Pension politics

By Felix Salmon
February 13, 2014
David Sirota has a very important scoop today: the PBS series “Pension Peril” has secretly been funded by John Arnold, a billionaire powerbroker with an aggressively anti-pensions political agenda.

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David Sirota has a very important scoop today: the PBS series “Pension Peril” has secretly* been funded by John Arnold, a billionaire powerbroker with an aggressively anti-pensions political agenda. This looks very bad for PBS — but it’s also bad for Arnold, who generally gets glowing press, and who would seem to have no good reason to have insisted on secrecy when writing the $3.5 million check that made the series possible.

The PBS series in question seems to fall uncritically into line with the beliefs of Arnold and other Very Serious People — that pension liabilities are a huge problem, and that the only way to fix them is to reduce the amount that pensioners get paid. But of course it’s not nearly as simple as that.

The John Arnolds of this world tend to assume that three things are always true:

  • Defined-contribution pensions are better than defined-benefit pensions;
  • Funded pensions are better than unfunded pensions;
  • Individual pensions are better than group pensions.

It’s easy to see why people think this way. If there’s no money, then what assurance do you have — really — that you’ll be paid? If you have to share your pension with others, how can you be sure that they won’t end up with more than their fair share? Isn’t it better to just keep all your money for yourself, and make sure to save enough that you can live well in retirement?

This is a pretty libertarian, every-man-for-himself view of retirement: it makes few concessions to the idea that there’s a societal obligation to the elderly, or that groups can achieve more together than they can individually. At heart, it’s a view which benefits people like John Arnold, who pay a lot of taxes, at the expense of the poorest members of society, who might take out more than they put in. And, of course, it’s a view which benefits successful investors, like John Arnold, over schmucks who have no idea how to best invest their paltry 401(k) funds.

In reality, big pooled pension funds are much more efficient — and generate much higher returns — than anything an individual is likely to be able to manage. And in the specific realm of public finance, the case for group-funded defined-benefit schemes is even stronger. That’s because public servants — police officers, elementary school teachers, you name it — tend to have much longer tenure at their jobs than, say, hot-shot fund managers. They are also willing to work for relatively low salaries precisely because they know that their pension benefits are good: that they don’t need to worry about how they’re going to make ends meet in retirement. That peace of mind is hugely valuable, and rarely factors in to the calculations of the pension opponents, who seem to think that worrying about your individual retirement investments is a good thing.

Around the world, indeed, in places like Hungary and Poland, the roll-your-own pension plan model is being, reversed, and governments are reverting to the “trust us” model. The mechanism has been particularly drastic in Poland, where the government recently confiscated some 150bn zlotys (€36bn) of Polish government bonds and government-backed securities, seizing them from private pension-fund managers. The Poles then cancelled those bonds entirely, which had the effect of reducing Poland’s national debt overnight, by a substantial 8 percentage points. Given debt-ceiling rules, that gives the Polish government a lot more room to run deficits than it had before. In return, the Poles who were counting on the retirement income which was going to be generated by those bonds are just going to have to make do with a standard pay-as-you-go system, where they’ll receive a state pension which is paid for out of general tax revenues.

This is not as dreadful as it necessarily looks at first blush. Governments can always find a way to reduce pensioners’ incomes, through taxes or any other means. And now, at least, those incomes will be less tied to the vagaries of market returns. Indeed, Poland isn’t all that far from the United States: although we do put a lot of government bonds into the Social Security trust fund, it’s entirely up to the government how much money pensioners take out of that fund. It can be less than the fund is earning, or more: the decision is political, and doesn’t bear much relation to the income being generated, or even whether the trust fund has any money in it at all.

Still, the Polish move is a pretty bad one. The pension funds still exist, but now they’ve lost most of their fixed-income component, so they’ve become a lot more volatile. The playing around with the national-debt figures is a silly, and dangerous, trick. And without strong domestic pension funds, Poland has now lost an important source of investment flows — the kind of money that helps to keep an economy innovative and productive.

So pension funds are, generally, a good thing. And when you have a pension fund, it’s a good idea to fund it well. But they’re not a panacea, and in general the answer to the problem of underfunded pensions is just to fund them better, rather than to start cutting benefits.

The John Arnolds of this world should remember one thing: it’s just as easy to tax retirement funds as it is to cut defined pension benefits. If America really needs to start taking money from future retirees, then maybe the politicians will start looking at a much juicier target — the massive tax expenditures being spent on things like IRAs and 401(k) plans. Those tax breaks are not fair — they benefit the rich much more than the poor. Maybe the sensible thing to do is to take those tax expenditures, and use them instead to shore up distressed public pension plans. If indeed those plans are in as much peril as John Arnold says they are.

*Update: Leila Walsh, the director of communications at the Laura and John Arnold Foundation (which also responded to Sirota’s article), emails:

You stated that the “PBS series ‘Pension Peril’ has secretly been funded by John Arnold.” This statement is entirely inaccurate. Information about the grant is available on the LJAF website. We have nothing to hide and have publicly disclosed the amount, term, and purpose of the grant.

WNET also issued a statement this afternoon that says, “The Arnold Foundation is a supporter of this initiative, which has been clearly disclosed on the three PBS NewsHour Weekend broadcasts (produced by WNET) that have included segments funded through this project.”

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

This article seems to be conflating a number of things.
1) PBS’s poor disclosure policies
2) Poland stealing from their citizens a la Argentina
3) Some rich dude who has no use for a 401k or pension arguing against the current system

You can reasonably argue DC vs. DB plans. I don’t think there’s much argument on funded being better than unfunded pensions (although it’s written like this is wrong??).

Maybe this should have just been an article on why group pensions are better than individual. The rest is all a mishmash that just seems to say “I don’t like John Arnold”.

Posted by C.D. | Report as abusive

PBS did do a good one a couple years ago and it’s still’s more about 401k accounts…he started checking his at the end..focus on fees here. he-retirement-game-401k-complexities.htm l

Posted by TheMedicalQuack | Report as abusive

You can be sure that people WILL game the system to grab as much of the pie as they can. You can be sure that the state legislature will steal from the young to boost the pensions of the old. You can be sure that the management positions will be given away as a political sinecure, with funds directed towards campaign contributors. Corruption at its best. You can be sure that having squandered the pension fund, voters will find a way to renege on the promises you paid for out of your own pocket.

If the funds aren’t in an account with your name on it, you don’t have any ownership of the money. Somebody profits from your savings, but it likely won’t be you.

Posted by TFF | Report as abusive

>it’s just as easy to tax retirement funds as it is to cut defined pension benefits<

I’m pretty sure Fidelity, Schwab, all rich people who have 401ks, etc have better lobbyists that Joe Shmoe pensioner.

Posted by dtc | Report as abusive

What DTC said.

Fundamentally there are three issues in play:

(1) In a defined-benefit pension plan, the pension guarantor carries the performance risk. If the guarantee can be trusted, this is an implicit subsidy. If the guarantee cannot be trusted, it is not truly defined-benefit. What would a private party charge to guarantee 8%+ investment returns on a portfolio?

(2) In a pension plan, the longevity risk is pooled. You can annuitize a portfolio in a private transaction, but the implied returns are abysmal. Perhaps the government could offer an alternative?

(3) Management fees are ridiculous on a 401k, largely because of the red tape required by the authorizing legislation. You could implement defined-contribution retirement systems far more cheaply if you cared. And if Fidelity/Schwab weren’t paying those lobbyists.

Posted by TFF | Report as abusive

Isn’t this a sharp turnaround for this blogger? It was only last month Felix was lambasting the NYTimes for calling into question the objectivity of reliably “pro-business” academics. (Though the NYTimes didn’t go that far.) 14/01/08/nyt-vs-pirrong-and-irwin-david- kocieniewski-responds/

But, apparently, now the source of funding is quite important to assessing the objectivity…

Posted by Trollmes | Report as abusive

If a swindler, a tax cheat, a bad tipper, and someone who just throws their recyclables in the trash got together to secretly help fund the PBS special in question would the pension math change? Would the aggressive return assumptions be easier to meet? Would the bad laws that allow perpetual under funding go away?

…an attack on the messenger is the only rebuttal when the plain truth isn’t what you wish it to be.

1 Workers will bear more of the burden of funding their retirements than they did in the past.

2 This burden will be much larger than it was previously as the last 5 years of life expectancy means a 50% longer retirement.

3 Workers will need to fund this much larger nest egg with investments that have almost no chance to provide the returns achieved in the past.

Posted by y2kurtus | Report as abusive

Being able to take care of yourself is ultimately the only security we have. Far too many defined benefit programs are underfunded with the government’s implicit (via regulation or lack thereof) agreement and those who fail are “saved by the PBGC, itself an insolvent government guarantee.

Social Security, another leg supporting retirement is plagued by a decreasing number of workers and an increasing number of pensioners. You don’t need to be an actuary to know the system is not sustainable in its present form for those with years to retirement.

401Ks are flawed vehicles, and not just for the reasons you note. More needs to be done to see that companies offer better choices and to educate employees on their choices, but 401Ks are also the only vehicle where employees control their own money.

Government’s want control so educating workers on smart investing is not what they want to do (even if they could). Nonetheless I think of my mother, a woman with only a high school education who never worked and husband who never made more than a blue collar wage working for a company with no pension program. She made sure the family never went into debt and always saved. When she died last year, at age 97, she was proud to have accumulated enough to have a small estate to distribute to here children and grandchildren.

Ultimately the problem is not the pensions, but the choices we make throughout our lives. No one today seems to be able to live like my parents (just ask me) but living a disciplined financial life greatly reduces the chances of poverty in retirement.

Posted by OregonJon | Report as abusive

Here are the facts:

1) DB pension funding accounting rules are more liberal than life insurance accounting rules.

2) Pension actuaries have long assumed investment earnings rates well in excess of what can be achieved.

3) Longevity has long been increasing for those that buy annuities, and take pensions.

4) Average people are lousy investment managers, they panic and get greedy at the wrong times. Pension asset managers aren’t great, but they largely avoid panic & greed.

5) The PBGC is horribly underfunded, as are most municipal pension plans.

6) Overseas, things can be bad, like Poland, Argentina, India, etc. In those cases being on your own is better. Our custodial systems here are pretty good. (Please ignore MF Global.)

7) Fees are generally too high in asset management, and most people should go for passive management, or a few clever value investors.

8 ) Hedge funds, commodities, and private equity are not the answer. Analyze the returns on an dollar-weighted [IRR] basis and they will be much lower than the illustrated buy & hold returns.

Summary: in general, you are right, Felix, but it is a question of cost to the corporations funding the DB plans. I think the cost is worth it, but maybe it needs to be shared with workers, taking pre-tax dollars to buy more future DB plan payments. How many people would do that? Sadly, not many.

Posted by DavidMerkel | Report as abusive

Two more notes:

9) Highly paid workers lose out in bankruptcy. Multi-employer trusts r prone to a run on the pension plan if a major employer goes BK.

10) the average person is at best a budgeter, and not an investor. That said, buying inflation insurance is very expensive, if you can achieve it at all.

Posted by DavidMerkel | Report as abusive

Sometimes the answer to the problem of a pension AuM shortfall is to allow/encourage pensions to invest more aggressively. If a pension’s managers are working within politically set guidelines, with rules that for example block them from investing in various forms of ‘vice,’ then THAT is the problem.

Posted by Christofurio | Report as abusive

Sometimes the answer to the problem of a pension AuM shortfall is to allow/encourage pensions to invest more aggressively. If a pension’s managers are working within politically set guidelines, with rules that for example block them from investing in various forms of ‘vice,’ then THAT is the problem.

Posted by Christofurio | Report as abusive

“Sometimes the answer to the problem of a pension AuM shortfall is to allow/encourage pensions to invest more aggressively. If a pension’s managers are working within politically set guidelines, with rules that for example block them from investing in various forms of ‘vice,’ then THAT is the problem.”

Freeing up vice restrictions isn’t going to get you an extra 1% much less and extra 4%.

Pensions as currently operated in America are incredibly stupid and the people relying on them fools.

Posted by QCIC | Report as abusive

Felix, please review the salaries of your typical California police officer or firefighter and then get back to me about how they are working for “relatively lower salaries”. Feel free to pick any city or county at random:

Our cities and counties are being sucked dry by diverting city and county general funds to pay for the 100K plus retirements of public workers. 100K plus annual payout, with inflation protection, is a TYPICAL police or fire pension for someone retiring today in California. But, please, do not take my work for it. Look it up for yourself.

Posted by Barrelrider | Report as abusive


Please review the salaries of typical California city and county workers and then get back to me how they are working for “relatively low salaries”:

It may be instructive for you to then review typical pensions for workers that have retired in the last few years are receiving (same website as above).

Then you should study how cities and counties throughout the state are increasingly moving money from their general funds to pay for these 6 figure pensions and are thus forced to cut library hours, road maintenance, and safety personnel.

You may not like the messenger here in Mr. Arnold. But, please educate yourself on what is really going on with public workers’ salaries and pensions. After many years of public unions attempting to keep this information secret it is now in the public domain.

Posted by apatakiright | Report as abusive

401k’s and retirement planning in general in the US is a ticking time bomb – which benefits financial companies.

If you want to read some super scary and super hilarious retirement findings, check out this paper: eaching/BADM%20791/Week%209%20Behavioral %20Microeconomics/Benartzi-Thaler%20Bias ed%20Savings%20Behavior.pdf

Things you might learn:
1. People trust butchers (meat) for financial advice.
2. Companies love to match 401k in company stock. Which sounds awful until you learn that…
3. People think stock in their own company is a great idea. (Enron? What’s that?)
4. Financial education does not help.

Posted by dtc | Report as abusive

As long term rates (and so the discount rate) rise, much of the appearance of underfunding will go away. You are already seeing this with corporate pension funds. Yes, some public pension funds are in trouble, but the situation is not as dire as it appears.

Posted by pereubu77 | Report as abusive

“People trust butchers (meat) for financial advice.”

Not surprising. You can’t trust your typical financial advisor for financial advice, as the only thing they care about is churning your assets to generate commissions. There may be a few honest (fee-for-service) advisors around, but the dishonest ones are far more aggressive and give the business a bad name.

Pay somebody for selling you overpriced financial products and he will sell you overpriced financial products. Pay somebody for meat and he might give you good advice for free.

Posted by TFF | Report as abusive

“poorest members of society, who might take out more than they put in”

It is dishonest to use a word like “might” in a sentence like this. You “might” be hit by lightening; or you “might” win $100 million in the lottery; or John Arnolds “might” go and sell all his possessions and give the money to the poor (Matthew 19:21) – ie highly unlikely possibilities compared to the almost certainty that the poorest members of society will take out more than they put in. And then there is this: “the United States: although we do put a lot of government bonds into the Social Security trust fund”.
Here is what Social Security says about the SS trust funds that receive SS taxes: .html

“How are the trust funds invested?”

“By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds.”

“What happens to the taxes that go into the trust funds?”

“Tax income is deposited on a daily basis and is invested in “special-issue” securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.”

In other words, SS Trust money is treated just like ordinary tax revenue except that the government promises to repay these monies plus interest to the SS as needed. These trust funds are government debt obligations and can only be repaid by raising taxes (unlikely) or increasing overall government deficits. ndex.html?story=/mwt/feature/2011/04/02/ late_in_life_excerpt

“the first recipient of Social Security, a bookkeeper named Ida May Fuller, started to collect her checks in 1940. She proceeded to live another thirty-five years, long enough to witness the ascent and disbanding of the Beatles and the landing of the man on the moon. For her total $24.75 contribution, she received $22,888.92 in benefits”

Posted by walstir | Report as abusive