Another Pension Headline to Make You Cringe

Courtesy of the New York Times, we have, "Pension Officers Putting Billions into Hedge Funds." This is just a bad situation getting worse. Defined benefit pension plan sponsors are in a hole and continue to dig--someone should take away the shovel. Let's be clear from the onset:

1) I do not have any major issues with defined benefit pensions per se. If corporations want to sponsor them and workers will accept them in lieu of cash wages, then so be it. My own research contradicts the widespread perception that DB pensions offer the typical worker a better retirement outcome than DC pensions, given the way people contribute to them and invest them. They also make the firm's financial statements a bit more complicated.

2) I do not object to corporations making investments in hedge funds, if that's what the shareholders want to do. It is not my preference, because the impact of the investments on the firm's financial statements might make performance evaluation more difficult. But that's a small complaint.

3) I do not object in principle to PBGC insurance, but I do object to the way it is implemented. The insurance premium is too low on average, is inadequately related to the amount of underfunding, and is completely unrelated to the investment mix of the fund's assets. That premium structure, combined with lax funding standards, is what has put the PBGC in its current predicament, even without hedge fund investments.

The cocktail comprised of equal parts (1) - (3) is a vile brew. And the interaction with the political process will be a disaster. From the article:

While most pension plans have modest stakes in hedge funds, others have invested more than 20 percent of their assets. Weyerhaeuser, the paper company, has 39 percent of its pension fund's assets in hedge funds. In Congress, there has been a push for amendments that would make it easier for hedge funds to manage even more pension money, without having to comply with the federal law that governs company pensions.

Such a bad idea. So now the PBGC won't be able to figure out whether it is offering portfolio insurance to Long Term Capital Management? Continuing with the article:

Weyerhaeuser's big position has significant benefits for the company. Accounting rules let companies factor expected pension returns into their operating income; Weyerhaeuser's hedge-fund-laden portfolio allows it to claim expected annual returns of 9.5 percent. By comparison, the 100 largest companies that sponsor pension funds predicted last year that their average long-term returns would be 8.5 percent, according to Milliman Inc., an actuarial firm.

For Weyerhaeuser, each 0.5 percent increase in the expected rate of return is worth an additional $21 million to the company's pretax income this year, according to S.E.C. filings. Weyerhaeuser did not respond to phone inquiries about its hedge fund investments, but said in S.E.C. filings that its actual pension investment returns more than justify its assumption of 9.5 percent.

The article is missing the point here--the higher the rate of return the company can assume on its pension assets, the lower the contributions it needs to make today. Note that funding rules do not require any reserve to be accumulated to protect against the extra risk associated with the higher returns, nor do PBGC insurance premiums go up due to the added risk. So to the corporation, this looks like free money.

And finally, more bad news from Congress:

In Washington, despite concerns over the health of the nation's pension system, there has been little discussion of pension plans' growing use of nontraditional investments. Even as Congress has been working to shore up the pension system and strengthen the Pension Benefit Guaranty Corporation, a provision to relax the pension law for hedge funds has been proposed.

The provision would raise the limit on how much pension money a hedge fund can handle before it is deemed a fiduciary under the pension law, which would require it to be more prudent and careful than is required under securities law and would bar some trades entirely. The provision was added to a broad pension bill in the House shortly before the Committee on Education and the Workforce approved the legislation.

Currently a financial institution becomes a pension fiduciary when more than 25 percent of its assets consist of pension money; the bill would raise that to 50 percent.

That's just sad. We should be heading in the other direction: pushing corporate DB sponsors to use a term-structure of riskless Treasuries to value and fund their liabilities. At some point, somewhere, someone is going to have to pay the true economic cost of their activities.

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Tarawa and Tora Bora

Sixty-two years ago on November 23, the Battle of Tarawa came to a close. Here is one account:

On the morning of November 23rd, the 6th Marines counted 300 Japanese bodies scattered around their positions. As it turned out, this group of Japanese had been the last large contingent on Betio with only small pockets of resistance remaining. And following a painstaking mop up of the eastern side of the island, Japanese resistance, with the exception of a few snipers who would continue to take pot shots at marines for the next several days, came to an end. For at 1:12 P.M., after 76 hours of fighting, Betio was declared 'secure'. Upon arriving at Betio that day, General Holland Smith ordered both the Stars and Stripes and the Union Jack to be raised over Betio (for Betio was to revert to the British as a Pacific trust after the war). The general then toured the island west of the airport. He noted that only seventeen Japanese had surrendered while only 129 Korean laborers had survived out of a total of 4,700 troops and construction workers.

Read the whole story. Reading the history of the exploits of the Marines and the other armed services as they reclaimed the Pacific in WWII, it is hard to fathom why the senior administration did not let them have at it in Tora Bora four years ago, when the best information available placed Osama Bin Laden in that network of mountains and caves. We would have lost an awful number of brave young men, but we would have lost them in the purpose for which they joined the service.

For more on the parallels, read this excellent post (and the NYT article to which it links) at the blog, Arms and Influence.

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Federal Brain Drain

From the Partnership for Public Service:

The loss of experienced personnel is one of the surest ways to undercut an organization's effectiveness. When this loss occurs rapidly and is concentrated in critical positions, the results can be devastating. The departure of top-level employees at the Federal Emergency Management Agency is often cited as a key reason it struggled to respond effectively to Hurricane Katrina. Similar brain drains are likely to occur across government as 44 percent of all federal workers become eligible to retire over the next five years, with 61 percent reaching eligibility four years later.

Large-scale turnover. The federal government is particularly vulnerable to the coming baby boomer retirements. While the average age of the American worker has increased over the past decade, the federal civil service has twice as many workers over age 45 (60 percent) as the private sector (31 percent). According to U.S. Office of Personnel Management (OPM) estimates, among all full-time permanent employees in the federal workforce as of October 2004, 58 percent of supervisory and 42 percent of non-supervisory workers will be eligible to retire by the end of FY 2010. In addition to these retirements, well over 200,000 federal employees are expected to resign over the next five years, resulting in a potential loss of nearly 900,000 workers.

Loss of key employees. The impact on government effectiveness will be compounded by the concentration of turnover in high-level and hard-to-staff positions with specialized skills:

• 40 percent of Department of Homeland Security managers and program analysts will reach retirement eligibility by 2009.


• 42 percent of the Senior Executive Service is projected to retire by 2010.


• 87 percent of claims assistants and examiners in the Social Security Administration and 94 percent of their administrative law judges will reach retirement eligibility by 2010.


• The Federal Aviation Administration's air traffic controller attrition rates are estimated to triple by 2012.

The references to FEMA and the Department of Homeland Security are particularly worrisome.

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Catalogue for Philanthropy, Meet Irony

The Catalogue for Philanthropy has released its new Generosity Index, and according to the updated version (not posted at the moment), New Hampshire again ranks last. This is not a post griping about my home state's ranking--what my neighbors are doing for charity is of minimal interest to me as my family makes its giving decisions. But New England states have apparently looked for alternative measures that they claim are more fair. The Boston Foundation has released some reports to this effect.

We find the Associated Press on the case, dutifully reporting on what the principal actors have to say:

"We believe that generosity is a function of how much one gives to the ability one has to give," said Martin Cohn, a spokesman for the Catalogue for Philanthropy, a Boston-based nonprofit that publishes a directory of nonprofit organizations.

That seems like a reasonable premise, but it doesn't necessarily follow that any function of those two characteristics is a good one. This seems to be the thrust of the Boston Foundation's critique:

"If everyone in Massachusetts gave 100 times as much to charity as we do today and everything else remains the same, we wouldn't get above the bottom half of the chart," said David Trueblood, a spokesman for the foundation. "And no matter what Mississippi did, it couldn't fall below 22nd or 23rd."

This seems to be an accurate assessment, conditional on what other states are doing, at least based on my quick look at the index that is posted. But here's the fun part of the article:

Cohn said he was disappointed that the Boston Foundation chose to attack the index without understanding that its purpose is to promote discussion about philanthropy and that it never sought to hang a label on any state.

And maybe that's a true statement of Cohn's intent, but I think it's a bit ridiculous to be disappointed in an interview for an article that wound up with the title, "New Hampshire Is Named Most Miserly State." A little self-awareness on the part of the AP would be a welcome addition, too.

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Holtz-Eakin to the CFR

From David Rosenbaum of the New York Times, (by way of Brad DeLong), we learn that Douglas Holtz-Eakin will leave his position as Director of the CBO to join the Council on Foreign Relations. From the CFR's press release:

November 14, 2005—Council President Richard N. Haass has named Douglas Holtz-Eakin, current director of the Congressional Budget Office (CBO), the new director of the Council’s Maurice R. Greenberg Center for Geoeconomic Studies (GEC), and the Paul A. Volcker Chair in International Economics. Founded in 2000, the GEC works to promote a better understanding among policymakers, academic specialists, and the interested public of how economic and political forces interact to influence world affairs.

“We are thrilled to have an individual of Douglas Holtz-Eakin’s stature and experience join the Council,” said Haass. “He is the ultimate scholar-practitioner, someone able to advance thinking about the connections between economic and strategic developments and to make sure that the fruits of such thinking reach policymakers, business leaders, and others with a need to understand how the world really works.”

Holtz-Eakin is known for his longstanding and broad interest in the economics of public policy. He previously served as chief economist for the president’s Council of Economic Advisers, where he also served as senior staff economist in 1989 and 1990. He was trustee professor of economics at the Maxwell School, Syracuse University, where he has served as chairman of the Department of Economics and associate director of the Center for Policy Research. “This is a once in a lifetime opportunity,” said Holtz-Eakin. “I look forward to the chance to continue my nonpartisan, high-caliber work in an organization that is not only national but has a global reach.”

Congratulations to Doug. I had been hoping that he would be offered the position of CEA Chairman, to succeed Ben Bernanke when Ben takes over at the Fed. Doug would have brought some outside credibility on budget policy along with a familiar face from the early part of the Administration to a White House that is very much in need of both.

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Dartmouth Divests, Sort Of

From this morning's press release, in the wake of a Board of Trustees meeting over the weekend (with my emphasis) added:

Based on recommendations by the board's Investment Committee and the College's Advisory Committee on Investor Responsibility (ACIR), the trustees voted to direct the College's Investment Office to avoid investments in six companies deemed to be directly complicit in what the U.S. Congress and Department of State have determined to be genocide in the Darfur region of Sudan. As a result, Dartmouth will avoid investing in ABB Ltd.; Greater Nile Petroleum Operating Company, Ltd.; PetroChina Company, Ltd.; Sudanese White Nile Petroleum Company; Petroliam Nasional Bhd (Petronas); and Sinopec Corp., all of which are involved in oil drilling or oilfield services in Sudan. The College does not currently hold stock in any of these companies.

"Divestment and screening are steps that should be taken infrequently and only in the most compelling circumstances," President James Wright said. "This decision reflects Dartmouth's concern about the Sudanese government's campaign of atrocities against civilians, which Congress and the State Department have described as genocide. This campaign has created a humanitarian crisis of major proportions in Darfur and Chad."

Board Chair William H. Neukom thanked the ACIR and the students involved in the Darfur Action Group for bringing the issue to the board's attention, and for their work in researching and analyzing the Darfur crisis and the activities of companies doing business in Sudan. Neukom said the board encouraged the administration to support additional educational programs concerning the Darfur situation.

So divestment apparently didn't require the College to actually sell a stock. That may be a first, but it does abide by the claim I made in an earlier post: for divestment to have any impact through the capital markets, it has to focus on new rather than old capital. In that post, I also suggested that the critical element in using markets to punish the offenders is to work through the product markets--to boycott the products rather than merely ownership of the assets.

It will be interesting to see where the divestment movement on campus goes from here.

See also the article in today's Dartmouth and some comments over at Joe's Dartblog.

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In Praise of Nathaniel Fick

Our honored guest this evening was more impressive than I could have imagined, particularly in his willingness to answer direct questions with honest and thoughtful answers. Here is how I introduced him:

The name Nathaniel is derived from the Hebrew phrase, “Gift of God,” and Captain Fick’s presence here on Veteran’s Day reminds us that we should be thankful for the members of our nation’s and our allies’ armed forces who have stood as the front line in the defense of liberty around the world. Many of them have been buried not far from where they made that stand.

Captain Fick served tours in both Afghanistan and Iraq, in the latter leading a platoon of an elite Recon Battalion that was at times the northernmost one in the march toward Baghdad. He is now enrolled in a dual-degree program at Harvard’s Business School and Kennedy School of Government. Tonight, he joins us to speak about “Eating Soup with a Knife: A Marine Officer's Perspective on Afghanistan and Iraq.”

It was First Lady Eleanor Roosevelt who made an observation sixty years ago that has become part of the Marine Corps lore. She said:

The Marines I have seen around the world have the cleanest bodies, the filthiest minds, the highest morale and the lowest morals of any group of animals I have
ever seen. Thank GOD for the United States Marine Corps!

Even a quick glance at the role of the military in American society shows that the life of an American soldier is full of contradictions. There is no easy way to reconcile the world’s most lethal military force with the world’s most open society. But the two are inextricably linked. The more representative is the democracy and the freer is the republic, the more it is worth fighting for.

We can do our best to bridge this gap by hearing the stories from the veterans themselves, and although some experiences are off limits, old soldiers do like to tell of their adventures. As a result, the list of fascinating books about military campaigns is long. It has just gotten one book longer and a whole generation better. I believe that Captain Fick’s One Bullet Away: The Making of a Marine Officer is destined to be the classic military memoir for our times.

What do we learn from Captain Fick’s treatise? We see example upon example of how American soldiers use force deliberately rather than indiscriminately. We come to realize that operational mistakes in war are inevitable, but when they occur, Marines on the ground have been trained to overcome them. And we feel reassured that having a Dartmouth classics major at the helm of an elite platoon in Iraq makes for not just a great read, but it helps get the mission accomplished and keep the troops alive.

We are grateful to Captain Fick for being with us today to share the insights he has gained from his unique experiences. Earlier today, he had lunch with the Rockefeller Center’s PoliTalk discussion group and students in the Dickey Center’s War and Peace Studies program. He met with some of Dartmouth’s ROTC cadets. Tonight, he will lead a session of the Rockefeller Center’s Leadership Fellows program. It’s not quite a day of training at Quantico, but it is more than enough to show Nate’s affection for his alma mater.

Ladies and Gentlemen, please welcome Captain Nathaniel Fick.

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Happy Birthday Marine Corps

The birthday of the Marine Corps is November 10, 1775, at Tun Tavern in Philadelphia. Read a brief history here.

Tomorrow, the Rockefeller Center celebrates Veteran's Day by hosting Captain Nathaniel Fick '99, author of One Bullet Away: The Making of a Marine Officer. Here is what one reviewer had to say:

Fick signed up for the Marine Corps Officer Candidates School after receiving a B.A. from Dartmouth in 1999 because he wanted a challenge. He got one. He made it through the school and eventually into the First Recon Battalion (the elite of the elite), and he served in Afghanistan and Iraq before leaving the corps as a captain. The classics major proceeds in classic form, covering his training succinctly but thoroughly and his field experience in well-narrated detail, and concluding with a short epilogue. One of the corps' attractions for him was the chance for leadership in fighting. He quickly learned that the trust between platoon and leader can make the difference between life and death for both, and he builds his combat descriptions around that principle. One Bullet Away can be recommended to anyone wanting a frontline description of this country's recent combat theaters and to anyone seeking a personal account of the contemporary Marine Corps. Marines are people, and Captain Fick puts proof of it on paper. Frieda Murray
Copyright © American Library Association. All rights reserved

Here's an article from the local paper, previewing his talk last week. I'll post more about his visit over the weekend.

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Gas Tax Redux

A few months ago, I posted a couple of times on my preference for a gas tax compared to the CAFE standards. Today, I happened across two papers by Professor Jayanta Sen that are, at the very least, quite provocative. They focus on ways that the U.S. could make itself better off by (in the first paper) taxing an imported good that has a relatively inelastic supply and by (in the second paper) forming an international cartel of importing countries, to offset the market power of OPEC. Here are the abstracts, with links to the full papers at SSRN:

A Tax to Save the US $100 billion a Year and Solve Global Warming?

The position of the current US administration is that moves to reduce consumption of gas (like the Kyoto Treaty), will harm the US economy. On the contrary I show that a tax on crude would transfer wealth of $100+ billion a year from foreign governments to the US consumers, thus providing a major economic stimulus to the economy while at the same time reducing consumption of gas. Over the past decade crude oil prices have increased from $12 (1998) to over $65 a barrel. The amount of net oil exported to [by] importing countries is about 28 million barrels a day. With 1998 prices as a reference, this translates to an additional wealth transfer of $1.32 billion a day, or $480 billion a year. If the supply of oil is inelastic, then an increase in tax by the governments of importing countries would push up oil prices and decrease the wealth transfer. For a range of demand and supply elasticities that I study, the wealth transfer savings for the United States (which has about one-third of global oil imports) should be in the range of $108 to $152 billion a year. The new tax revenues to the US government from tax on imported oil should be $160 billion to $250 billion a year. This money can be returned to the US consumers as a lump sum, thus providing the economic stimulus. The reduction in crude oil consumption ranges from 7.13% to 10.30% while providing a stimulus (defined as additional purchasing power to consumers) to the economy of $95 billion to $133 billion a year.

Oil at $10 a Barrel and $200 Billion Savings a Year for the U.S.: Benefits to the U.S. from a Buyer's Cartel

In the international oil market, the producers are cartelized, whereas the buyers are fragmented. As standard economic analysis suggests, this results in a greater share of the surplus for the producers. The cost of production for a barrel of oil to the producers is approximately $8, whereas the recent price is $65. A buyer's cartel could be formed by the governments of the major oil importing countries like the U.S., Japan, Germany, China, India etc. All oil sold in these countries would have to pass through the buyer's cartel. The buyer's cartel could negotiate a price with the oil exporting countries, say $10 a barrel (which should be a sufficient markup over production costs). After purchasing oil from the producing countries, the buyer's cartel would release the oil in the market and let demand determine the price. If current demand conditions remain unchanged then the price would still remain at $65. However, this would reduce the effective price to the citizens of the importing countries to $10 a barrel as their governments would earn a profit of $55, which could be used to reduce taxes or pay for programs like Social Security. For the U.S. (which imports 10 million barrels a day) the savings would be $55 x 10 million x 365 = $200.75 billion a year.

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And Now from Argentina

I'll confess that I haven't been following the details of the Summit of the Americas, now underway in Mar De Plata, Argentina. I also haven't figured out why economic growth and higher standards of living stubbornly refuse to arrive in most Latin American countries, despite their abundance of resources and proximity to the largest market in the world.

But I'd be pretty surprised if Chavez, Maradona, Esquivel, or these fellows pictured above had a better plan for starting the process than ratifying the Free Trade Agreement of the Americas.

Read all about this cast of characters here.

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More on Alito

I came across two interesting pieces about the Alito nomination that I think are worth a recommendation.

The first is by John Hinderaker at Powerline, addressing Alito's dissent in the Casey decision and what it may or may not tell us about what type of Justice he would be:

If you are an abortion opponent and read Alito's dissent, you will likely be disappointed. It is technical and dispassionate; the issue on which Alito differed with his colleagues was whether the notification requirement constituted an "undue burden" on the right to abortion, under the Supreme Court's jurisprudence as it then existed. The opinion conveys no hint of Alito's own views on the topic of abortion, or even of his opinion as to how (if at all) the Constitution should bear on the subject of abortion. Rather, and somewhat ironically, his dissent is an effort to follow the twists and turns of Justice O'Connor's various opinions on the topic of "undue burden," and apply them to the record before him. The most one can fairly say, I think, is that Judge Alito's dissent in Casey does not evince any reflexive hostility to restrictions on abortion, and does reflect what most conservatives would regard as an appropriate deference to the legislature's role as arbiter of public policy. Anyone looking for the sort of fiery language that sometimes enlivens, say, Janice Rogers Brown's opinions, will be disappointed.

A judge on the Court of Appeals, like a District Court judge, takes Supreme Court jurisprudence as he finds it. His opinion as to whether the Supreme Court's rulings are right or wrong is entirely irrelevant. His duty is to apply the relevant Supreme Court decisions to the case before him, as best he can. Thus, in an area like abortion where Supreme Court precedent is relatively plentiful, reading an appellate judge's opinions is like reading tea leaves: one is unlikely to pick up more than obscure hints as to the judge's own views.

The other piece is by Norman Ornstein of AEI, in Roll Call, writing about Alito in comparison to Chief Justice Roberts:

What is the difference? Roberts respects Congress and its constitutional primacy; Alito shows serious signs that he does not. Some time ago, Jeffrey Rosen, a superb legal scholar, pointed out Alito’s dissent in a 1996 decision upholding the constitutionality of a law that banned the possession of machine guns. We are not talking handguns, rifles or even assault weapons. We’re talking machine guns.

Congress had passed the law in a reasonable and deliberate fashion. A genuine practitioner of judicial restraint would have allowed them a wide enough berth to do so. Alito’s colleagues did just that. But Alito used his own logic to call for its overturn, arguing that the possession of machine guns by private individuals had no economic activity associated with it, and that no real evidence existed that private possession of guns increased crime in a way that affected commerce--and thus Congress had no right to regulate it. That kind of judicial reasoning often is referred to as reflecting the “Constitution in Exile.” Whatever it is, it’s not judicial restraint.

Roberts is a very conservative guy, and a strict constructionist--one who means it. He understands that Congress is the branch the framers set up in Article I, Section 1 of the Constitution. It is not coincidence that Article 1 is twice as long as Article II, which created the executive branch, and almost four times as long as Article III, which established the judiciary. Judges should bend over doubly and triply backward before overturning a Congressional statute, especially if it is clear that Congress acted carefully and deliberatively.

I share much of this view of legislative primacy in the Constitution (it is reflected in my disagreements with Bibamus in the last post's comments, for example). I would like to see more examples from Alito's rulings to figure out how much of an issue this should be in his confirmation.

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Alito's Way

I'll join the chorus of people right of center who are pleased that the Miers nomination was withdrawn and that the President nominated Judge Alito for associate justice. Ann Althouse has been making several excellent posts, including one that links to this AP story. My own view on the Miers nomination was that the President tried to deliver a solid conservative vote in the way that has become customary in the post-Bork era--without having to reveal the nominee's judicial philosophy during the confirmation process.

Admirably, and to the benefit of the country, when the conservative base didn't seem to get the message, the President responded by sending it in an unmistakable way, with a judge with solid conservative and intellectual credentials and over a decade of judicial opinions. Let's call that Alito's way. Since these Supreme Court confirmations seem to reduce to the abortion issue, here (quoting from the article) is why the President's message to his base is so clear:

Among his noteworthy opinions was his lone dissent in the 1991 case of Planned Parenthood v. Casey, in which the 3rd Circuit struck down a Pennsylvania law that included a provision requiring women seeking abortions to notify their spouses.

"The Pennsylvania legislature could have rationally believed that some married women are initially inclined to obtain an abortion without their husbands' knowledge because of perceived problems — such as economic constraints, future plans, or the husbands' previously expressed opposition — that may be obviated by discussion prior to the abortion," Alito wrote.

The Supreme Court, in a 6-3 ruling, struck down the spousal notification, but Chief Justice William Rehnquist quoted from Alito's opinion in his dissent.

That's clarity.

I have to say that I am sympathetic to the reasoning behind Alito's opinion. I firmly believe that no government should have the power to compel a woman to endure childbirth if she decides she doesn't want to. I have wrestled with the competing claims--that one wins. But laws regarding notification don't presume that power. They may have the outcome that an abortion is avoided. If the state legislators in Pennsylvania, on behalf of their constituents, have decided that avoiding that outcome trumps other social considerations, then they should by all means enact such a spousal notification law. This is an issue that should be resolved in Harrisburg, not Washington, DC.

And my belief that with a Justice Alito on the Supreme Court, more issues will be resolved by legislatures rather than courts, is why I hope Alito is confirmed.

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A Place Somewhere

In a post regarding "The End of Pensions," Brad DeLong notes:

I think Andrew misses an additional important aspect of the situation. When pension funds (and health benefit programs) become large relative to the size of the firm, the retired and the sick join the bondholders and the stockholders as claimants on the firm's cash flow, but the retired and the sick don't have any place in the firm's corporate governance structure, and claimants on a firm's cash flow should have a place somewhere.

I agree. Last April, I suggested that DB plan participants be moved ahead of all other unsecured claimants in bankruptcy, in the context of how to protect current and past workers if the PBGC were eliminated. I don't know if that's enough, but it is a start, and I would equally well recommend it for all deferred compensation claims of rank-and-file workers, including retiree health benefits.

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The End of Pensions

Roger Lowenstein is an interesting contributor the New York Times magazine. In Sunday's article, with the same title as this post, he investigates the status of the employer-provided pension system, from both private and state- and local-government employers. On balance, I suggest reading the whole thing, though I do disagree with several of the conclusions he draws along the way. I explained my views on pension insurance in April, and I still have those views. In fact, this passage is directly relevant, and the thrust of it is missing from Lowenstein's article:

Defined benefit (DB) pension plans pay out benefits to retirees (and often survivors and occasionally the disabled) based on formulas that may increase with age, years of service, and earnings. The obligations look like the payment stream from a bond. In fact, a pension sponsor with a steady aggregate earnings profile and employee hiring and turnover could fully fund the liabilities and insure against risk with a portfolio heavily weighted toward bonds.

There is therefore no need for formal pension insurance. The government already provides the means for any conscientious pension sponsor to (nearly) fully insure. Every defined benefit pension plan has the opportunity to invest in Treasuries, to avoid the rate-of-return risk inherent in every other investment opportunity. With Treasuries [maturities] of a long enough maturity, the pension sponsor can even choose Treasuries to match the duration of its fund to those of its obligations, so that even shifts in the riskless rate of return do not affect its pension plan's financial position.

If you wanted to figure out what the cost of funding a pension plan with a given formula is, you would need to calculate the required annual contribution under the assumption that the pension plan sponsor were following the duration-matched Treasury investment strategy. The federal government shares the cost of this investment by allowing the pension fund to accumulate at the pre-tax rather than the post-tax return. (It also defers the employee's tax liability on compensation taken through a pension plan.)

Any deviation from this funding strategy should be examined with suspicion. The biggest deviation is to invest some of the fund in equities. This allows pension plan sponsors to assume a higher average return on the plan's assets and thus reduce contributions required to support it. This strategy is okay, as long as the pension fund is small relative to the firm's assets, so that the firm can make up the shortfall if the fund's asset values drop. As the article points out, we are learning that this isn't necessarily the case with a lot of the airline, steel, and auto companies. Almost by definition, it is not the case when a company approaches bankruptcy.

The problem is nicely illustrated by this passage from Lowenstein's article:

G.M. and other industrial companies, along with their unions, have harshly attacked the Bush pension proposal, which would force many old-economy-type corporations to put more money into their pension funds just when their basic businesses are hurting.

Well, no kidding. The industrial companies and their unions that encouraged them have no one to blame but themselves for their current troubles. They used their pension funds as speculative investment vehicles, and the combination of low interest rates, sagging stock market values, and optimistic funding assumptions put them in this position. Who but their shareholders and workers should be asked to make those additional contributions?

The government has decided through ERISA that it will permit the investment of pension funds in equities and subject plan sponsors to a set of minimum funding rules and require them to purchase (vastly underpriced) PBGC insurance. This is a bad strategy, in my view, because of the numerous ways to game it, which Lowenstein's article discusses in good detail. It creates the appearance that someone else is responsible for these companies, and that may ultimately prove to be the reality, with the taxpayers being asked to step in to make up the shortfall.

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