Elizabeth Warren And Your Retirement Savings

Occasionally I post an article that I have no understanding of. This is one of those articles. I am posting it because the source and headline are an indication to me that this is important information.

Yesterday Forbes posted an article detailing how Elizabeth Warren intends to change your retirement funds if she is elected. Keep in mind that she is rapidly becoming the Democrat front-runner. The dust up about Biden and the Ukraine may be the party’s effort to remove Biden (because he is not looking electable) and replace him with Warren.

The article reports:

So, as it turns out, Elizabeth Warren’s Social Security expansion proposal is not the only one of her plans to affect Americans’ retirement well-being. But the proposal of hers which will affect Americans’ retirement savings, in their 401(k)s and their IRAs and the funded status of their pension plans (which might be irrelevant for single-employer traditional pension plans guaranteed by employers but matters considerably for multi-employer plans), is tucked away in a component of her platform with the harmless-looking title, “Empowering Workers Through Accountable Capitalism.”

It’s a proposal that’s a repeat of legislation she proposed in 2018, the “Accountable Capitalism Act,” which, as it happens, I dug into at the time on another platform. The most nebulous part of the proposal is the notion that large corporations would be obliged to pursue the “best interests” of a long list of entities, not merely shareholders but also employees, suppliers, customers, the local communities where the companies locations are based, and others, with the fundamental premise that such a corporation “shall have the purpose of creating a general public benefit.” But however much writers such as Kevin D. Williamson decried this as “the wholesale expropriation of private enterprise in the United States” this all appears to be aspirational and symbolic, without any enforcement mechanism included in the legislation, or administrative agency named to ensure the corporation is indeed “creating a public benefit.”

What is far more concrete is a requirement that such “United States corporations,” that is, those with over $1 billion in revenue, would be obliged to bring onto their boards of directors, representatives elected by employees, at a minimum ratio of 40% of the total board members. The website declares:

“Elizabeth’s plan gives workers a big voice in all corporate decisions, including those about outsourcing, wages, and investment,”

and references Germany as an example of a country with a similar approach.

In an abstract way, of course, directors are bound to represent shareholders; if 40% of board members no longer represent the shareholders, than this is, in effect, taking away from shareholders the ownership of 40% of the company. But this is more than just an abstract impact. How much of a difference would it make?

The article explains that Elizabeth Warren’s plans would reduce the value of the stocks. In the German model, only the wealthy own stocks

The article concludes:

Take a look at the estimates from Pensions & Investments: 80% of stock market equity is held by institutions: that means, mutual funds, pension funds, 401(k)s, and the like. In particular, 37% of stock is owned by retirement accounts; when subtracting out foreign owners of US stock (26% of the total), 50% of US-owned US equities are owned within retirement funds. And it should go without saying that there is no way to “punish” the wealthy by causing the value of only the stock they own to go south while somehow protecting the 401(k) and other retirement accounts for the rest of us. It’s cutting off your nose to spite your face and, as someone with a 401(k) account, I’d really prefer not to do this.

As I said, I don’t fully understand what this is all about, but I do know that as many Americans lose faith in our Social Security system, they are creating 401(k) accounts and other holdings in preparation for retirement. I have a feeling that if Ms. Warren is elected, none of us will be able to retire.

A Victory For Freedom, A Possible Victory For Taxpayers

The Associated Press posted an article today about the Supreme Court’s decision that government workers can’t be forced to contribute to labor unions that represent them in collective bargaining.

The article states:

A recent study by Frank Manzo of the Illinois Economic Policy Institute and Robert Bruno of the University of Illinois at Urbana-Champaign estimated that public-sector unions could lose more than 700,000 members over time as a result of the ruling and that unions also could suffer a loss of political influence that could depress wages as well.

Alito acknowledged that unions could “experience unpleasant transition costs in the short term.” But he said labor’s problems pale in comparison to “the considerable windfall that unions have received…for the past 41 years.”

Billions of dollars have been taken from workers who were not union members in that time, he said.

“Those unconstitutional exactions cannot be allowed to continue indefinitely,” Alito wrote.

Kagan, reading a summary of her dissent in the courtroom, said unions only could collect money for the costs of negotiating terms of employment. “But no part of those fees could go to any of the union’s political or ideological activities,” she said.

The court’s majority said public-sector unions aren’t entitled to any money from employees without their consent.

There are two aspects of this decision that are going to make the political left very unhappy. Obviously this will severely limit the amount of money unions can contribute to Democrat political campaigns (to check union political donations, see opensecrets.org). But there is another issue here–pension funds. The other aspect of this decision is union retirement funds.

On October 19, 2012, I posted the following (here):

In a column in the Washington Examiner in April, Mark Hemingway pointed out that the average union pension plan had only enough money to cover 62 percent of its financial obligations.  Pension plans that are below 80 percent funding are considered “endangered” by the government; below 65 percent is considered “critical.”  Union membership is declining, which means that less people are paying into these funds.

The Pension Benefit Guaranty Corporation (PBGC) was created by the Employee Retirement Income Security Act of 1974 (ERISA).

According to Wikipedia:

The PBGC was created to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, PBGC’s insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at 65 ($60,136 a year as of 2016).[2] The benefits payable to insured retirees who start their benefits at ages other than 65 or elect survivor coverage are adjusted to be equivalent in value.

In fiscal year 2015, PBGC paid $5.6 billion in benefits to participants of failed single-employer pension plans. That year, 69 single-employer pension plans failed. PBGC paid $103 million in financial assistance to 57 multiemployer pension plans. The agency’s deficit increased to $76 billion. It has a total of $164 billion in obligations and $88 billion in assets.

On 03/23/2010, Senator Robert Casey of Pennsylvania introduced S3157.

The summary of S3157 at congress.gov states:

Create Jobs and Save Benefits Act of 2010 – Amends the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code to: (1) permit multiemployer pension plans to merge or form alliances with other plans; (2) increase Pension Benefit Guaranty Corporation (PBGC) guarantees for insolvent plans to increase participant benefits; and (3) increase from $8.00 to $16.00 the annual premium rate payable to the PBGC for each individual who is a participant of a multiemployer plan after December 31, 2010. (The underline is mine)

The bill was referred to committee and died there. So what is my point? The danger to the unions in this Supreme Court decision is that they will not have the money to pay their union pensions. The danger to the taxpayers in this decision is that they will be asked to pay the union pensions.

Stay tuned. This is going to get interesting.

 

The Next Financial Collapse The Taxpayers Will Be Asked To Bail Out

On January 17, 1962, President John F. Kennedy signed Executive Order 10988. This order allowed federal employees to form unions. Eventually bureaucrats at all levels of government formed unions. So what was the result of this? The eventual result is large amounts of unfunded liabilities in terms of generous retirement benefits and medical benefits for retirees. These are listed as unfunded liabilities because the actual cost of the benefits negotiated did not show up in the annual budgets of the towns and cities that were approved by the states. This is the perfect negotiating tool–unions make large donations to candidates. These unions then negotiate for retirement benefits for union members. Those doing the negotiations want to stay on the good side of the unions in order to continue to receive campaign contributions.

The Daily Signal posted an article today showing the per capita amount of these unfunded liabilities in every state.

Here is the chart and the list:

The article reports:

Contractual or constitutional obligations for government pensions could mean that paying the pensions of retired government employees may take precedent over paychecks for current employees.

Moreover, some state constitutions prevent any changes to government employees’ pension benefits. That means current government employees can’t ever be required to contribute more to their pension plan than they did on the first day they were hired. And, actually, not a single term of their initially promised pension benefits ever may be altered.

Just imagine how detrimental it would be to private employers if they never were allowed to alter the benefits they initially offered their employees.

With an average funding ratio of only 33.7 percent across state and local pensions and every single state at risk of defaulting on pension obligations (as measured by Pension Protection Act standards, assuming a risk-free rate of return), taxpayers across all states face significant tax increases to pay for their governments’ unfunded pension promises.

As the federal government attempts to cut the amount of taxes each American pays, the states may be forced to raise their taxes to cover their unfunded liabilities. States and municipalities need to fund their pension programs as the money is needed and encourage employee participation–past practices need to change.

The Next “To Big To Fail”

On December 23, Investor’s Business Daily posted an editorial about the problem with public employee pension funds. These future pensions are generally unfunded liabilities that municipalities take on when negotiating with public employee unions. What generally happens is that employees are promised great pension benefits instead of instant raises. That way the municipality does not have to raise its immediate budget–it looks as if it is being fiscally sane, and it quietly kicks the can down the road. In most cases (if not all) no provision is made to pay for these future benefits. Well, there always is a place where the can is no longer kicked down the road because the road ended. California is nearing that place.

The article reports:

Last week, the 85-year-old California Public Employees’ Retirement System, or CalPERS, slashed its official investment forecast going forward, meaning that state and local governments, police and sheriffs departments, and even school districts will have to spend billions of dollars more to CalPERS to support their future retirees. And, no doubt, it will mean higher taxes for all.

Sadly, this move won’t be enough. For years, the state has projected steady investment returns of 7.5% for CalPERS, the largest pension fund in the nation. But returns have been below that. So now CalPERS is trimming its return to 7% per year. But, given the pension fund’s mismanagement and poor performance, even that may be too high. Today the fund is a little over 60% fully funded, meaning it will have to raise billions of dollars more to be solvent. That means higher contributions for government workers, and higher taxes for average citizens.

It’s no accident. “CalPERS has … steered billions of dollars into politically connected firms,” wrote Steve Malanga in City Journal, back in 2013. “And it has ventured into ‘socially responsible’ investment strategies, making bad bets that have lost hundreds of millions of dollars. Such dubious practices have piled up a crushing amount of pension debt, which California residents — and their children — will somehow have to repay.”

That’s happening now. California’s famous Highway Patrol, for instance, has grossly underfunded its pensions. So it got the state to agree to a $10 hike in car registration fees to help make up the shortfall. No doubt, it will be asking for more soon.

It’s not just California. Across the country, pension funds have been underfunded, mismanaged and in some cases looted by managers. Today, according to the Fed, pension funds across the country are $2 trillion in the red — after being overfunded as recently as the year 2000. That means tax hikes are coming, like it or not.

This is a nationwide problem. This is also not a new problem. In 2010 I posted an article about the shortfall in union pension money. The close connection between many local politicians and local union leaders is a major contributor to this problem.

The Investor’s Business Daily article concludes:

In a scathing, just-released report, the American Legislative Exchange details how “rather than investing to earn the best return for workers, (politicians and fund officials) use pension funds in a misguided attempt to boost their local economies, provide kickbacks to their political supporters, reward industries they like, punish those they don’t and bully corporations into silence and behaving as they see fit.”

It’s quite an indictment. It’s time for a national commission to look into the misconduct and mismanagement — which pose a clear danger to the financial system — and answer the scariest question of all: Have public employee pension funds become too big to fail?

We have just elected a businessman to the Presidency. Hopefully he will have the skill and the knowledge to deal with this upcoming disaster. What is happening in California will eventually impact the rest of the country.