OPINION:
“In the long run, we are all dead.” So quipped the famous economist John Maynard Keynes. He didn’t mean policymakers should ignore the long-term consequences of their actions, yet that’s what many politicians have taken from this joke.
The pols boil the idea down to, “Never deal with a problem today if you can ignore it until tomorrow, or next year, or 30 years from now.” Major problems today that have received this See No Evil treatment range widely, from the Social Security shortfall, to unmet needs for floodwalls, to the inevitable results in coming decades of ceding vast swaths of the world to Russia, China, and Islamofascism.
We’ve had generations of political leaders who couldn’t care less about challenges that won’t come to a crisis till they’re out of office. The same was true of business people who for decades bought “labor peace” — an absence of strikes and other unrest — with sweet deals for unions, at great future expense to their companies. It seemed like a good idea at the time.
General Motors and the United Auto Workers agreed to the “Treaty of Detroit,” a no-strike deal covering 1950 to 1955, with a provision for a pension worth about $1,200 a month in today’s money. GM CEO Alfred P. Sloan wrote in his memoir that the deal “represented an effort to introduce an element of reason, and of predictability” into relations with the UAW. That’s true, if you only looked at the next few years.
The problem with the long run is that eventually we get there. That mayor or governor or CEO who negotiated wildly generous pension deals with unions 20 or 40 years ago may now be sunning himself on a beach in Florida or be six feet under. Likewise, the union officials on the other side of the bargaining table. But we and our children and grandchildren will live with what they did.
Even if the negotiators on both sides of the table are conscientious, trouble can arise from the human tendency to discount the possibility of catastrophic failure. Did Southern politicians in 1860 realistically consider the consequences of secession — defeat and century-long impoverishment? Do smokers think seriously about smoking’s health effects? Do tailgating drivers carefully calculate reaction time and braking distance to determine the risk they face?
And some calculations simply can’t be made. As management guru Peter Drucker said in a 1950 Harper’s Magazine article, a pension plan is a “mirage.” He criticized the GM/UAW pension deal, noting that no business lasts forever, yet, “For such a plan to give real security, the financial strength of the company and its economic success must be reasonably secure for the next 40 years. But is there any one companyor any one industry whose future can be predicted with certainty for even 10 years ahead?” Pension plans such as those being propos”offer no more security against the big bad wolf of old age than the little piggy’s house of straw.”
One solution is to create an entity that insures pensions. But who insures the insurer? If there’s a significant economic downtown — if pensions in general are based on overly optimistic assumptions — what’s to prevent the whole system from cascading down?
The federal government has an agency, the Pension Benefit Guaranty Corporation, that insures pensions. As PBGC supporters note, no one wants a repeat of the infamous Studebaker case, in which a carmaker increased its promised benefits to retirees four times in the ’50s and early ’60s, then went broke with workers losing about 85 percent of their benefits. The PBGC was created to make sure that never happens again.
But the PBGC’s existence creates “moral hazard,” defined as “a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.” As we’ve seen in the Savings and Loan crisis of the 1980s, the financial crisis of 2008, and many other times, the prospect of a bailout encourages risky behavior.
The PBGC insures both single-employer and multiemployer pensions (the former cover 34 million people in almost 29,000 plans, while the latter cover almost 10 million people in more than 1,500 plans). Although the single-employer category is larger, the multiemployer category — mostly pensions tied to labor unions — presents the larger problem.
As Carl F. Horowitz writes in an upcoming issue of the Capital Research Center’s Labor Watch, “It’s the multiemployer situation that keeps PBGC awake at night.” As of Sept. 30, 2014, these pensions had expected liabilities outpacing assets so badly that it “produced a whopping combined deficit of $42.5 billion, a more than fivefold increase from the gap of a year earlier. By Sept. 30, 2015, the deficit had risen to $52.3 billion.”
Liabilities at the Teamsters’ Central States Pension Fund alone exceed assets by $17.5 billion, with the shortfall increasing by $2 billion a year. This alone may be enough to trigger a collapse of the PBGC.
But don’t worry. That probably won’t happen for 10 or 15 years. You know: the long run, when we’re all dead.
• Terrence Scanlon is president of the Capital Research Center in Washington, DC.
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