LEGISLATIVE REPORT: Management of Pension Funds Affects the U.S. Economy



Pension Law and Policy,
By Michael Karsch,
Legislative Representative

Many of you may have seen the recently released film The Irishman, the three-and-a-half-hour movie directed by Martin Scorsese. The film is about the life of Jimmy Hoffa and union politics. Of relevance to us is the importance of pension funding and control. Hoffa was a member of the Teamsters union and eager to climb up the ladder of the union. After he became the head of the union, he and others maneuvered for control over their pension fund, “using it for mafia-related loans and personal gain,” according to the Dailysignal.com. “In fact, it was fraud and conspiracy related to the union’s pension fund that landed Hoffa in prison, and after that, the Teamsters’ pension fund was under federal oversight for decades.” Not all union pension plans are hurt by allegedly illegal activities, but alleged mismanagement has been a problem.

Congress is now considering how to fund the multi-employer pension systems in the private sector. According to Dailysignal.com, 1,400 such plans have set aside only 43 cents on the dollar to pay for these pension payouts. This does not affect pensions for the public sector, but some public pension systems are facing the same problem of not setting aside sufficient revenue to cover obligations.

Interest-rate changes in the marketplace have serious consequences. They impact us in how much we have to pay when borrowing money, or in our pension plan’s need to cover for future payouts. The impact of such rates in pension funding are seen in the capital market for U.S. municipal bonds, which is where many government bodies go to borrow for credit cushions to their upcoming obligations. The market performs by having expectations built in to bond prices; if you want to buy bonds to cover your future, you pay a premium for the bond. “Bondholders, wary of how a default could play out, demand a premium.” (Review.chicagobooth.edu) “Unfunded pensions cost U.S. states more than $2 billion in lost bond-issuance proceeds in 2016.” The writer also commented that the larger effect on bonds with longer maturities (stretching out the long term of bonded indebtedness to fully cover a pensioner’s lifespan) of 10 to 20 years means a considerable, longer impact and higher cost.

A year-end review of 2019 and outlook for the future in the Wall Street Journal (Jan. 2, 2020) mentions “Japan’s Lost 30 Years Give Pause to Those Looking at the U.S.” The Nikkei Index has been flat (yes, flat means barely any growth) after peaking at the end of 1989, starkly in contrast to U.S. shares. While the U.S. still looks good in contrast, the U.S. has falling interest rates, may have slower growth and an aging population, which “look a lot like Tokyo.” Again I draw attention to the role of interest rates in an economy. Low interest rates help all of us to finance a new home and we like that, but at the same time lower rates hit hard at the savings rate in a country. A former bond fund manager (Bill Gross) is quoted: “Artificially low interest rates destroy the savings function so necessary for capital to be invested in the real economy. Pension funds, insurance companies and any financed-based structure with long liabilities are slowly being strangled because they cannot earn their assumed return.” It should also be noted that the billions of dollars that are invested by pension funds have significant sectors of investment types that are strongly affected by low interest rates. An increase may lead to inflation if it goes too far, but the desirable “middle” compromise is always a challenge to reach. Ask the Federal Reserve Board.