The Next Looming Economic Contagion: Pensions Collapse
By John Klar
As the
stock market implodes in response to COVID-19, there is an underlying economic virus that will soon be
evident: America's grossly underfunded pensions. With the market
down 40% in from its high point (before rebounding March 24), many corporations
may default on their pension promises. consumption and thus gross
sales will decline (further dampening corporate profits), and the widespread
weakness of pensions will be exposed. This in turn will cause a
vicious cycle in which retirees and those planning retirement will have fewer
disposable dollars and will divert more money to retirement savings — further
weakening consumption and undermining the effectiveness of interest rate
adjustments by the Federal Reserve.
The
problem of underfunded pensions has been loudly proclaimed for
years. It is hard to ignore article titles like "The Coming
Pension Crisis Is So Big that It's a Problem for Everyone" (Forbes, 5/20/2019), "'Their house
is on fire': The pension crisis sweeping the world" (Financial Times, 11/17/2019), and
"Pension Plans for Millions of Americans Are on the Brink of
Collapse" (NPR, 11/28/2018).
Yet
these warnings have been
ignored. Now we must face the consequences.
America
is on the brink of a realization of just how much corporations and legislatures
have "planned for the best, in denial of the worst." In
both corporate boardrooms and legislative budget-making, employees will look
back and see that what has been done is nothing short of fraud. But
it's too late now — we cannot roll back the investment clock.
John
Boehner and Joe Crowley issued a bipartisan warning last summer:
Left unchecked, this crisis will decimate the retirement
future of millions. Over the years, the number of retirees has grown
dramatically, while the number of active participants and employers has
decreased. This imbalance, combined with the market decline from the
Great Recession, has put many of these vital pension plans on an unsustainable
path[.] ... To make matters worse, the Pension Benefit Guaranty Corporation
(PBGC) multiemployer program, the funding backstop for plans that have run out
of money, is also projected to collapse by 2025. The
dissipation of the PBGC would leave retirees with about 2% of what they had counted
on for retirement[.] ... The collapse of the entire system would further
compound the pension crisis at hand and have a domino effect on our economy,
potentially leading to widescale business closures, layoffs and rising
unemployment.
The
current decline was foreseen — and the warnings ignored. The
imminent implosion will quickly exceed all municipal defaults in U.S.
history combined. Worse, state pensions are some of the greatest
offenders in playing "kick the can" with beneficiaries' contributions. Legislators
everywhere have played this game of promising costly benefits to unionized
state labor organizations (especially teacher unions) and then diverting
required contributions to other budgetary preferences using unrealistic predictions
of returns on existing investments, accounting gimmicks, and absurdly low
estimates of future benefits.
There is no federal Pension Benefit Guarantee Corporation for
state plans — the PBGC insulates only private-sector defined benefit plans
under ERISA. State workers may
perceive that the government will always pay, but states don't print currency,
and they are limited by reality:
When states and local governments reduced their employer
contributions to their public pension funds during the Great Recession, they in
effect borrowed from those pension funds. If governments hope to
meet their contractual obligations to their employees, they must pay these
delayed pension contributions back at some point.
But
most states did not pay them back. This analysis from the Federal
Reserve Bank of Cleveland addresses the legal recourse of pension beneficiaries
when the state lacks the financial resources to keep its word in a time of
crisis:
[O]ur legal system provides judges with the flexibility to
adapt broad constitutional principles to the extreme and exigent necessities of
their times. In such times, federal courts typically defer to
states' "police" (sovereign) powers, a decision which essentially
allows the state, as a sovereign entity, to resolve an issue as it sees
fit. The US Supreme Court has made a similar ruling, deciding that
"[t]he contract clause must be construed in harmony with the reserved power
of the State to safeguard the vital interests of her
people. Reservation of such essential sovereign power is read into
contracts." In other words, when "vital interests"
are at risk, defending contracts may be of secondary importance. [A]
state may have all the legal authority it needs to shed its insurmountable
liabilities and force its creditors to accept any deal it offers.
What
remains now is to ponder the extent of the federal bailout that will be granted
to employees whose pensions are evaporating before their eyes. When Sears sought bankruptcy protection,
the PBGC undertook to step in for some 90,000 employees. How many
can it rescue now, even with a
federal infusion of cash? The present situation promises to be
exponentially larger.
If
President Trump is the voice seeking aid for private pensions, Nancy Pelosi and the Democrats will
likely strangle a rescue plan or try to attach socialist conditions. But
how much money would be required for the federal government to also rescue
underfunded state pensions?
In
June 2019, the Pew Charitable Trusts provided a 2017 snapshot of state pension
shrotfalls:
[T]he pension funding gap — the difference between a
retirement system's assets and its liabilities — for all 50 states remains more
than $1 trillion, and the disparity between well-funded public pension systems
and those that are fiscally strained has never been greater[.] ... In 2017, the
state pension funds in this study cumulatively reported a $1.28 trillion
funding gap[.] ... Even after nine years of economic recovery, most state
pension plans are not equipped to face the next downturn.
A
serious hurdle to a federal rescue is this moral hazard — states that had been
most neglectful in funding their pensions would have the most to gain.
Whichever
way this shrinking pie is sliced, there will be only crumbs for retirees and
workers. The coming economic whirlwind is going to pick up this Dorothy's
house of pensions neglect, and no one knows where it will land.
We
aren't in Kansas anymore. Nor are we over the rainbow.
THE REASON TRUMP IS NOT PROSECUTING EMPLOYERS OF
ILLEGALS IS TO KEEP WAGES DEPRESSED!
More Americans Are Going on Strike
For decades, the
decline of the American labor movement corresponded to a decline in major
strike activity. But new data released by the Bureau of Labor Statistics, or
BLS, indicates a recent and significant increase in the number of Americans who
are participating in strikes or work stoppages. As a report from the
left-leaning Economic Policy Institute explained on Tuesday, strike activity
“surged” in 2018 and 2019, “marking a 35-year high for the number of workers
involved in a major work stoppage over a two-year period.” 2019 alone marked
“the greatest number of work stoppages involving 20,000 or more workers
since at least 1993, when the BLS started providing data that made it possible
to track work stoppages by size.” Union membership is declining, but workers
themselves are in fighting shape.
EPI credits the
strike surge to several factors. Unemployment is low, which bestows some
flexibility on workers depending on their industry. If a work environment
becomes intolerable or an employer penalizes workers for striking or
organizing, a worker could find better employment elsewhere. (Though federal
labor law does prohibit employers from retaliating against workers for
participating in protected organizing activity, employers often do so anyway,
and under Trump, the conservative makeup of the National Labor Relations Board
disadvantages unions when they try to seek legal remedies for the behavior.)
The other reason
undermines one of Donald Trump’s central economic claims. Though the president
points to low unemployment as proof that his policies are successful, the
economy isn’t booming for everyone. Wage growth continues to underperform.
People can find jobs, in other words, but those jobs often don’t pay well. As the
costs of private health insurance rise, adding another strain on household
budgets, Americans are finding that employment and prosperity are two separate
concepts.
Without a union,
exploited workers have few options at their disposal. They can take their
concerns to management, and hope someone in power feels pity. They can stage
some kind of protest, and risk the consequences. Or they can find another job,
and hope their new workplace is more equitable than the last. Lackluster wage
growth suggests that this last option is not as viable as some right-to-work
advocates claim. Unions afford workers more protection. Not only do they
bargain for better wages and benefits, union contracts typically include
just-cause provisions, which make it more difficult for managers to arbitrarily
fire people for staging any sort of protest at work. Discipline follows a set
process, which gives a worker chances to improve. Retaliation still happens,
but would likely happen more often were it not for union contracts, which are
designed to act as a layer of insulation between workers and managers with ill
intent.
The new BLS data
reveals that despite their relatively small numbers, unionized workers are
exercising the power afforded them by their contracts. Elected officials ought
to listen to what this activity tells them. A strike wave is a symptom that the
economy is actually not as healthy as it superficially looks. Nobody withholds
their labor unless they’ve exhausted all other options. Strikes and stoppages
stem from exasperation, sometimes even desperation. Workers know they’re
playing a rigged game, and they’re running out of patience.
“The remarkable thing is how weak wages are, how weak the
economy is, given that as a result of the tax bill we have a $1 trillion
deficit.”
Donald Trump is ‘just wrong’ about the economy, says Nobel
Prize-winner Joseph Stiglitz
President Donald Trump told business and political
leaders in Davos, Switzerland last week that the economy under his tenure has
lifted up working- and middle-class Americans. In a newly released interview,
Nobel Prize-winning economist Joseph Stiglitz sharply disagreed, saying Trump’s
characterization is “just wrong.”
“The Washington Post has kept a tab of how many lies and
misrepresentations he does a day,” Stiglitz said of Trump last Friday at the
annual World Economic Forum. “I think he outdid himself.”
In Davos last Tuesday, Trump said he has presided over a
“blue-collar boom,” citing a historically low unemployment rate and surging
wage growth among workers at the bottom of the pay scale.
“The American Dream is back — bigger, better, and stronger than
ever before,” Trump said. “No one is benefitting more than America’s middle
class.”
Stiglitz, a professor at Columbia University who won the Nobel
Prize in 2001, refuted the claim, saying the failure of Trump’s economic
policies is evident in the decline in average life expectancy among Americans
over each of the past three years.
“A lot of it is what they call deaths of despair,” he says. “Suicide,
drug overdose, alcoholism — it’s not a pretty picture.”
The uptick in wage growth is a result of the economic cycle, not
Trump’s policies, Stiglitz said.
“At this point in an economic recovery, it’s been 10 years since
the great recession, labor markets get tight, unemployment gets lower, and that
at last starts having wages go up,” Stiglitz says.
“The remarkable thing is how weak wages are, how weak the
economy is, given that as a result of the tax bill we have a $1 trillion
deficit.”
As the presidential race inches closer to the general election
in November, Trump’s record on economic growth — and whether it has resulted in
broad-based gains — is likely to draw increased attention.
BLOG: THE GREATEST TRANSFER OF WEALTH TO THE RICH OCCURRED
DURING THE OBAMA-BIDEN BANKSTER REGIME
“The middle class is getting killed; the middle class is getting
crushed," former Vice President Joe Biden said in a Democratic
presidential debate last month. "Where I live, folks aren't measuring the
economy by how the Dow Jones is doing, they're measuring the economy by how
they're doing," added Pete Buttigieg, a Democratic presidential candidate
and former Mayor of South Bend, Indiana.
Trump has criticized Democrats for tax and regulatory policies
that he says will make the U.S. less competitive in attracting business
investment.
“To every business looking for a place where they are free to
invest, build, thrive, innovate, and succeed, there is no better place on Earth
than the United States,” he said in Davos.
Stiglitz pointed to Trump’s threats last week of tariffs on
European cars to demonstrate that turmoil in U.S. trade relationships may
continue, despite the recent completion of U.S. trade deals in North America
and China.
“He can’t help but bully somebody,” Stiglitz said.
Max Zahn is a reporter for Yahoo Finance. Find hi
Bullard
Says Unemployment Could Rise to 30%
23 Mar 2020523
1:15
The unemployment rate in the U.S.
could hit 30 percent, Federal Reserve Bank of St. Louis President James
Bullard said in Bloomberg News interview.
“This is a planned, organized
partial shutdown of the U.S. economy in the second quarter. The overall goal is
to keep everyone, households and businesses, whole,” Bullard said. “It is a
huge shock and we are trying to cope with it and keep it under control.”
That would be the highest rate of
unemployment since the Great Depression.
Bullard said he expects economic
growth to plunge 50 percent in the second quarter but for the economy to bounce
back later in the year, so long as the appropriate measures are taken by the
fiscal and monetary authorities.
“I would see the third quarter as a transitional
quarter,” Bullard said. The next six months, however, could be very strong.
“Those quarters might be boom quarters,” he said.
Bullard also said the Fed was far
from being “out of bullets,” as some Fed watchers have claimed.
“There is more that we can do if
necessary,” he said. “There is probably much more in the months ahead depending
on where Congress wants to go.”
Donald
Trump’s Economic Record Isn’t What He Says It Is
He claims
the economy is “the best it has ever been.” A closer look at the data tells a
different story.
February 5, 2020
U.S. Department of Agriculture/Flickr
Donald
Trump has been on a mission this week to distract from his impeachment by
touting his administration’s economic record. First, he launched a 30-second ad
after the Super Bowl promising that “the best is yet to come.” Then, in his
State of the Union address Tuesday night, Trump highlighted the “American
Comeback.” The speech was full of audacious—and characteristically
inaccurate—claims: “our economy is the best it has ever been”; the “average
unemployment rate … is lower than any administration in the history of our
country”; and “wages are rising fast.”
The
reality, however, doesn’t match Trump’s
rhetoric.
In fact, it would take much longer than a
30-second
commercial to highlight the many
ways that
the U.S. economy isn’t working for all.
Still,
the moment provides an opening for Democratic presidential candidates to
challenge the president’s record.
In
2019, for instance, the gap between the richest and poorest households in the
United States reached its highest point in more than 50 years. The number of
Americans without health insurance continues to climb following years of declines since the
passage and implementation of Obamacare. And household debt is now in excess
of $14 trillion, exceeding the pre-recession high.
Even
with low unemployment, wage growth is lagging. The most recent employment
report reported wages increasing by just 2.9 percent over the last year. With
inflation at 2.1 percent, that’s not much of a pay raise. To the
extent that wage growth has picked up in recent months, a major contributor has been increases in state and local
minimum wages that Republicans and the president opposed.
Trump’s
signature legislative accomplishment, the 2017 tax cut, has produced none of its promised benefits, including the $4,000
pay raise that he and his allies promised to American workers.
In fact,
as a result of the tax cut, 91 companies in the Fortune 500 paid no federal taxes last year. The country’s six
biggest banks saved $32 billion at the same time that they laid off more
than 1,000 employees.
The
tax cut has also failed to produce the “four, five and even six percent” economic growth
that Trump promised. In the fourth quarter of 2019, the GDP growth of 2.1
percent was lower than both the growth rate before the tax cut was passed in
2017 and the average of Obama’s second term (2.4 percent). Instead, the tax
cuts have produced annual budget deficits of $1 trillion, which Trump has signaled may lead to cuts in Social Security and Medicare, in
addition to his ongoing efforts to erode the social safety net.
Ironically,
despite the president’s pledge to help the “forgotten men and women,”
blue-collar job growth—which includes construction, manufacturing, and
mining—remains anemic, only growing at 0.8 percent in 2019 compared to 2 percent in
Obama’s final term.
What’s
more, the ongoing trade war plunged the manufacturing sector into recession
last year, which has stunted economic growth in states like Wisconsin and
Michigan. Tensions with China produced a 24 percent increase in farm bankruptcies last year, with the most coming
from Wisconsin. The Congressional Budget Office estimated recently that Trump’s trade policies will cost
American households an average of $1,277 this year.
of
layoffs in four years. For workers who are able
percent
less than before. That gap is even greater
for
workers who were at the same job for three
years
or more.
But
while the economic reality under Trump is troubling for most Americans overall,
it’s even more daunting for African-American workers, who have an unemployment
rate almost twice as high as white workers. Displaced African Americans earn 13 percent less
in their new jobs. Those who were employed for three or more years earned 31
percent less in their new jobs.
Despite
the headlines, too many workers are not feeling the economic boom Trump
describes. Instead of making investments to provide Americans with the
world-class education and training needed for 21st-century jobs, the president
and the Republican Congress chose stock buybacks to benefit the wealthy and a
temporary sugar high for the economy that has now worn off.
Democrats
can and should challenge Trump on the economy in 2020. Millions of workers are
looking for good jobs and a pay raise. Policies to build an economy for all
should be central to any campaign’s message. But it’s more than just good
politics. Building an economy that works for the 90 percent instead of just the
top 10 percent is sound economic policy.
“The remarkable thing is how weak wages are, how weak the
economy is, given that as a result of the tax bill we have a $1 trillion
deficit.”
Donald Trump is ‘just wrong’ about the economy, says Nobel Prize-winner
Joseph Stiglitz
President Donald Trump told business and political
leaders in Davos, Switzerland last week that the economy under his tenure has
lifted up working- and middle-class Americans. In a newly released interview,
Nobel Prize-winning economist Joseph Stiglitz sharply disagreed, saying Trump’s
characterization is “just wrong.”
“The Washington Post has kept a tab of how many lies and
misrepresentations he does a day,” Stiglitz said of Trump last Friday at the
annual World Economic Forum. “I think he outdid himself.”
In Davos last Tuesday, Trump said he has presided over a
“blue-collar boom,” citing a historically low unemployment rate and surging
wage growth among workers at the bottom of the pay scale.
“The American Dream is back — bigger, better, and stronger than
ever before,” Trump said. “No one is benefitting more than America’s middle
class.”
Stiglitz, a professor at Columbia University who won the Nobel
Prize in 2001, refuted the claim, saying the failure of Trump’s economic
policies is evident in the decline in average life expectancy among Americans
over each of the past three years.
“A lot of it is what they call deaths of despair,” he says.
“Suicide, drug overdose, alcoholism — it’s not a pretty picture.”
The uptick in wage growth is a result of the economic cycle, not
Trump’s policies, Stiglitz said.
“At this point in an economic recovery, it’s been 10 years since
the great recession, labor markets get tight, unemployment gets lower, and that
at last starts having wages go up,” Stiglitz says.
“The remarkable thing is how weak wages are, how weak the
economy is, given that as a result of the tax bill we have a $1 trillion
deficit.”
As the presidential race inches closer to the general election
in November, Trump’s record on economic growth — and whether it has resulted in
broad-based gains — is likely to draw increased attention.
BLOG: THE GREATEST TRANSFER OF WEALTH TO THE RICH OCCURRED
DURING THE OBAMA-BIDEN BANKSTER REGIME
“The middle class is getting killed; the middle class is getting
crushed," former Vice President Joe Biden said in a Democratic
presidential debate last month. "Where I live, folks aren't measuring the
economy by how the Dow Jones is doing, they're measuring the economy by how
they're doing," added Pete Buttigieg, a Democratic presidential candidate
and former Mayor of South Bend, Indiana.
Trump has criticized Democrats for tax and regulatory policies
that he says will make the U.S. less competitive in attracting business
investment.
“To every business looking for a place where they are free to
invest, build, thrive, innovate, and succeed, there is no better place on Earth
than the United States,” he said in Davos.
Stiglitz pointed to Trump’s threats last week of tariffs on
European cars to demonstrate that turmoil in U.S. trade relationships may
continue, despite the recent completion of U.S. trade deals in North America
and China.
“He can’t help but bully somebody,” Stiglitz said.
Max Zahn is a reporter for Yahoo Finance. Find hi
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