands, pension under funding, etc.

kurthr 8y ago
I read that as, the purpose of PE is to kill the sick business quickly and strip any valuble assets before dumping it in the legal fiction bankruotcy river where the remaining obligations and externalities are paid for by the public (PBGC, Superfund, water treatment).
- d4rti 8y ago
  Perhaps it should be called Public Subsidy instead.

fatbird 8y ago

Why isn't it a solution to simply require pension funds to be fully funded, perhaps under a separate legal entity that's protected from raiding by PE firms? Why is it that the "unfunded pension" crisis always makes people question the second term in the phrase instead of the first?

tome 8y ago
I'd like to know the answer to that. I'm curious how it's legal to call something a "pension" without legal guarantees and professional oversight. Otherwise it's less a "pension" and more a "vague promise".
- mundo 8y ago
  A pension is a lot like a loan - a promise to pay someone something with your future earnings. The problem is not that people sometimes fail to repay loans when they go broke, it's that they sometimes manage to weasel out of paying them despite not being broke, and then pocket the money they were supposed to use to pay the debt.
  - closeparen 8y ago
    The consequences for the prospective retiree are the same regardless of whether the company is actually broke.
    - mundo 8y ago
      Sure. And if you lend me $100 and I refuse to pay it, you're out the money regardless of whether I'm living in a cardboard box or a mansion. But there's a case to be made that the law should allow you to collect your $100 in the latter case. Obviously it's a lot more complex in the case of a PE firm buying a struggling business. But at a high level, if the company has $X in debts, it is worth $X more to someone who thinks it's possible to weasel out of paying that debt than it is to someone who doesn't. And finding novel ways to make a company more valuable than its current owners think it is is kind of the whole MO of private equity. That's what's going on here - PE firms are finding novel ways to weasel out of paying pension debt, and pocketing the difference. And what people are complaining about is that in this case, the person who's out the money is not able to collect from the courts, despite the entity who ought to be responsible for the debt living in a mansion and not a cardboard box.

pm24601 8y ago

Fully funded pension plans are assets that a PE firm uses as collateral for the loan to do a hostile takeover of the firm.

ddingus 8y ago
Those should not be allowed as collateral.
lozenge 8y ago
Shouldn't the assets of the pension plan be owned by the individual employees? A PE can't acquire a stock broker and just sell the stocks in people's accounts for profit. Why is a pension different? FWIW this is exactly how it works in the UK. After employer and employee contributions are made my employer has nothing to do with what it's invested in etc.
- closeparen 8y ago
  With a 401k, you own the underlying assets, and a brokerage is just holding them for you. With a pension, you own a promise from the employer to pay you a fixed amount. How it does that is (theoretically) none of your concern. Some consider pensions to be more pro-worker because you're entitled to the same payout regardless of market performance. But it seems to be turning out that the 401k is more worker-friendly, as there's no promise to be reneged.
  - deogeo 8y ago
    > With a pension, you own a promise from the employer to pay you a fixed amount. How it does that is (theoretically) none of your concern. I'm mostly in the dark about the US pension system, so forgive me if the question is a silly one: How is this 'promise' not a legally binding debt, to be repaid as much as possible by the selling of assets during bankruptcy?
    - closeparen 8y ago
      They are. But in these cases, substantial repayment is not possible: a) The entity never had enough assets to begin with (public pensions). b) The assets have lost their value (business failure). c) The assets were directed elsewhere by management (private equity takeover).

ataturk 8y ago

The state of Illinois, the state of California, probably most other states, too, all in the same bad situation. If you look at the budgets for school districts, same thing--a lot of $$$ going to pension obligations, starving the rest of the organization. Our taxes keep going up, but no level of tax can fill this void. Pensions were pretty much a ponzi, they spent the money and what they invested failed to perform as projected. Every city, county, local municipality, and school district over-promised on pensions while underpaying salaries.

TuringNYC 8y ago

I think that just a big a scandal is that the PBGC (https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...) doesn't have stricter requirements for funding pensions -- the teeth i.e., we stop guaranteeing if you fail to meet these requirements. It seems unfair to me, as a taxpayer, to guarantee something that is the owner themselves aren't working to keep in good shape. In my humble opinion, pension meltdowns will be the triggering event for massive unrest in the coming decade.