30 April 2011

Public and Private Pensions

A passage from what will become chapter 14.

Let's talk about pensions. In the simple dictionary sense, a pension is a fixed amount paid by an employer to a retiree or a former employee's survivors in consideration of past services.

A pension plan is a fund established with an eye to subsequent such payments.

Pension plans are often divided into two general types, "defined benefits" and "defined contribution". The labels are self explanatory. But just to be very clear ... in a defined contribution plan, the sponsor/employer on the one hand and the employee on the other will make specified contractual contributions to the fund over the period of employment. The benefits are not defined, and so they will be determined by non-contractual factors, notably, how successfully those contributions are invested over the period before the fund has to make payments to the retiree/beneficiary.

In a defined benefit plan, on the other hand, the employer/sponsor becomes the guarantor of the contracted-for benefits, regardless of how well the fund does.

The golden age of defined-benefits plan was also the era of U.S. hegemony and self-confidence. It was the post-World War II era -- Bretton Woods tied the dollar to gold and tied every other currency in the world to the dollar, which seemed only right, given U.S. strength and centrality. Nobody ever expected that the major US corporations, those that hired the much maligned men in the gray flannel suits, would not always be around, or would not always be good for the money they were promising in decades to come.

In Detroit, the golden age of defined contributions was the time of Alfred Sloan and Walter Reuther, the heads of General Motors and the United Auto Workers respectively at the time of the "Treaty of Detroit" in 1950. GM was coming off a very profitable year (1949 was a record maker for it) and felt sufficiently flush to declare a stockholder dividend of $190 million when it decided to ensure itself against labor unrest by paying half of employees' hospital and medical insurance, and offering a pension of $125 a month. As measured by the value of the U.S. dollar at the time of the 2008 crisis, that would be the equivalent of $1,040 a month.

In his 1963 memoir Sloan would congratulate himself on introducing "an element of reason, and of predictability" into GM's labor relations.

But of course, it was an element of "predictability" only because continued prosperity for General Motors was deemed predictable. Further, the precedent once established, buying peace in this way became a habit, because at each negotiation cycle thereafter the issue would be one of embellishing the benefits offered in the existing system.

Both sides of such a negotiation could benefit by billing the future, by creating an ever more expensive defined benefits plan to be financed however-it-would-be and paid at a future date. The corporate bosses avoided strikes, keeping their shareholders happy. It was easier to promise benefits in subsequent decades than it would have been to make here-and-now salary concessions. For the same reasons, the Labor bosses were happy. They had a win with each round, and could brag to their rank-and-file about how tough they were.

Under the heading of public pensions, there is this.

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