Customer Reviews

While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis

5 star:		(13)
4 star:		(7)
3 star:		(8)
2 star:		(2)
1 star:		(2)

 

 

Roger Lowenstein is the author of my favorite books "Buffett" and "When Genius Failed". His ability to collect the historical facts is amazing: the author gives 575 references to other sources throughout the book. I like this approach very much. This book is also timely and accurate: it is not only a spell-binding economic and political history, the origin and the problems of IRAs, 401(k) and other mechanisms - it is an urgent call to action and a prescription for reform. You will also find what do the precedential candidates of 2008 campaign think about this issue. Besides that, Lowenstein, a regular contributor to many financial periodicals, proposes his own solution. The author recognizes that the workers are entitled to decent security in their retirement - a critical issue as the country ages. He warns that the pension wars that erupted in Detroit, New York and San Diego are only the first. Government and corporations across the country used pensions as a seemingly easy way to curry favor with unions (easy because the expense would be deferred until a later generation). But now, with cumulative retirement deficits approaching $1 trillion, the day of reckoning has arrived.

The author declares that pensions are perfect vehicle for procrastination; in the financial world, they are the most long-enduring promises that exist. The only rival is the federal Social Security system - but there, surprisingly, the commitment is no so airtight. Congress, if it chose, could reduce or cancel Social Security benefits tomorrow. Pensions are forever.

There is a noteworthy example in the book: the young men who went to work for General Motors after World Word II, when GM ruled the roost of American business, were promised pensions and health care benefits that remained in force for half a century. One GM retiree, who died at 111 in 2006, had been collecting pension and retiree health benefits for forty-eight years. When he first went to work, in 1926, GM's managers could not have had the faintest conception of what the company could or would be paying in benefits eighty years later.

I do also recommend the other books by Roger Lowenstein in addition to his book.

Although Lowenstein is a talented writer and the topic of retirement in America is an important one, the narrow focus of this book makes it hard to recommend. Lowenstein skillfully recounts in detail the pension plan difficulties faced by General Motors, the New York City subway system and San Diego.

However, these three stories seem to exist in isolation. He doesn't spend enough time putting them in the context of other government and private pension and 401(k) plans. Lowenstein seems to have focused on making sure the three stories are easy to read and in this he has succeeded. But in doing so, he has not provided the hard data that a reader needs to really understand the issue. There is not a single chart of table in the book. There are virtually no benchmarks in the book - it's hard to judge the appropriateness of the pay and pensions described in the book without details of the payroll and benefit costs of other American workers.

Although the stories were good, after reading 230 pages I didn't feel that I had learned anything significant that I did not know before.

Very interesting and informative book, enjoyed it immensely. However I part company with the author when it comes to solutions. His only idea seems to be tax increases so the public can pay for the rapacious antics of the public sector unions in particular or so the government can bail out the private sector companys that have caved into unions. And heaven forbid that people actually be allowed to control their own retirement funds and investements, the nanny state uber alles.

I am glad to see the inadequacy of public pension plan funding getting more attention. The book is extremely well written and easy to read. It provides valuable insight into the pension plan decision-making process, and shows the danger in trading benefit improvements for inadequate contributions. As Roger Lowenstein points out, public pension plans themselves are not the problem, the problem is that they are so often underfunded. Contributions to public defined benefit plans calculated under traditional actuarial methods are not necessarily sufficient to make a plan actuarially sound. There is a need to establish rules for funding contribution calculations to strengthen the actuarial soundness of public plans. The current rules allow payments to be made on the unfunded liabilities that are less than the interest on the liability. At least for mature plans that are poorly funded, the payments made on the unfunded pension liabilities should be accelerated. Consideration should be given to requiring minimum contributions to public pension plans.

The nation's pension system is collapsing at the same time its population is aging. In the late 1960s, 60% of Americans were covered by a pension plan; today it is under 20% of those in private employment. Pension funds in the private sector are $350 billion in deficit, and many employers (IBM, Sears, etc.) are freezing their plans to keep obligations from growing further. Similarly, states and localities are hundreds of billions behind on funding, and Lowenstein declines to even get into Social Security's status or obligations for health care to retired public employees. (In another source Lowenstein estimates a $1 trillion deficit for retired public employees - presumably this also includes health care.)

"While America Aged" covers how we went from almost no pensions in the early 1900s (most worked on farms, and 'retirement' consisted of working less while relying more on family members), to a high proportion of coverage (more workers were in industry), to unsustainable benefit levels, using three case studies (G.M., the New York City subway system, and San Diego municipal employees).

In each case, management officials were lulled (and sometimes forced through long strikes) into acceptance by the delayed impact involved. At first few, if any workers were retired, and they were supported by a very large employee base.

In G.M.'s case, the firm also benefited by being the dominant force in the industry - 50%+ market share. Then autoworkers aged, Japanese autos reduced G.M.'s market share, cheap money to encourage home ownership and consumer spending undermined G.M.'s ability to attain adequate pension-fund earnings, and G.M. dug itself in even deeper with unrealistic assumptions on fund earnings and further benefit increases. Thus, from 1991-2006 it poured $55 billion into its pension funds, and only paid $13 billion in dividends.

To date, most corporations continue to minimize the problem, or pass off pension obligations to the government through bankruptcy, especially steel and airline companies. Unfortunately, the PGBC program is in deficit as well, and not designed to also take the burden of municipal pension funds.

New York City's transit, teachers, sanitation, firemen, and police public employee unions engaged in a "leapfrog" contest during the 1960s. Between them they steadily increased pension benefits through lowering the age of retirement, the proportion of "ending" salary paid upon retirement, changing "ending" salary to just the last year and including overtime (a extra $76 in overtime pay during a retirees final year created $1,100+ in pension liabilities), adding an inflation index provision, and reducing/eliminating employee contributions. These escalating costs for the MTA were hidden through deferred maintenance, state and federal aid, a soaring stock market, actuarial manipulation, and increased taxes. Mayoral egos bent on higher office often facilitated these additions. All this on top of high pay - in 2005 the average high-school educated NYC worker earned $29,000, vs. a public bus driver at $63,000.

Similarly, San Diego in 2005 found itself with a public employee pension fund deficit of $1.7 billion ($6,000/family of our), no audited financials, and a reputation as the "Enron-by-the-Sea." It had fallen into this through Proposition 13, mayoral candidates aspiring to higher office (eg. Pete Wilson), and union influence on elections and decision-making.

Finally, a 5/19/08 USAToday article contends that state and local retirement obligations total $3.6 trillion, out of a total government retirement debt of $61.7 trillion ($541,472/household), on top of $13.8 trillion in personal debt (mortgages, credit cards, etc.), for a total of $650,644/household.

I enjoyed reading this book and it gave me an better understanding on how public and union plans can succumb to the pressures to increase benefits now without having to pay for them until later. Gives a good historical perspective of what was going on at GM, in NYC, and San Diego when their pension plans developed their problems.

One thing that is never explicitly stated is that all these governments and unions that crippled their finances by promising generous postretirement medical benefits must be praying for the enactment of universal health care to bail them out of paying for their promised benefits.

I had to take a star off for the final chapter on what should be done going forward. I suppose after an excellent history lesson, Mr. Lowenstein felt the need to tie his three vignettes together, generalize the lessons here to the state of all US pension plans, and come up with a set of solutions. However, the problems facing public and union pension plans are different from those that have put private pension plans in decline. Private pension plans have been hurt by overregulation and by the high cost and volatility that these plans have on a company's financials under new and evolving accounting standards. A private company can freeze it's plan (if its not collectively-bargained) and many have chosen to do so to provide benefits with 401(k) plans whose costs are easier to control.

The other failing of the last chapter is that, after keeping his politics mostly in check through most of the book, he starts reciting liberal talking points to come up with his solutions. He lauds Hillary Clinton by name for her solution of providing government-paid 401(k) accounts for low income people, but condemns President Bush (along with the right wing) for exaggerating the funding strains on the Social Security system and proposing to partially privatize Social Security with a 401(k)-based solution. After spending the whole book expounding on the problems caused when current benefit promises rely on future cash outlays, he then brushes off the same dynamic when it applies to the Social Security system.

Where were you while America aged? ;) I've been following the issues in this book written by Roger Lowenstein for over 20 years. As an actuary (but not a pension actuary) and a financial analyst, I have written about the issues involved since 1992.

Roger Lowenstein motivates the issues surrounding pensions by telling three stories, those of General Motors, the New York City Subway, and the City of San Diego. He captures the essence of why we have pension problems in a way that anyone can appreciate. I sum it up this way: promises today, payments far in the future. Get through the present difficulty, at the price of mortgaging the future.

If you repeat that recipe often enough, you get into a tough spot, as GM is in today. Give GM credit though, a lesser firm would have declared bankruptcy long before now, and shed its pension liabilities to the Pension Benefit Guaranty Corporation [PBGC].

Given the softness of funding requirements for pension liabilities, the easy road for corporations and municipalities has been to skimp on funding pensions, leaving a bigger problem for others to solve 10+ years later. As for municipalities, review my recent post here.

Now, why didn't the US Government insist on stricter funding standards for pension plans? Because of pushback from corporations and municipalities. The US Government hoped that their funding methods for corporations would encourage the creation of pension plans, and that corporations would be good corporate citizens, and not play it to the edge.

As for municipalities, which are not subject to ERISA, as corporations are, the government assumed that they would act in their best long-term interests. Alas, but governments are run by men, not angels.

I found each of the three stories in the book to be interesting and instructive. They are tales of people aiming at short-term results, while letting the future suffer. In the case of the NYC Subways, the plan sponsors finally fought back. With GM, they accomodated until they were nearly dead. With San Diego, they compromised until it cost them their bond rating, and many people involved got sent to jail.

As any good author would, the book offers a few solutions at the end, but it recognizes as I do, that we are pretty late in this game -- there are no "good" solutions. There are solutions that may aid future generations. An example is making municipalities subject to the funding requirements of ERISA. I agree, and add that we should apply that to Federal DB [defined benefit] plans, and Social Security too. This could be our own Sovereign wealth fund, investing overseas for the good of US retirees. (What, there is no money available to do that? What a shock.)

I would also add that the funding requirements specified in ERISA are weak. The standards for life insurance reserving are stronger. The weak standards were there to encourage the creation of DB plans. Well, you can encourage creation, but maintenance is another thing.

A certain level of overfunding is need in good times, hopefully, with discipline not to increase benefits. That overfunding is hard to achieve, because the IRS discouraged overfunding above a certain level, because it did not want companies to shelter income from taxation by contributing to the DB pension plans.

Now, I have also reviewed the book Pension Dumping. Which one is better? For the average reader, While America Aged motivates the topic better, but if you want to dig into some of the deeper issues, Pension Dumping does more.

Roger Lowenstein is one of the most accomplished financial writers around. Pensions are a boring subject. Who would ever have drinks, on purpose, with an actuary? Maybe if you were stuck on a plane next to one, and the liquor were free...
Lowenstein is able to make them seem both dramatic and important. Something has escaped our attention. Pension benefits have been piled on by labor unions and politicos without regard to their ultimate cost. Lowenstein makes it pretty clear through several recent and important examples that this is nothing short of a disaster. But why should it matter to us? Because we face a huge pension shortfall as Social Security becomes underfunded, and many states are verging on bankruptcy...
The negotiations Lowenstein depicts are as dramatic as those of The Smartest Guys in the Room - and equally rife with chicanery. Though he's deft with analysis, rendering the complex simple, he's got a knack for characterization and drama that belies what might be considered remote and dull subject matter. Once you read the book though, you won't feel the same way about pensions or even unions - though of course unions have greatly benefited the US at other moments in our history.

So read it and weep! Or get mad and do something about it.

Is it just me, or is Roger Lowenstein one of the best writers going. If you liked 'When Genius Failed', 'Buffett, The Making Of An American Capitalist' and 'Origins Of The Crash', you won't be disappointed with 'While America Aged'. Top-notch writing, top-notch research. Brings to light events you may have read about in WSJ and NYT. Always thought unions were a mixed blessing. Now I am certain. Required reading for people who are not saving enough for retirement.

You might recognize Roger Lowenstein's name. He is the author of When Genius Failed, the definitive history of the 1998 Long-Term Capital Management collapse. While America Aged is a good history of the pension crisis and would be a good compliment to Dora L. Costa'sThe Evolution of Retirement.

The root of the problem is that the pension and health bills are paid by future generations but the benefits are enjoyed today by the current workers who receive payment, the current tax payers who temporarily dodge payment, and the current politicians that can take credit. This is a classic example of moral hazard in action.

One of Lowenstein's key themes is that "retirement" is a relatively new concept. It was never considered a guaranteed "right" that all Americans are entitled to until very recently. Is his historical recap, Lowenstein writes,

"But in the United States, until very late in the nineteenth century, pensions were almost unheard of... Most people worked on farms on in small shops or mills. As they got older they didn't stop working, they simply worked a little less. If old age did catch up with them, they turned to their families for food and shelter. The `problem' of old age was in any case not widespread.... Retirement was less one of life's standard passages, like adolescence or middle age, than it was an infrequent and brief preamble to the grave."

So what was the impetus for the creation of "retirement"?

"The man who tended a farm could gracefully age on the job; the factory worker couldn't. Shop stewards and department managers wanted the graybeards out, to make room for younger blood.... Pensions were created by companies that reckoned it to be in the corporate interest. They were a tool for managing labor, not an entitlement due to labor...."

The transformation of retirement from a benefit to the company to a benefit for the worker was gradual, but it greatly accelerated during World War II. The government froze wages while still allowing firms to grant noncash benefits such as pensions and health insurance.

The American private pension and health system was not really planned; it evolved based on labor market conditions from a bygone era mixed with muddled and ill-conceived government regulations. Yet because it has become the status quo, it is treated as somehow being sacrosanct and untouchable. But as Lowenstein writes, "...there us no reason for [pensions and] healthcare to be tied to the workplace (any more than there is for companies to provide schooling, shelter, or basic needs.) In any case, they can't afford it."

On thing is certain: This problem is not going away. With the coming retirement of the Baby Boomers, pension and health funding at the corporate, city and state, and national levels will be the next major fiscal crisis for the United States.