Thursday, August 04, 2005

What's the real problem with United's pension fund?

Coincidentally, I had e-mailed Don Luskin about this New York Times article just before he posted his entry about it, but my message was delayed and ultimately failed delivery.

The Times article is pure balderdash, even by their standards. Notice the title, which falsely blames Wall Street for what we'll see is really an underlying structural problem with this particular pension fund. Hmm, it harps on the risk of investing in stocks, yet ignores the structural issues that actually precipitated the trouble...did Krugman had a hand in writing this? It's exactly what he's done with Social Security.
How Wall Street Wrecked United's Pension

HAD anyone listened to Doug Wilsman, tens of thousands of United Airlines employees would not be facing big cuts in their pensions. And the federal agency that guarantees pensions might not be struggling with its biggest losses ever.

So who is Doug Wilsman? He is a retired pilot and a former fiduciary of United's pension plan for pilots, and in 1987 he discovered that the company had abandoned its older, tried-and-true approach of investing retirees' money in bonds timed to pay when the pensions came due. Instead, it had bought into the promises of Wall Street that it could put less money into the plan - and take out more later - if it just put most of the assets into the stock market.

Mr. Wilsman was skeptical of such promises, and soon after learning of the change in strategy, he filed a grievance with his union, the Air Line Pilots Association. "Hey, you guys are really building yourselves a trap," he recalled warning them at the time. "Someday, at the worst possible moment, when the bottom falls out of the stock market, the plan is going to have to come up with new money, and it's going to be enough to kill the company."
Both Don and our new friend Josh Hendrickson have a great point: the stock market since 1987 has gone nowhere but up. How is it possible for United to lose all this money by investing in stocks? If you had invested in a simple index fund, like the S&P 500, how could you not wind up ahead? Josh's S&P 500 chart clearly shows the upward trend since the start of 1988, when stocks were recovering after the October 1987 crash.

The article didn't mention Social Security, but that's precisely why the Times seized this (and any other) opportunity to warn about the mythical "you can lose everything" risk of investing in stocks. Think of it as subliminal news telling people how stocks are bad, which isn't true. Nor is it true that "stocks" are the cause of United's pension woes. In fact, the real problem is very much akin to the Social Security crisis.

Simply, United's workers contribute too little to the pension fund for what they will receive in the future. That's it. Like most companies, United relied on profits to supplement what workers put into their pensions, but that changed with its bankruptcy. United had to turn to the Pension Benefit Guaranty Corporation, with which United and many other companies have a pension insurance policy. The Times article states, "United has paid a little less than $100 million in premiums to insure employees' pensions," and the insurance policy means that United's retirees will collect $6.8 billion "in coming years."

Where will the difference come from? Well, "all but what United paid in premiums will be borne by the other companies participating in the insurance program." And if the PBGC doesn't get enough money from the others, or "If those companies ever tire of footing other companies' bills" and leave the program, we the taxpayers will foot the bill. Imagine what would happen to Social Security if current workers could "opt out" and not have to pay for current retirees?

So United's problem is structural, not from any "investment losses" like the Times claimed. And the plot thickens. This Times article from August 13, 2004, mentions that United had about three-fifths of its assets in stocks, and "The average corporate pension fund was about the same." Why did United supposedly do so badly, then, compared to other companies? Because some of its investments were in bad stocks, junk bonds and even risky foreign companies. So much for the safety of bonds, and so much for the headline blaming "Wall Street."

Now we see the truth about United's portfolio. Just because it invested some of its portfolio badly, should we then avoid all stocks? Of course not. And putting the pension money into bonds wouldn't have kept United's pension program solvent. Workers were contributing too little, and the fund depended on continuous company profits to cover the rest. Such a plan falls apart once you hit bad times.

The recent Times article quotes a few United mechanics who show how little they know about investing. One said, "It's possible for every single aircraft mechanic in the country to keep track of every single job they do. But we can't keep track of the money managers. That's too complicated for us." It doesn't appear he's ever heard of the SEC.

Is there something in the water supply for East 43rd that the Times should forget that 2004 article? Maybe there is; I wouldn't know. Though I live around all the reservoirs that supply NYC, I drink only bottled water. The local water has too high a mineral content.

2 Comments:

Blogger TKC said...

Simply amazing.

I've often wondered how much money I would have in a retirement account if the 6% FICA and 6% employer match would have been mine to invest since 1987? Instead, the SSadmin saw fit to lend that money to the government leaving me holding the bag. What should be an asset is now a liability. In order to collect on SS I'm going to have to first pay the money in taxes to the government so they can pay back SS.

What a scam.

Thursday, August 04, 2005 1:29:00 PM  
Blogger Mike said...

I've never understood why people are so afraid of the stock market. I'm getting ready to set up my IRA (I'm 18), and I have absolutely no problem with investing most of it in the stock market. The stock market, as a whole, does not go anywhere but up. Granted, as I get older, the fund I'm getting into will shift more of my money into bonds, but that's just common sense.

Anyway, while I've been pretty pissed about all the money that's been taken out of my paychecks this summer for SS and Medicare, I can't be too upset. After all, since I'm going to have a Roth IRA, I don't have any tax on the back-end. And I don't make enough to pay income tax, so I'm basically going to be setting up a completely tax-free IRA. Hehehe...

Saturday, August 06, 2005 2:38:00 PM  

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