Beware of wealthy CEOs who are lecturing the rest of us about tightening our belts.The paper Scott Kilinger co-authored, A Pension Deficit Disorder: The Massive CEO Retirement Funds and Unfunded Worker Pensions at Firms Pushing Social Security Cuts, is well worth reading.
While America's CEOs are fretting about the government's so-called "fiscal cliff," millions of American workers face a financial disaster that gets much less media attention. There's a half-trillion-dollar deficit in the nation's worker retirement benefits.
The Great Recession, which decimated retirement assets, played a big role in building this lesser-known cliff. But many corporations could have avoided the problem by shoring up these funds during the boom years. Instead, they siphoned pension assets for other profit-boosting purposes. When the pension deficits started to balloon, many corporations responded by slashing back their benefit programs.
As a result, Americans today are more reliant on government-funded Social Security and Medicare programs than at any other time in the last 60 years.
What's even more outrageous is that the very same CEOs who have contributed to rampant retirement insecurity are now calling for cuts to these earned-benefit programs for senior citizens.
Nearly 100 CEOs have banded together to convince the American public that Social Security and Medicare lie at the root of America's fiscal challenges. Their "Fix the Debt" campaign features plain-spoken Americans in their ads and sounds moderate because they call for both spending cuts and revenue increases.
But the real objectives of the campaign include massive new corporate tax cuts and reduced spending on Social Security and Medicare, which would likely involve raising the retirement age.
American workers, at present, cannot collect Social Security and Medicare until age 66, the highest retirement age among rich countries. In 2020, the Social Security retirement age will rise to 67, assuring that American workers will be toiling longer than any other industrialized country for years to come. In contrast, Japanese and Chinese workers can collect their equivalent of Social Security starting at age 60.
The Fix the Debt campaign's CEO supporters need not worry about Social Security because they're members of the "I've Got Mine Club." Fifty-four of the CEOs leading Fix the Debt directly benefit from lavish executive retirement programs. Their collective pension assets total $649 million, which comes to more than $12 million per CEO. That's enough to garner a $65,000 retirement check each month starting at age 65 that will continue for as long as they live, according to a new report by the Institute for Policy Studies, which I co-authored. In contrast, the average retiree receives just $1,237 from Social Security each month.
Yet, the firms headed by Fix the Debt CEOs owe their U.S. pension funds more than $100 billion, according to the IPS study. U.S. law requires corporations to keep their pension debts to manageable levels, but this pressure has often resulted in benefit cuts.
General Electric, which has a staggering $22 billion pension deficit, shut down its pension fund last year, saying it had become a "drag on earnings" (at a whopping cost of 13 cents per share, according to their estimates). Like many other firms, GE has shifted new employees to a less costly 401(k) plan, putting the risk for poor stock market performance onto employees.
Beware of wealthy CEOs who are lecturing the rest of us about tightening our belts. American workers would be far better off if CEOs worried more about fixing their own companies' pension debts.
I agree, beware of wealthy CEOs who plundered their employees' pension plans during the great retirement heist and are now claiming we all need "shared sacrifice" to overcome the so-called fiscal cliff.
But Kilinger is wrong about raising the retirement age to 67 as people are living longer. More importantly, he fails to see the real fiscal cliff Trojan is all about privatizing Social Security so that banks, mutual funds, insurance companies, hedge funds and private equity funds can find new sources of revenue growth.
Worse still, all this hullabaloo over the fiscal cliff is detracting attention away from the pension crisis. Ted Dabrowski, vice-president of the Illinois Policy Institute, wrote an op-ed for USA Today, Crisis remains after 'fiscal cliff':
If Republicans and Democrats ever get around to fixing the "fiscal cliff," President Obama won't be done dealing with potential budget calamities. There's a new bailout on the horizon: this time, for cash-strapped state pension systems.
A recent report by the U.S. Congress Joint Economic Committee pegged the debt of state-run retirement systems at nearly $3.5 trillion.
That amount, which is nearly one-quarter of the entire federal debt, is decimating state budgets and pushing some toward the brink. Despite this looming crisis, states continue to avoid necessary reforms. The usual culprits, California and Illinois, lead a long list of states that continue to accrue more and more debt.
States avoid reforms
California faces more than $370 billion in unfunded pension liabilities and continues to live under the perennial risk of bankruptcy. The Golden State first laid the groundwork for a bailout in 2009, during the peak of the financial crisis.
At the time, a spokesman for California State Treasurer Bill Lockyer rationalized the call for federal relief as this: "We think California taxpayers stack up pretty well compared with Wall Street firms." Since this plea, California has enacted cosmetic reforms but failed to enact changes that would turn around its troubled finances — leaving the door wide open for federal relief.
Obama's home state of Illinois is in even worse shape. It has on hand less than 30% of the money needed to fund its pension obligations. Many experts say Illinois' funds already are insolvent.
Since 2009, Illinois Gov. Pat Quinn has floated the idea of federal pension relief both at the White House and in his 2012 budget proposal. Illinois has yet to enact or even consider any major reforms, and the governor has refused to rule out accepting a federal bailout for pensions.
Cities in trouble, too
At the municipal level, public pension shortfalls have forced cities into tough spots. Some are nearing crisis; others already are there.
Rep. Hansen Clarke, D-Mich., recently sought $1 billion in emergency federal aid for Detroit, stating he wanted "relief to be sizable enough" to save the city from its emergency status. The cry for help fell on deaf ears in Washington, but how long until more voices join and the cry gets loud enough that Washington has to pay attention?
The truth is, state and local politicians would rather be rescued by Washington than take on the structural reforms while fighting the resistant special interests that stand in the way.With all due respect to Mr. Drabowski, the bailout states received pales in comparison to the multiple bailouts banksters have received since the financial crisis erupted.
One bailout already
A precedent was set with the American Recovery and Reinvestment Act, which was a bailout in all but name. Nearly a quarter of the $787 billion stimulus went to states and local governments. Governors used this money not to enact long-lasting reforms but to continue their spendthrift ways.
Though he is a champion of government and government unions, Obama must understand that a bailout of states would destroy federalism. In order to force states to face their own problems and enact reform, both Obama and the new Congress have to make it clear that state bailouts — whether direct or disguised under another name — are off the table.
But he's right, the magnitude of the pension crisis is so large in some states that instead of implementing meaningful reforms, including reforms on governance to bolster defined-benefit plans, they're looking for more federal bailouts. As states, cities, municipalities and private companies go over the pension cliff, it will place enormous pressure on budgets, reallocating resources away from public services.
Struggling with bankruptcy, one California city, San Bernardino, suspended its pension payments, setting up a constitutional battle with CalPERS. As more and more public and private pensions get squeezed and downsized, the future of many US pensions looks bleak, just as bleak as Greece.
Of course, all this talk of pension crisis and debt crisis is way overdone. The real crisis remains a jobs crisis. Developed economies are simply not creating enough good paying jobs with benefits. High and protracted unemployment, job insecurity, low to non-existent savings, are all wreaking havoc on public finances and will ensure pension poverty and more debt for future generations.
Below, Australia's Greens Deputy Leader Adam Bandt recently introduced a private members bill to help the millions of Australians impacted by insecure working arrangements. Nobody was around to listen to him but much of what he states is symptomatic of all economies. Food for thought at the next Davos summit.
