Here’s another article commenting on the impact of aging Boomers on the economy without any new insights on how to offset the dislocations of that impact.
I include it here because of the data on Boomer retirement. Authors Kenneth S. Baer and B. Liberman question the rule of thumb that the economy needs to create 140,000 new jobs every month just to keep up with population growth. They say that Boomers are retiring faster (200,000/month) than in previous years. Policy makers, they say, should not think that stimulus spending is ineffective just because new jobs aren’t growing as fast as they used to. They claim the “new normal” is 100,000 jobs/month and that growth of ‘only’ 150,000/month has been enough to drop the unemployment rate from 9.5% to 7.9 over the last two years.
So bring on more stimulus spending? When Boomers are leaving the workforce faster than young workers are entering it? I don’t think so. I think the problem with the analysis is that it looks at the reduction in the employment rate in isolation. Better, I think, would be to estimate what rate of unemployment would be consistent with funding the entitlements of all those retiring Boomers.
via The Baby Boom Bump – NYTimes.com.
Defined Benefit Pension plans used to be the norm. The pension plans were run by the employers and provided employees with specifically defined benefits in retirement. Working and retired Boomers have benefited from these plans while their employers and former employers struggle to fund the plans.
Defined Contribution Pension plans are now the norm. It’s the contribution of employees that is defined; the benefit received at retirement will vary according to the market returns on the investments and the costs of administering the plan.
An obvious explanation for the shift from DB to DC is that employers a.) found the DB plans increasingly expensive to manage, and b.) found that younger employees coming in to the work force would accept Defined Contribution plans. The less obvious explanation is that Boomers changed the regulations regarding employer-provided pension plans. A summary of these regulatory changes is included in a 2008 Discussion Paper, Large Declines in Defined Benefit Plans Are Not Inevitable: The Experience of Canada, Ireland, the United Kingdom, and the United States, by John A. Turner and Gerard Hughes of The Pension Institute. The authors posit that regulatory changes (Boomer regulators) have made in increasingly expensive for DB plans.
“While pension legislation has had a number of goals, increasing the likelihood that employers provide defined benefit plans has not been one of them. Regulations have been designed to make defined benefit plans more secure for those participants covered by them, and in the process shifted risks to employers.
“Regulations have been designed to limit the loss in tax revenue to the government Treasury by restricting the amount of funding allowed in defined benefit plans. Regulations affect plan costs, but the effects are not the same for defined benefit plans and defined contribution plans. Regulations could have raised the cost of providing a dollar of benefits through a defined benefit plan relative to a defined contribution plan, and evidence suggests that has occurred.”
- Compliance Costs
- Regulatory Disincentives to Funding Plans: Ownership of Surplus Assets
- Disincentives to Funding Plans: Funding Limits
- Volatility of Asset Markets
- Volatility of Contributions
- Problem of Underfunding
- Incentives for Terminating Defined Benefit Plans
- Accounting Rule Changes
- Early Retirement Subsidies
- Decline in Real Value of Maximum Pensions for Upper Income Workers
- Effects on Retirement Age
The working paper includes country-specific analyses for Ireland, the Unites States, the United Kingdom and Canada.
“In all four countries, it appears that unexpectedly large increases in life expectancy have played a role in the decline in defined benefit plans. Defined benefit plans in none of these countries provide benefits that are indexed to increases in life expectancy. Thus, generally the plan sponsor bears the cost of increased life expectancy.
“Regulatory changes could be considered to make it easier for defined benefit plans to deal with the increased cost arising from increases in life expectancy.”
In summary, when working Boomers realized that their Defined Benefit pension plans would be at risk when their kids joined the work force they, changed the rules – closing the door on Defined Benefit plans.
Governments are trying to cut spending by reducing public service payrolsl. Teachers seem to be easy targets and the teachers’ unions are understandably agitated: it’s the union’s responsibility to protect their members, right? What if the union’s responsibility was to protect the earning power of all teachers, not just the one’s who currently have jobs?
What if union leadership decided to represent unemployed teachers as well as employed teachers? And what if, in their bargaining positions, they emphasized full teacher employment rather than protecting compensation (salary, benefits, pensions) of the teachers with the most seniority?
Well, the first thing that would happen, I guess, is that there would be some new union leaders who knew better than to mess with the boomer rank-and-file.
I’m out on a limb here, but can you imagine a world in which teachers’ unions and school boards negotiated with the objective of providing full-time jobs for all certified teachers, while still setting limits on total compensation? The effect would be to reduce average salaries while increasing the number of salaried teachers. At some point salaries for beginning teachers might fall so low that the supply of newly minted teachers would stabilize.
What am I missing here? We’d have lots of teachers, more teachers per pupil, possibly more teachers per classroom, all while holding the lid on total teacher compensation.
One final thought: to minimize the initial hit of this full-teacher-employment policy on the salaries of existing teachers we could cancel the contracts of all the retired (boomer) teachers who have come back to work, freeing up compensation dollars for younger teachers.
The unions are looking after their members….their older members. Younger members, new hires? Not so much. “New hires will start at a lower hourly rate than under the previous contract and take longer to reach the top of the pay scale,” according to the Toronto Sun.
New hires = Younger workers.