In the news today, but anticipated for quite some time, Sears has filed for bankruptcy. As the Chicago Tribune reported last week in anticipation of this step,
If Sears, once the nation’s largest retailer, declares bankruptcy, it could cause one of the biggest pension defaults in U.S. history, but the government would step in to keep checks coming to more than 90,000 retirees.
The company’s long-term pension obligations, which have been underfunded by more than $1 billion for years, would be covered by the federal Pension Benefit Guaranty Corp., which has footed the bill for nearly 5,000 failed employer pension plans since its founding in 1974.
In this respect, the PBGC will work as it's been designed to work. Sears paid its premiums to the fund and its employees will reap the benefits, since, as the Tribune reports, its pension plan participants were primarily hourly workers whose benefits fall below the PBGC's maximums, while higher-income workers received lump sum pension benefits at retirement. Of course, the PBGC single-employer fund had a deficit of $10.9 billion at the end of fiscal year 2017, so the added Sears pension underfunding of $1.5 billion won't exactly be a boost to its balance sheet, but the PBGC premium rate increase now being phased-in as well as overall improved market conditions are forecast to bring the fund into a surplus, reaching $26.4 billion (in nominal dollars) in 2027. (This is, incidentally, quite a different story than the ever-increasing deficits of the Multiemployer Program, the finances of which are wholly separate.)
But at the same time, the Sears demise, and the fate of its pension plans, is just another illustration of why anyone still clinging to the idea that all that ever stands between American workers and a return to traditional pension plans is corporate greed, should abandon that notion for good.
After all, once upon a time, the running joke (among actuaries, anyway) was that General Motors was not a car company so much as a "pension plan that makes cars" and even now, after bankruptcies and pension settlements, its pension liabilities are still 90% higher than its market cap (or, at any rate, that was the case back in March). Sears? Sears had pension liabilities of $4 billion as of 2017, with assets of $2.5 billion, for a 63% funding ratio. (All figures from the annual reports.)
So here's a chart of the pension assets and liabilities over the years (excluding OPEB and Canada):
Not surprisingly, assets dropped through 2008, but recovered since then, due to market recovery and ongoing contributions, and the liability decreases and increases, by and large, follow the increase and decreases in the plan's discount rate, based on corporate bonds, and peaked in 2008:
Also, in 2012 and 2017, the plan paid out settlements of $1.4 and $1.2 billion respectively -- that is, they reduced liabilities through a combination of paying out lump sum benefits to some retirees and purchasing annuities for others -- on top of making contributions to the plan following their legal obligations, at levels of about $300 million for each of the past several years and as much as $516 million in 2012, all of which were aimed at making up for shortfalls, since no participant has earned any new benefits in the plan since 2005. Yet despite these contributions, the plan's funded ratio, which peaked at 84% in 2007, is now only 63%.
And, yes, I anticipate that over the course of the day, everyone who fancies themselves an expert will have a Hot Take on why Sears management failed, and, yes, if any of these Monday morning quarterbacks could go back and undo the mistakes of the past, the PBGC would not be facing an extra $1.5 billion in liability, give-or-take. But the very feature of pension plans that once made them attractive to employers -- those employers' ability to be flexible in their contributions, paying more into the fund to reduce tax liabilities when available cash permitted and paying in only the minimum when finances were tighter -- has produced a situation where the need to cope with an underfunded pension has added to the strain of a troubled company, even to the extent, in this case, of necessitating entering into special agreements with the PBGC in 2015 (the company's fiscal year 2016) to "ring-fence" certain assets to satisfy its minimum contribution requirement.
Had there been no pension plans to fund, had Sears simply sponsored 401(k) plans for its employees, it would have been able to make decisions about the level of match or employer contribution to the accounts, in line with other employee compensation decisions and, in fact, the company ceased matching its employees' contributions in 2009, though the accounts themselves remained for employees to use to build up retirement savings. Had employer contributions been mandated, as some proposals for retirement security enhancement suggest ought to be the case, this would likewise be no different than if the government had added a new payroll tax, and the company may have responded by reducing salaries across-the-board, or by reducing headcounts. But it is the nature of a pension plan with unforgiving funding requirements that placed them in a much tougher spot.
So there's no easy answer, and there is not magic formula or method by which, if we were only willing to try a bit harder, we could create a means by which American workers could have no-risk retirement benefits that are affordable to them and their employers.
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