2007Feb Telling Retirees No!

2007Feb Telling Retirees No!

Telling someone “no” is never any fun. When it comes to covering costs of retirement benefits, private companies can already see that in the years to come they will have to tell a lot of their retired workers “NO!” But there is a way out. Firms are escaping the responsibility for legacy costs such as open-ended retiree health benefits by handing over the investment assets they had set aside to unions via special trusts. Such agreements essentially mean that “the employer is getting out of the retiree medical coverage business,” in the words of columnist Russell Greenblatt, by making the union responsible for managing both the assets and liabilities. This move is attractive to both sides because it allows companies to relinquish responsibility while unions increase their relevance in the workplace.

Unlike pensions, retiree health benefits are not protected by a government agency like the Pension Benefit Guaranty Company. They are alarmingly under funded, if not unfunded altogether, with no safety net in cases of company bankruptcies or defaults. On average, the companies of the S&P 500 have only 22% of the assets needed to satisfy retiree health care benefit outlays. It appears the generous benefits of 50 years ago no longer exist. More people will have to dig into their dwindling savings accounts to pay for their own health care costs as the average American lives longer and the cost of care skyrockets.

As the WSJ article relates, Goodyear Tire & Rubber Co. attempted to relieve themselves of their legacy costs last month by agreeing “that the company will make a one-time payment for retiree health benefits into a trust.” The trust would be governed by a committee jointly appointed by Goodyear and the Steelworkers union which would manage and invest the trust’s assets as well as maintain the benefit programs. “The union and the company will no longer bargain over retiree health benefits” according to the union.

The Goodyear agreement has caught the attention of “executives at General Motors Corp. and other big automakers… because a similar deal could allow them to relinquish the massive, but unfunded, amount of money needed for retiree health-care benefits they currently carry on their books…‘If [the trusts] have really good investment returns, they can say, 'We're going to improve the benefits,' says Derek Guyton, a principal with Mercer Health & Benefits in Chicago, who estimates that 25% of large companies have a version of these trusts. But poor returns could easily result in higher co-payments for retirees or the need to trim benefits, he says.”

For many Baby Boomers, visions of leisure and security are finally on the horizon after a lifetime of hard work and saving. To the surprise of many, the security they have toiled away for will most likely not be there. Going forward, the generosity of retiree benefits will not be what it once was, and with the permanent aging of the population it is not likely to ever be as generous again. These kinds of changes are not easy to make, and companies have begun to shift this difficult role of telling retirees “No!” to the unions, in the belief that workers will be more understanding when the bad news comes from their own ranks. Regardless, in the words of the WSJ, “Someone has to tell retirees no!”

At the same time, the percentage of the workforce that belongs to a union is near its low of the last half century. With stronger laws on the books, greater transparency, and fewer manufacturing jobs in the country, the need for unions is in decline. If unions are placed in a position of controlling retirement assets and benefits, then they will continue to play a significant role in the workplace.

The underlying assumption in all of this is that the new Health Care Trusts will earn enough to pay or increase benefits. In Congressional testimony in June 2004, Alan Greenspan said, “We will run into fairly serious difficulty in the next decade, say 2011 and forward…” You can support his warning from several different directions.

Consider this major confluence of events. The first Baby Boomers were born in 1946. Add 65 years for their retirement. You end up at 2011! Except for some short-term “celebration” expenditures, the average retiree household consumer spending continues to decline the rest of their lives. (PSSST! This is not good for the economy!)

The last year of the Baby Boomer births was 1964. Add 47 years for when their household spending peaks. You end up at 2011! They switch from spending on their kids education to saving for their own retirement. (PSSST! This is not good for the economy!)

Whether running your portfolio as an asset to support retirement or building your portfolio to prepare for retirement, your investment return assumptions need to be materially different than they have been since 1982 when the current Bull Market started.

If you plan on being retired between the years 2011 and 2024, you should take a serious look at the items of concern before the “NO, NO, NO!” materially impacts you!