We’ve paid a lot of attention at VM to public-sector pensions, where unfunded liabilities at the state and local level are forcing governments to choose between honoring promises to retired workers and providing basic services to citizens. But the private sector, despite having to live up to tighter accounting standards than the ones politicians set for themselves, is also running into trouble.
The Fed is trying to stimulate economic growth by keeping interest rates at historically low levels. The idea is that if money is cheap, companies will go out there and invest. But unfortunately there is a side effect. Low interest rates make it harder for companies to keep their pension programs funded at a legally acceptable standard. As a result, dozens of major American companies are having to shovel billions of dollars into pension funds, dramatically reducing their profit margins and the resources available to invest in expanding their activities and creating new jobs. The WSJ reports:
Ford Motor Co. expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars.
The nation’s second-largest auto maker is one of a who’s who of U.S. companies pouring cash into pension plans now being battered by record low interest rates. Verizon Communications Inc. contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies’ sensitivity to this issue—BoeingCo. now reports “core earnings” to separate out pension expenses.
It’s yet another reason why the massive, record breaking stimulus of the past five years, combined with the most aggressive monetary policy in the history of central banking, has yet to launch a vigorous economic recovery. It’s also yet another example of a massive transfer of wealth and income from the current generation of workers to the Boomers and the Greatest Generation.
Young workers are getting screwed in two big ways. First, they are getting decidedly less generous pensions than their elders. Almost everywhere new hires don’t get the same pension terms that used to be routine. Second, the transfer of profits into pension funds means that new jobs aren’t being created for the young workers entering the job force.
America is eating its young. This is always a bad idea.