All Americans should be concerned about three separate, but interrelated, retirement crises: the impending meltdown in multiemployer pension plans; the roughly 50% of private-sector workers not in a workplace retirement plan; and the enormous unfunded liabilities associated with public pension plans.
Fortunately, the country can solve these problems and simultaneously create large pools of capital needed for certain infrastructure projects. Once created, this capital can address infrastructure needs in this country and, as a matter of national security, compete with China, which has aggressively moved to acquire long-term leases of vital Mediterranean seaports, such as Piraeus in Greece.
Unfortunately, congressional responses so far appear headed toward continued stalemate.
In response to the first crisis, Congress created a Joint Select Committee on Solvency of Multiemployer Pension Plans, co-chaired by Sens. Orrin Hatch, R-Utah, and Sherrod Brown, D-Ohio, and with 16 members equally divided between the two parties and the two legislative bodies. The rules creating the joint committee specify that if at least five members of each party support a piece of legislation, then it will automatically receive a vote in both Houses. The committee has done an admirable job soliciting input from stakeholders and the public, holding multiple open hearings. However, the only plan emerging so far is a massive loan program embodied in HR 4444 and SB 2147, both sponsored only by Democrats. This legislation, known as the Butch Lewis Act, would create an entity to issue bonds and use the proceeds to make low-interest loans to troubled multiemployer plans to pay retiree benefits. The loan program envisions interest-only payments for 29 years, followed by a balloon repayment. Needless to say, the loans won't solve many, if any, of the existing problems with each existing plan. Given the existing trouble, how many employers and plans will be able to repay the loans?
As to the second crisis, recent news stories have reported on discussions in Congress, but mainly among Republicans, to tinker with the 401(k) model by making it easier for small companies to offer such plans and for workers to create an annuity upon retirement with whatever each worker has managed to save. Because there is no risk-pooling, these ideas still require each worker to save as if he or she will live to be 100. Few Americans are able to save such sums.
In the meantime, no one seems to know what to do about public pension liability, which produces shrill, daily news coverage in states such as Illinois, New Jersey, California, Kentucky and Connecticut. Likewise, the civil engineers keep reminding us that our D-plus infrastructure needs trillions of dollars.
Here's one way to address all of these problems. First, we need to recognize that pension funds, not a 401(k) or an individual retirement account, can pool large amounts of capital and then invest it. Second, pension plans provide enormous advantages over atomized savings plans because they pool risks, cut costs and provide lifetime retirement income. Third, in contrast to complaints from some quarters that defined benefit plans are not sustainable, we should ask whether there are successful defined benefit plans and what lessons can be learned from them.
Answers to the last two questions can be found in two church plans, the Wisconsin Retirement System, the Ontario Teachers' Pension Plan and the Province of New Brunswick Public Service Pension Plan. Each of these plans uses a discount rate ranging from the cost of an annuity (3.17% in 2017 for the Presbyterian Church U.S.A.) to a blended rate of 5.5% for Wisconsin. Even with such discount rates, they maintain a funded status ranging from 100% to 120% (or higher). They have reached compromises between those who insist that public plans can use their expected rates of return to compute liabilities and the financial economists who insist just as fervently that only a risk-adjusted rate is appropriate (meaning something close to risk-free).
The plans achieve these results by underpromising and overdelivering on the benefits side and with discipline on the investing side. The two churches — the Presbyterian and the Christian Church (Disciples of Christ) — contribute 11% of ministers' compensation to their pension plans, with members accruing annual pension credits of 1.25% and 1.5% of compensation, respectively. If the plans maintain a funded status above at least 115%, the trustees can grant special apportionments to members and retirees. Over time, those additions have far outpaced Social Security cost-of-living allowances, as illustrated: