Pensions in America: Oh the Mess…Wednesday, November 22, 2006
I live (and grew) up where the auto industry reigns supreme and rules the land. One thing that this industry brought forth, and that I have forever observed, is the fact that “the corporation owes me cradle-to-grave care, and I’ll be damn if you are going to take it away.” Defined-benefit pension plans were a product of the post-WWII/FDR/Social Security/Vet Comes Home mentality that said “ye shall be guaranteed all the comforts of life and have his entire future insured against any and all calamities.” Thus were workers especially drawn to the big auto companies, what with their promise of fat pensions and all.
This is a very long post, but bear with it; I think you’ll find it informative. I have been gathering much, much notes on this topic in anticipation of publishing an article, perhaps soon. To just sum up some of my notes, thoughts, and future comments on this topic …….. In accounting/finance-speak, I’ll put it simply: the corporate world cannot ever afford to pay the obligations that they took on in the 50s and afterwards as part of the move to forever guarantee workers a cradle-to-grave caretaker’s total package. The defined-benefit pension plan – such as with Ford – was the worst idea to ever come to fruition in corporate America, and that system is done. It’s over. Finished. It was unsustainable from the beginning, and all it took was the end of Fed-created DOW euphoria in the late 90′s to sink this silly bastard-of-an-idea back into the craphole where it belongs.
You read all this ugly stuff about corporate America — huge losses, unsustainable pension plans, ungodly debt, negative net worth, and inevitably, bankruptcy. Ford, for starters, has a balance sheet that is one of the worst in corporate America. The company cannot, cannot sustain its current course as it is. All costs that can be cut have been cut, and this is true throughout the entire auto industry. I worked in the industry for a certain player and I worked on the cost-cutting. I’ve seen the leaks and the holes and the plugs and the cooking of the books. The only thing left to focus on is the big pieces that fall under the “restructuring” umbrella – this is what you hear of in the news nowadays. Ford cannot and pay its suppliers. It has problematic cash flow. This is due to the fact that its operating cycle (OC) is in the shitter. The OC is driven by the number of avg. days it takes to collect accounts receivable; the number of avg. days it takes to turn over inventory; and the number of avg. days it takes to pay accounts payable. The combination — the operating cycle – - tells us how a corporation finances its operations via its working capital. My article (or paper) will spell out these details. (GM, on the other hand, is sustained ONLY by its massive cash flow that it has accumulated over the years, though now GM has been running negative on cash flow.) The only thing that can likely save Ford from bankruptcy is government favors.
The notion that because one works for Ford, one should buy Ford stock, is sheer lunacy and just plain bad judgment. The Detroit News and Free Press have been littered with “oh so sad” stories of blue collar types who invested 100% of their retirement monies in their own company’s stock because they have been trained to “invest in their own products.” That is the most illiterate move one can make. Now they are all broke. Their money is essentially gone. Bad news: Ford’s stock will not be rising – and cannot rise – unless the Very Visible Hand of Big Guv makes that so, as they have likely done with GM through the Working Group on Financial Markets (Plunge Protection).
The government exacerbated this monster mess known as defined benefit pension plans with the creation of ERISA (Employee Retirement Income Security Act) in 1974. ERISA established the accounting standards for pension plans and also created the PBGC (Pension Benefit Guaranty Corporation) to insure private pension plans.
Most defined benefit pension plans are insured by the government by way of its PBGC. Thus when a company insured by PBGC can no longer afford to support is pension plan, the PBGC comes to the rescue and insures employees in that plan at no less than the amount of its minimum benefits. But the PBGC has “insurance” limits too. For a person who retires at age 70, the annual guarantee is an eye-popping $73,000. It’s less when one retires earlier than 70, however, even the minimun amounts are very substantial.
If the PBGC makes you feel warm and fuzzy about your guaranteed retirement, wait. The PBGC has, depending at what point in time you pull out the numbers, a deficit of approximately $11 billion. It no longer has a surplus position, meaning that its liabilities exceed its assets. It is essentially insolvent. Remember that PBGC took over the pension plans for Bethlehem Steel, LTV Steel, and National Steel, even after all the government did to try and keep these inefficient, bloated monsters afloat. The PBGC also picked up airline plans: US Airways, Braniff, TWA, Eastern, and Pan Am. With steel and airlines sucking on the dwindling and dried-up teat, the auto industry is up next to bat.
Most big companies with defined-benefit pension plans are under-funded – this means the plan assets are less than their liabilities. “Under-funded” means that assets come in at less than 90% of the liabilities. It is estimated that between United Airlines, Delta, Northwest, and Delphi, there is going to be anywhere from $30-40 billion in pension liabilities relieved through bankruptcy proceedings to come.
Soon, the Financial Accounting Standards Board (FASB) will require companies to place pension costs on their balance sheets. This is why there is a mad dash away from defined-benefit plans in favor of 401(k)s. Shedding burdensome pension plans is the new wave of financial engineering. And you have a government which, through its bankruptcy laws and insurance guarantees, encourages and sustains poor financial management and irresponsible cradle-to-grave promises from big business to employees.
How about some truth that tells the story? Much of this info can be found in the interesting Charles Morris book, “Apart at the Seams: The Collapse of Private Pension And Health Care Protections.” There are at least 20 major corps whose pension liabilities exceed their market value. Yes, the market value! Ford’s pension liabilities are almost 3x its MV, GM’s pension liabilities are almost 5x higher than its MV, and so on and so on. If you are ready for this….ready?…….Delta claimed bankruptcy because its pension liabilities exceeded its market value by a ratio of 13-1. Liability bye-bye!
About 350 S&P 500 companies have defined-benefit plans, and almost all of them are under-funded, with the plan’s assets being less – sometimes far less – than 90% of its liabilities. This overall shortage is estimated to be as high (probably higher) as $350 billion. Though the airlines industry has placed huge liabilities onto the backs of taxpayers through the PBGC, the losses that accrue from the auto industry could be mind-boggling in comparison. One study showed that a PBGC bailout could be in the neighborhood of $80 billion and up – depending on which way the pendulum(s) swing in the decrepit auto industry, because that estimate was prior to the automotive collapse. Even the PBGC estimates that 75% of the plans that it guarantees are under-funded. And Exxon Mobil, with its astounding profits, was $10+ billion under-funded when I last checked earlier this year. Pension accounting is too complicated for laymen, but to make it somewhat understandable, note that on a balance sheet, if the present value of the pension liabilities exceeds the fund’s assets, net worth is drawn down and it is reclassified as debt in order to cover the shortfall.
t of this year, Herr Bush signed into law the Pension Protection Act of 2006, a very ERISA-like move. Yet another move by government to try and sustain an unsustainable plan: birth-to-death life support and a medley of guarantees. In addition, even the federal government’s Civil Service Retirement System (CSRS) is grotesquely under-funded. A congressional hearing – a few years ago – vetted out CSRS assets of $417 billion with $950 billion in liabilities for future benefits.
Thus understand why financial Austrians – such as moi – are livid over the current state of affairs and the oncoming financial disasters that could paralyze this nation because, of course, the only ones that can pay for it are we, the captives, as we are at the mercy of an elected band of thieves that rob us daily to pay for their whorehouse visits. The housing bubble crash and the pension debacle, along with our tanking dollar and the very strong possibility of hyperinflation, could render this nation financially-economically impotent and completely debt-ridden not too far out into the future.