Book Review: Lowenstein’s “While America Aged”
August 20th, 2008 by 
James Cullen
My latest reading project was Roger Lowenstein’s “While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis
For the drawbacks, the narrative approach does make for the presentation of some compelling characters – which I’d say is a strength of Lowenstein, especially in a biographical work like Buffett: The Making of an American Capitalist
At the end of the book, Lowenstein offers very rough sketches of the way to solve the pension crisis, though it comes off as hollow because there really is no “fix” for it. A substantial amount of taxpayer revenue needs to be raised and/or diverted to these trusts to catch them up, and a larger and larger percentage of existing tax revenues needs to be allocated to these kinds of expenses. To that end, Lowenstein’s solution is to bite the bullet and socialize retiree benefit programs, bringing everything under the watch of the federal government. Doing so, he argues, will help level the competitive playing field in industries where American businesses are saddled with legacy cost burdens their foreign (or newer domestic) counterparts don’t have. While I want to say I’m opposed to expanding federal entitlement programs, pension promises simply aren’t fair to break. That doesn’t mean that should be taken as is – in the case of San Diego, widespread fraud created a case for undoing a number of benefit hikes – but if unions want the security offered by a federally-backed pension plan (above and beyond the Pension Benefit Guaranty), it’s fair that they should accept some combination of modest reduction in pension benefits or later retirement/vesting ages.
Will any of this happen? Your guess is as good as mine. It’s going to require the scarcest of commodities these days – political courage – and raising tax revenues or cutting government services isn’t likely to go over well in most voting districts, much less during an economic downturn. Still, a state like New Jersey (my home away from school) is $25 billion behind on their pension plan, in addition to $58 billion in promised retiree healthcare benefits for which it has no reserves. How much longer this can continue is anyone’s guess, but at the rate the cash outflows increase annually, I find it hard to imagine we won’t have a reckoning on this one decade out. Lowenstein’s “While America Aged” is a good primer for understanding a huge potential landmine all levels of the country face.
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August 20th, 2008 at 1:53 pm
I can’t see how private pensions are a federal or public matter. Either they can keep their promises, or they will rightly go bankrupt or both. Owners of the business i.e. equity is on the hook here.
I can’t believe making this debt public is even talked about. I also fail to see why retirees should accept a reduction in benefits(Though current workers might be wise to renegotiate). Party A entered into a contract with party B. There is a well established body of law as to what happens if either party does not fulfil that contract. Usually the offending party will have to pay other party whether or not they can comfortably afford to do so. The important point is that Party C (the rest of us, or more to the point Me, myself, and I)has nothing to do with it.
If I enter into a contract with my local bank: they loan me 200,000 dollars to start a business, in return I agree to pay them back. If I can’t pay them back, its clear what happens. My assets are seized and sold off for what they will bring to pay off the debt. Imagine a world where I’m free to turn to my neighbor and say, Gee, I really don’t want to loose all these assets…. I think you’ll have to pick up my payments…
Does this whole discussion sound crazy to anyone else? If GM can’t compete with the agreements they have entered, they will fail, as any other business would fail. Someone else will learn from their mistakes, probably buy thier assets and start another company. No big deal.
August 20th, 2008 at 9:54 pm
We (party C) do have something to do with it. We backstop private pensions via the Pension Benefit Guaranty Corp. (PBGC), which is a federally backed insurer of corporate benefit plans. The PBGC looks to be woefully underfunded/provisioned relative to the plans it insures, and underfunding will require taxpayer money. As you say, when party A owes party B something, party A cannot unilaterally revoke its debt without consequences. We (taxpayers) owe the pension recipients if their own company is unable to pay, so yes - equity takes a hit, but in too many cases the pension liability exceeds the equity value by a large sum.
Likewise, by face value it is wrong to go back on promises to retirees, many of whom assumed they had a fixed income guarantee for life. I agree in principle - except when their gains were ill-gotten, via fraud or collusion on the part of negotiators. Lowenstein implies in the book that this seems to be fairly common, and many are complicit; in fact, the unions acted as they did (accepting lower wages for higher benefits) because they knew the management on the other side of the table would wink and nod, as long as they could defer the cash contributions that kept the pension plans solvent. I’ll admit that this book challenged many of my political beliefs about small government and non-interventionism, but there doesn’t seem to be any other way to deal with the pension problem other than federal government involvement.
August 20th, 2008 at 10:38 pm
Travis is right on target in saying that this “should” be a private matter between the parties involved with this contract or pension. Unfortunately in another giveaway the US has agreed to come to the rescue of big corporate pension programs in which inadequete reserves or premiums have been salted away.
No organization company or government projects accurately the future costs of benefits. It is not in their best interests to do so. My opinion has always been that there should be no pensions. Everyone should be responsible for their own retirement through a 401-K or IRA. Why should those of us without a pension have to pay for our own and someone elses retirement (through added taxes).?
September 7th, 2008 at 6:19 pm
[...] Mortgages are important, they let people buy homes. And whether right or wrong, much of our financial system is structured around and levered to home price appreciation. Most markets are efficient most of the time and government intervention generally does not help, but when crucial markets cannot function, government needs to step in. I wouldn’t blink at $50 billion for Fannie/Freddie, but $50 billion for Ford (F), General Motors (GM), and Chrysler? You’ve got to be kidding me. This is almost like a temporary, backdoor bailout of the Pension Benefit Guaranty Corp., because – at least in the case of Ford and General Motors – those companies are owned not by the common stockholders, but by the pension recipients. [...]