“I’M A RETIRED INVESTOR, LIVING ON A PENSION…”

5/28/10

Today’s Wall Street Journal held news that Congress is considering a bailout of multi-employer pension plans, i.e., plans run jointly by unions and, mostly, smaller companies with members and employees who change employers often. Such plans can be found in, among others, the trucking and construction industries.

Incidentally, Senator Bob Casey (D., Pennsylvania), a good enough politician to know that words like “bailout” are about as popular as head lice at the moment, says that his proposal is not a bailout, no sir. In order to increase the bill’s prospects, he points out that, under the legislation, plans taking advantage of this non-bailout would have to cover the first five years of benefits; the Pension Benefit Guaranty Corp. (“PBGC”) would “only” be responsible for the longer term costs. Thus, this non-bailout would “only” cost the taxpayers $8 billion. Such is the state of logic in Washington, D.C. But I digress.

This legislation will encounter plenty of trouble, and not only because of the citizenry’s finally heightened sensitivity to big spending, large budget deficits, and the attitude reflected in the contention that something costs only $8 billion dollars, a figure that would be bad enough but that strains credibility given the government’s track record of estimating costs of programs. Long time readers will remember an argument I first made in the Pontificator in my 11/16/07 post, “ELIHU, WOULD YOU LOOFAH MY STRETCH MARKS?”, in which I made the connection between the Drew Peterson case and public pensions, and that I have been making in other fora for years, to wit: A large and growing number of taxpayers are no longer covered by traditional defined pension benefit plans. In the private sector, such plans are going, or have gone, the way of the dodo bird. Taking money from people in order to finance benefits to which they have no access is a difficult task and increasingly, as private pension plans go away, should become more difficult to the point of impossibility.

As a further point of diversion, I have to admit I was floored by the Journal article’s contention “about 10 million workers, or almost one in four workers who have a private pension” are covered by multi-employer plans. There is plenty of ambiguity in this statement. What is a “private” pension plan? Is that a plan provided by a private sector employer or is it a “private” plan in the sense that it is not social security? Are we talking about defined benefit plans here, or are defined contribution plans (401k plans) considered “private pension plans” for these purposes? But let’s assume for a moment that the denominator in this article means what it appears to mean; i.e., defined benefit plans provided by private sector employers. That would mean 40 million workers are covered by private sector defined benefit pension plans. How many people work in the private sector in the United States, a country of 300 million with a still larger private sector than most of its international counterparts? 150 million? Say that’s true; that would mean that a little more than a quarter of private sector workers are covered by a defined benefit pension plans. That percentage, while small enough to contribute to the above argument about the defined benefit plan going the way of the t-rex in the private sector, is still a larger number than I would have presumed. One thing is nearly certain: that number, already not large, will go down in the future. But, again, I digress.

Two things, however, might help this bailout proposal succeed. First, in the case of local government workers, the focus of the aforementioned 11/16/07 post, the taxpayers can see a clearer connection between public sector pensions and their own checkbooks both because states and municipalities cannot (legally, at least) run deficits; therefore, any increase, or sustenance of, local or state government pensions must be covered by tax increases or service cuts. The federal government can simply borrow more for the above bailout, leaving current taxpayers with the bill only for interest which, at least for now, is miniscule, as a percentage. Further, local pensions are paid primarily through property tax bills, which, not being withheld from wages, have a tendency to be more visible to taxpayers than the federal income tax, which almost half of Americans don’t pay anyway.

Second, there is the age-old public finance problem of concentrated benefits and dispersed costs. In this case, the pension benefits are highly visible to those ten million people who receive such benefits. Therefore, they will fight hard to maintain those benefits, via federal bailout if necessary. The cost of the bill is dispersed among many more taxpayers. Given how the government spends money, the cost of this bill, like the cost of most any individual bill, will hardly be noticed. Thus resistance will be scattered and, in most cases, half-hearted. This is, ladies and gentlemen, how government grows: concentrated benefits, dispersed costs and, when attempts are made to rein in costs, concentrated pain and dispersed benefits; i.e., those few whose oxen are getting gored are much more vocal than the many who are saving a few bucks, maybe, on their tax bills.