A tetralemma is a situation in which one must choose among four options, each having drawbacks. That’s the situation faced by workers contemplating their retirement prospects.
Historically, workers had four choices about who would collect and protect their retirement savings: the government, the company, the union, and themselves. None of them was exactly problem-free.
We have all heard of cases of workers mismanaging their 401ks by investing in a ditzy way – investing in bull semen, say, or putting all their money in just one stock. And we have seen any number of companies fail, leaving their workers with no pensions at all.
But the idea that unions or governments are better at handling retirement money than individuals or companies is risible. Consider a report by Kevin Mooney in the Washington Examiner (June 7). Since the Pension Protection Act of 2006, unions have had to file forms revealing the financial shape of their funds, and Mooney was able to review the 2007 documents. He reveals that nearly half of the 20 largest unions have grossly underfunded pension funds.
In fact, the unions with underfunded pension plans are among the very biggest: the International Association of Machinists, the International Brotherhood of Electrical Workers, the International Union of Operating Engineers, the Laborers International Union of Northern America, the National Plumbers Union, the Service EmployeesInternational Union, and the United Food and Commercial Workers. The Pension Benefit Guarantee Corporation estimates that the average union pension fund has only 620/0 of the assets needed to cover promised benefits.
And these reports are based upon the filings through 2007, before the major market correction and jump in unemployment!
Mooney notes that the desperate, fanatical push for card-check legislation by organized labor may be an outgrowth of the union pension crisis. Unions are looking to empower arbitrators to force companies and nonunion workers into the underfunded union pension plans. I would add that by increasing their membership and consequently their political clout, they can elect more Obama types, who will step in and rescue the underfunded pension plans by shoveling taxpayer cash at them.
Consider now a report by David Cho in the Washington Post (Oct. 11) on the crisis facing public employee pension funds. The financial downturn has resulted in state and municipal employee pension funds losing $1 trillion in the value of their assets. A recent analysis by PricewaterhouseCoopers estimates that within 15 years, public employee pensions will have less than half the assets needed to pay the benefits that they are on the hook for.
In many cases this is because the pension fund managers gambled on risky investments, such as outré hedge funds or arcane mortgage-backed securities. This is ironic, no? – considering that the first objection that statists offer to any proposal to privatize pensions is that ordinary workers are not wise enough to pick sound investments.
Even more ironic is that some of these pension funds are now tempted to make still riskier investments to cover the gap. In other words, they want to go back to dicey ways of chasing a high return. Bull semen, anyone?
But even if these funds managed to average an 8% annual return, Kim Nicholl of PricewaterhouseCoopers estimates that they would still have less than half of what is required to cover pensions by 2025.
It is overwhelmingly likely that taxpayers will be stuck with paying for those pension benefits from increased taxes. To put this bluntly, the retirement of the many will be ruined to pay for the entitlements of the privileged few.
Meanwhile, Chile has gone through three decades with a privatized pension system, in which each citizen owns his or her own retirement account, but investments are limited to broad index funds. It has averaged something like 10% on the up side per year, and it is so popular that even the left of center governments that have been in power since its enactment have left it alone.