Jane the Actuary Retirement

Forbes post, “The Massachusetts ‘Essential Worker’ Pension Boost Proposal Is A Case Study In Public Pension Failures”

Originally published at Forbes.com on August 19, 2021.

 

23 out of 40 Massachusetts state senators support it by signing on as co-sponsors.

126 out of 160 Massachusetts state representatives have done the same.

But the legislation, a bill to pay a bonus retirement credit to in-person public workers in that state, is still a terrible proposal.

The text of the bill, H. 2808/S. 1669, is brief. All employees of the state, its political subdivisions, and its public colleges and universities, a bonus of three years “added to age or years of service or a combination thereof for the purpose of calculating a retirement benefit,” if, at any point between March 10, 2020 and December 21, 2020, they had “volunteered to work or who [had] been required to work at their respective worksites or any other worksite outside of their personal residence.”

During a hearing on July 21, sponsor Rep. Jonathan Zlotnick explained his purpose in bringing the bill forward:

“This was the time when these essential services were most important, the people being asked to perform them were most at risk coming into contact with members of the public and with co-workers. They continued to do their jobs, often exhibiting flexibility and creativity and an effort to ensure that those needs were met. It is in recognition of that effort that we offer this bill.”

However, at the time, Rep. Ken Gordon “questioned Zlotnik on whether or not a financial or fiscal analysis had been conducted relative to the cost that would be incurred if the legislation was signed into law,” and Zlotnick admitted that no such calculation had been made, and “Zlotnik said he recognizes that many details associated with the proposal still need to be contemplated.”

In subsequent reporting, government watchdog group The Pioneer Institute voiced its opposition. In a statement posted on their website, they criticized the broad coverage — acting as an unfunded mandate for municipalities, including workers even if they had worked outside their home for a single day, encompassing both blue collar and white collar workers. They estimate the bill’s cost at “in the billions of dollars” and point to a massive boost even for a single individual, the president of the University of Massachusetts, whose lifetime pension benefit would increase by $790,750.

In response to these objections, Zlotnik “said the bill is still ‘very early in the process’ and said cost would be a ‘major determining factor’ in any bonus payout to public workers, in an e-mail to the Boston Herald.

And left out of Zlotnik’s proposal is a recognition that the state’s main retirement fund is 64% funded, and the teachers’ fund, 52%, as of 2019.

Now, whether this bill ultimately becomes law is still unknown. But, again, 79% of Massachusetts state representatives are on board with their support without taking any interest in the cost of the proposal, and even Zlotnik himself is not troubled by having brought forward a bill with such serious deficiencies. It is not even clear whether he would have pursued any cost analysis, had he not been called out on this. What’s more, nowhere in any of the discussion does Zlotnik or any of the bill’s supporters suggest that among the revisions would be any notion that the state should pay for the added cost up-front.

In fact, regardless of one’s opinions on the various proposals to give teachers, for instance, bonuses for their year of remote teaching, it is nonetheless a far more fiscally responsible choice to make, than this proposal, which is no different than borrowing money for the same purpose. And, again, 126 state representatives and 23 state senators were willing to sign onto this because the symbolism of the gesture was more important than assessing whether it was a financially responsible decision. Will those sponsors be willing to vote down the measure? Will those in power recognize this would be an embarrassment and simply never bring the bill to a vote? One way or the other, this is a prime case study in how pensions become so underfunded, as it is always far more popular to promise benefits than to pay for them.

Update: as of December 2024, this bill was reintroduced in 2023, and as of March 2024, is sitting in committee.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Do Teachers And Public Workers Without Social Security Lose Out? A New Analysis Says, ‘Sometimes’”

Originally published at Forbes.com on August 2, 2021.

 

Conventional wisdom says that the reason for public sector pension plans’ poor track record on funding levels is that benefit levels are simply too high, causing politicians to kick the can down the road perpetually. In Illinois, for example, “Tier 1” teachers can retire at any age, after 35 years of service, without any reduction to their benefit, and receive 75% of their pay with automatic 3% increases each year. As a bonus, they can add to their service calculation two years of unused sick leave, as well as non-vested time spent teaching out-of-state, if they pay the employee contribution (but not the employer cost) for that service. You simply can’t beat that in the private sector, even considering Social Security benefits.

But that’s not always true. Illinois is one of 15 states which do not cover some or all of their employees in Social Security. Although these plans ought to provide benefits that are the equivalent of the combination of Social Security and a private-sector retirement plan, federal law requires that, at a minimum, they must provide benefits at least as good as those provided by Social Security, and has established a “Safe Harbor” formula that determines whether plans comply with these rules: if a plan pays a benefit of at least 1.5% of pay, averaged over the last three years of service, and beginning no later than Social Security retirement age, then the plan is considered “qualified” and the state/town/school district can opt out of Social Security.

This is a very narrow test, though, and individual teachers in those plans can end up losing out. The test allows states to establish vesting periods, in some cases in excess of what federal law permits for private sector plans, such as 10 years in Connecticut, Georgia, Illinois, and Massachusetts. (Strictly speaking, Social Security has a sort of “vesting” in its coverage requirements, but those are met by work history over multiple employers.) The test doesn’t question whether the benefits provide by the plan exceed the contributions required from the employees. It doesn’t take into account teachers who withdraw their contributions and lose their benefits. And it doesn’t require a cost-of-living adjustment, without which fixed-income pensions will lose ground relative to Social Security even if benefits are equal at retirement.

At the same time, some workers in these plans will get a full Social Security benefit even if they leave their public sector job before earning a vested benefit, or if their benefit is so low they take their refund of contributions instead, simply because they will have met their 35 years of Social Security earnings history required for a full benefit, and because Windfall Elimination Provisions don’t apply for retirees who worked for public sector employers if they don’t actually have public sector pensions. That’s not to say there are positives to the failings in public sector plan design, but that Social Security itself mitigates those failings.

It is with this in mind that the Center for Retirement Research published a brief in April summarizing its authors’ research on the question of how workers in these plans fare, overall, taking into account all of those systems’ workers, not merely those with careers long enough to benefit from the systems’ generosity for full-career employees. They used a set of assumptions to calculate workers’ lifetime pension wealth, and a counterfactual Social Security wealth, to calculate, across all employees in a system and their likelihood to make it to retirement, and based on the benefits available for newly hired employees (taking into account, that is, reductions for new tiers), the “wealth ratio” for a given plan. And, in fact, nearly half of those plans, or 43%, did not have benefits that were as good as Social Security, on average for all workers, using this more sophisticated analysis.

To be clear, that’s the percentage of plans; the authors did not provide an analysis of what percentage of workers ended up with lower-than-Social Security lifetime benefits. They did, however, perform their analysis for certain sample workers, finding that in 74% of plans, a low earner would be better off with Social Security.

And the authors did not provide a listing of which of the plans in their study were relatively more or less generous, nor whether more generous plans were more or less funded than the parsimonious ones, nor — considering that they evaluated only new hires’ benefits — whether those which are low, are low because those are plans which had historically been low, or reflect new benefit cuts in response to low funding ratios.

But even with those limitations, this study is an important data point, especially for those of us, including, yes, myself, who believe that a key piece of Social Security, and public pension, reform is for all Americans to participate in our national old-age social insurance system.

And if you ask yourself, “how can benefit plans which are so expensive that politicians can’t fund them properly, have such poor results in this analysis?” that demonstrates, in part, the extent of the inequality between some workers and others, that you get with these sorts of plans.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Public Pension Roundup: Reform And Regression”

Originally published at Forbes.com on February 19, 2021

 

A round-up of reports across the country.

Florida: ending pensions for new employees?

From Tampa Bay Times,

“After years of discussions about the tricky issue of overhauling Florida’s retirement system for government employees, a Senate committee this week approved a proposal that would shut future workers out of a traditional pension plan.

“The proposal, sponsored by Senate Governmental Oversight and Accountability Chairman Ray Rodrigues, R-Estero, would require new employees as of July 1, 2022, to enroll in a 401(k)-style “investment” plan. Employees currently are allowed to choose whether to take part in the pension plan or the investment plan. . . .

“The pension plan was considered fully funded from the 1997-1998 fiscal year to the 2007-2008 fiscal year but then started running actuarial deficits, said Amy Baker, coordinator of the Legislature’s Office of Economic & Demographic Research. The deficits began during a major recession that hammered investments.”

Now, generally speaking, when an employer switches from a traditional pension to a defined contribution plan, this means a significant drop in plan benefits for employees. In Florida, that’s not the case — at least nominally not so: the employer contribution rate is the same for either type of plan, and varies only by employment class. (Of course, this doesn’t take into account any additional contributions needed to remedy funded status.) In addition, regular readers will know that I insist whenever the opportunity arises that state and local employees should participate in Social Security just as much as the rest of us do; as it happens, that is already the case for public employees in Florida. In addition, unlike the 8 year vesting of the traditional pension plan, the employer contributions to the defined contribution plan vest after only a year of service.

Kentucky: a new hybrid pension plan?

From WDRB,

“A bill creating a new pension tier for future teachers that will require them to pay more toward their retirement and work longer before they can earn full benefits passed the House Thursday.

“House Bill 258, sponsored by Rep. C. Ed Massey, moved to the House floor on a 14-4 vote and cleared the lower chamber hours later on a 68-28 vote. The measure, if passed, would put teachers and others covered by the Kentucky Teachers Retirement System hired after Jan. 1, 2022, into a new hybrid pension plan that includes foundational and supplemental benefits.

“Massey, R-Hebron, said the proposal would keep future hires from joining an already burdened and overtaxed’ defined-benefit pension system at KTRS, which actuaries expect will have unfunded pension liabilities totaling $14.8 billion and have 58.4% of the money needed to cover pension costs for current retirees and workers by fiscal year 2023.”

As described by WDRB as well as by the Louisville Courier Journal, the bill is not without opponents but there is a degree of consensus that reform is needed. However, unlike Florida, teachers do not participate in Social Security in Kentucky, so much more is at stake.

Illinois: pension spiking is back, baby

From The Patch, a local news publication in suburban Chicago:

“The Hinsdale High School District 86 board on Thursday approved a two-year agreement with the teachers union, including a “pension spiking” provision and relatively small pay raises.

“The agreement is retroactive to the beginning of the 2020-21 school year. Over the two years, teachers are expected to see base salary increases amounting to 2.2 percent.

“Under the agreement, the teachers will now get 6 percent annual increases in the last four years of their careers, up from the current 3 percent.

“This change will mean higher pensions for teachers, a practice that critics call ‘pension spiking.’ In Illinois, the state foots the bill for local districts’ pension contributions. So District 86 won’t suffer the long-term costs of the end-of-career pay hikes.”

Of course, the pension boosts won’t be free — but it will be Illinois taxpayers who will bear the cost, and quite substantially so. Receiving a guaranteed pay increase of 6%, rather than the current 3%, for four years, will mean one’s final salary is 12% higher than it otherwise would be, and one’s lifetime pension benefit (a four year average), 8% higher.

New York and Massachusetts: early retirement incentives on tap, boosting pension costs

From Spectrum News (Albany),

“Public workers in New York could have an incentive to retire early under a proposal by a pair of state lawmakers unveiled on Thursday.

“The bill backed by Sen. Peter Harckham and Assemblyman Tom Abinanti would create early retirement incentives for workers 55 and older who have 10 years of service with state or workers with 25 years of government service. A separate bill that covers early retirement for public workers in New York City was previously introduced. . . .

“To be eligible, a worker would have to be in a position that can be eliminated. . . .

“’It is better that longtime employees retire with guaranteed income than governments be forced to lay off employees who then seek unemployment benefits,’ said Abinanti. ‘Retirements in the short term will cut local payrolls, and in the long term, open jobs for those who want to work in government.’”

What is the incentive, specifically? Up to 3 years of additional service credit, based on current years of service, plus, for employers in “an optional retirement program,” additional retirement account contributions of as much as 45% of pay. In addition, employees at least 55 years old with 25 years of service would be spared the early retirement reductions that would otherwise apply — reductions which are as high as 27%, depending on age.

Not surprisingly, the bill comes with no actuarial analysis of the long-term cost of these benefit increases. And, although the plan is fully funded (based on the public plan funding methods), the new costs still must be paid by taxpayers.

Finally, according to MassLive, in Massachusetts,

“A bill that would allow teachers who are eligible to retire to purchase up to five years of service, age or a combination of the two in order to make room for new teachers has been backed by state Sen. John Velis, D-Westfield, and state Rep. Carol Doherty, D-Taunton.

“If approved, the bill known as ‘An Act to provide a retirement enhancement opportunity to members of the Massachusetts Teachers Retirement System,’ would be voted on by each city or town’s School Committee before teachers in those communities would be eligible. . . .

“The proposal was created by the Massachusetts Teachers Association as a way to provide an early retirement opportunity for teachers who have struggled to adapt to the remote teaching model and those who are at high-risk for COVID-19 and do not want to return to or continue teaching in-person while also giving opportunities to younger teachers in need of work.

“’With the money saved from allowing teachers with higher salaries and advanced degrees to retire early you could hire two teachers and then some,’ said Lori Lyncosky, president of the Westfield Education Association and a spokesperson for the Massachusetts Teachers Association which drafted the bill.”

This bill would increase the retirement benefit of an eligible teacher by adding 5 years to the teacher’s age and 5 years to the teacher’s service, or by some combination of each up to a total of 10 years. In principle, participating teachers would be required to “purchase” these credits based on a calculation of the costs; however, these calculations tend to understate the true cost, for instance, by the way assumptions are selected, or by using flat costs without regard to age, even if employees who “win” from this cost-setting are more likely to take the benefit.

It is, of course, an indicator of a broken salary schedule system at any particular school district if long-service teachers earn pay that’s double their new hire counterparts without adding double the value in terms of their experience, ability to mentor younger teachers, and the like. And this sort of incentive, even ignoring the question of whether the buy-in cost is fairly set, boosts the costs of pensions, which assume, in terms of such assumptions as retirement age, that even though teachers generally have very young retirement eligibility, a significant number of teachers will continue teaching to an older age, with the side benefit of less cost in pensions.

The bottom line: we have 50 states and 50 different pension systems, and significant differences in the reform-mindedness of those states’ legislators.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “April 15, 1981: A Snapshot In Retirement Policy History”

Originally published at Forbes.com on May 28, 2020.

 

Yesterday, as it happens, was slated to be the long-awaited launch of the SpaceX Dragon spacecraft, the first reusable rocket, the first private-sector spacecraft, and the first manned launch from the U.S. in nearly a decade. While it was postponed to Saturday due to weather, the prospect of this new era in spaceflight inspired me to dig out and show my children the newspapers I had personally saved (and recently rediscovered in the process of cleaning out my parents’ longtime home): the Detroit News, the Detroit Free Press, and the New York Times for April 15, 1981, the day after the space shuttle Columbia landed after its inaugural flight.

According to the Detroit News,

“Astronaut [John W.] Young caught the mood of much of the country yesterday. ‘We’re really not too far — the human race isn’t — from going to the stars,’ the world’s premiere test pilot said.”

According to the Free Press,

“The flawless return of the space shuttle Columbia to earth Tuesday opened a new age for Americans in space — an age that will allow space flight to become routine.”

According to the New York Times,

“Ultimately officials envision the shuttle being able to turn around in a matter of weeks. Each shuttle would have a life of 100 missions.”

In reality, the Columbia was returning from its 28th mission when it disintegrated in 2003 and the entire program, with a fleet of 5 space shuttles, had a total of 135 missions.

Of course this is a cautionary tale about believing grandiose claims, and a recognition that “there is nothing new under the sun.”

But — hear me out on this — the same is also true with respect to retirement issues.

Featured on the front page of the Free Press, just below the photograph of the Columbia touching down, in an article with the headline, “Young gives council budget and warning,” by Ken Fireman.

“With a warning that Detroit has one final chance to avoid fiscal disaster, Mayor Young Tuesday presented to the City Council a 1981 – 82 budget containing over $270 million in uncertain revenues.”

The budget contained 5% pay cuts for city employees, a hike in resident and commuter income taxes, and the sale of $100 million in bonds. Specifically,

“Another proposal certain to provoke controversy is Young’s call for the city’s two pension funds to buy ‘their full share’ of city-issued long-term bonds needed to liquidate the current deficit.

“The city currently owes a total of $18 million to the two funds from last year, and lingering bitterness over the longstanding debt may lead pension trustees to balk at buying any city bonds.”

On the op-ed page, syndicated columnist James J. Kilpatrick wrote, “There’s new hope for Social Security.”

“A House subcommittee last week made the first intelligent move in many years toward rescuing our Social Security system from the mess it is in. The subcommittee voted to increase gradually the age at which full retirement benefits are paid from 65 to 68.”

(Half a year later, the Washington Post reported that this legislation was killed in the Democratic-dominated House Ways and Means Committee.)

In the Detroit News, the secondary front page article was, “Plan threatens aid for elderly,” by Gary F. Schuster, which reported, with no details, that “President Reagan has decided to slash Social Security as the primary means of balancing the federal budget by 1985, White House aides said yesterday.”

And, finally, in an April 4 edition of the Detroit News (for which I can discern no reason it had been saved), “Pension dispute continues” (author name no longer legible) reports on court proceedings in which the police and fire pension fund were fighting to for the city to make pension contributions. While the first paragraph is no longer legible, the article reports,

“Olzark opened hearings two days after 6,000 police and fire retirees missed their April 1 paychecks. Faced with only $500,000 in cash to meet the $6.5 million monthly payout, the board’s trustees refused last week to liquidate short-term assets to cover the payment. . . .

“City officials had publicly acknowledged the $14.6 million debt since the suit was filed Feb. 25.

“But Sachs said he learned through ‘a flurry of paperwork this week’ that the city now claims it owes only $59 million, instead of the $102.5 million approved last year by the pension’s actuary and trustees and appropriated by Young and the Detroit City Council.”

(The article does not indicate the pension plan’s actual assets, liabilities, or funded status at the time.)

It’s no surprise that politicians and number-crunchers were worried about Social Security in 1981, and state and local governments have been kicking the can with respect to their pension funds for far longer than these 39 years. But it’s startling that even on a wholly arbitrary day, there’s so much material to illustrate this. And it’s still important to bear in mind how very longstanding these issues are when debating them now.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “It’s Time To End Social Security Opt-Outs For Everyone”

Originally published at Forbes.com on February 26, 2020.

 

Earlier this month, I wrote about the Windfall Elimination Provision and the Government Pension Offset, two provisions in Social Security which are designed to prevent double-dipping by workers who participated in both Social Security (directly or as a spouse) as well as another retirement system which opted out of Social Security.

Who are these workers?

Federal government workers who were hired before 1984 and who in 1984 declined to make a switch when offered the option, are covered by the Civil Service Retirement System, and

Public employees in 15 states, including California, Texas, and Illinois. (In Illinois, most direct state employees are covered by Social Security, depending on classification; employees at schools and universities as well as municipal workers are not.)

In addition, clergy and religious workers who complete Form 4361 and declare that they conscientiously/religiously opposed to social insurance, are exempt from FICA taxes for their ministerial income, and forego not just Social Security but also Medicare, which personal finance expert Dave Ramsey says he would do “in a nanosecond” but the site The Pastor’s Wallet issues strong cautions. For most of us, however, this is merely a bit of trivia.

To be sure, when Social Security was first enacted, far more workers were excluded: self-employed workers, government, farm, domestic, and non-profit workers were all added later. 1950 amendments added farm workers, domestic workers, and the self-employed; in each case with subsequent adjustments loosening the eligibility requirements. Also in the 1950 amendments, non-profit employers were included if two-thirds of their employees elected to be covered; in 1984, coverage was extended to all non-profit employees, except that religious groups who, as an organization, object to Social Security, are permitted to opt out as an entity; however, their workers must still pay in as if self-employed, except for those exempt as objecting clergy.

(And here’s an incidental piece of information on the question of coverage: it has long been claimed that the exclusion of farm and domestic workers was due to the demands of racist Congressmen from the South, because they wanted to keep black workers bound to low-paying jobs in their fields and kitchens; however, the record shows that their actual objection was to the social assistance provisions of Social Security rather than the social insurance elements earned by work history.)

All of which is context for an article from late January profiling the situation for teachers in Alaska, “No Social Security? For Alaska teachers, that’s just the way it is.” (The article is bylined as “Presented by NEA-Alaska” rather than being the product of a reporter at the Anchorage Daily News, where it’s published.) I’ve written before about the Illinois Tier 2 pensions, in which newly-hired teachers may accrue pension benefits lower than they would have under Social Security, and school districts may find themselves failing the “adequacy test” for public systems that don’t participate in Social Security. In Alaska, the legislature created a different sort of retirement system reform for teachers hired after 2006, a defined contribution system in which the employer contributes 7% of pay into workers’ accounts. That’s not in addition to Social Security benefits — that’s instead of Social Security.

At the same time, teachers and other public employees aren’t permanently excluded from Social Security. As the article explains:

“’Any single district can allow a vote to opt back into Social Security,’ [NEA Alaska President Tim] Parker said. “That option is right there in front of us.” From there, teachers in the district would decide the matter, either a straight up-or-down vote or an opt-in vote that would allow in those who wished to join, while other positions would be phased into Social Security as employees left and were replaced.

But, he added, a school district that wanted to opt in to Social Security would have to be prepared to pay for it.

“‘They’re on the hook for 6.2 percent for every one of their employees, every year,’ Parker said. ‘The employee is also on the hook for 6.2 percent. These things all happen in addition to the numbers that are going in on the defined contribution side.’

“At a time when state funding is tight, he acknowledged that might be a tough sale.

“’Where do you find an extra 6.2 percent?’ Parker asked. ‘It’s not an easy thing. Our budgets are very tight.’

“Still, Parker said he wouldn’t be surprised to see some of the state’s smaller districts, where teacher turnover is especially high, opt in to Social Security as a way to attract candidates.”

And that’s the key:

In the same way as federal employees were moved to the Social Security system in 1984, so, too, for state and local public employees to be moved into Social Security should not be a choice left to be made by school districts or teachers focused on the short-term expense of an additional a 6.2% of pay each.

After all, to revisit the nonprofit workers: in 1951, they were provided a mechanism to opt into Social Security. In 1981, over 20% of those workers were still not a part of the system, necessitating the 1984 legislation mandating their inclusion.

And I’ll point out that my longstanding proposal to move Social Security to a flat benefit system would solve the issue nicely. But that’s hardly the only way to get from here to there: although the system initially excluded all state and local workers due to federalism concerns (that it, it was seen as inappropriate for the federal government to tax state or local governments), and only in the 1950s permitted states to elect participation, the federal government’s power relative to state governments has expanded to such a degree (whether directly or in the guise of withholding grant money to states) that it’s hard to find this rationale credible any longer.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “GM, Pension Funds, And The Temptations Of Big Pots Of Money”

Originally published at Forbes.com on October 14, 2019.

 

The UAW’s strike against General Motors has now entered into its fifth week, with no indication of a resolution soon, as the UAW pushes to increase wages of its lower-seniority workers and move more workers away from their temporary status and the company focuses on using its profits to make investments in U.S. factories. Earlier, in late September, various of the Democratic presidential candidates joined the picket lines to show their support for the strikers.

And in the midst of this, on October 1, New York State Comptroller Thomas DiNapoli sent a letter to GM CEO Mary Barra (as reported at Crain’s Detroit Business and at Spectrum News Syracuse). DiNapoli, who Crain’s reports has received support from the UAW in the past, wrote, in part:

I write as Trustee of the New York State Common Retirement Fund (Fund), the third largest public pension fund in the United States, which holds and invests the assets of the New York State and Local Retirement System on behalf of its 1.1 million members, retirees and beneficiaries. The Fund is a long-time investor in General Motors Company (GM or the Company) and as of June 30, 2019 held more than 3.8 million shares of the Company’s stock.

Specifically, I am writing to express my concern regarding the current labor dispute between GM and the United Auto Workers which has resulted in approximately 46,000 employees striking at more than thirty Company factories in several different states, including New York State. As an investor, I am concerned about reports estimating the Company’s lost earnings between $50 and $100 million per day during the strike. The last prolonged strike at GM, lasting 54 days in 1998, reportedly cost the Company $2 billion and two percent of market share. Even though recent reports indicate the Company and the UAW are making progress in their negotiations, it is conceivable this strike could similarly cause significant losses unless a resolution is quickly reached.

I believe the effective management of human capital is critical to the success of GM and its ability to create long-term shareholder value. Fair wages and benefits for workers and a more U.S.-based work force are important matters to consider in fostering positive labor relations.

Separately, WXXI News reported last week that

“New York State Comptroller Tom DiNapoli joined striking members of the United Auto Workers union outside a General Motors plant in Rochester on Monday, as tensions continue between workers and the company.

“DiNapoli spoke to workers on the picket line outside the plant on Lexington Avenue. He says he supports the UAW in their negotiations with GM.

“’I certainly support them in their battle and I hope that GM, which has been an enlightened company in many ways, will listen to their better angels and come up with a positive resolution as soon as possible,’ DiNapoli says.”

Now, Tom DiNapoli is a politician; but as a trustee of the New York State Retirement Fund, he also has a fiduciary duty to the pensioners of that retirement fund. He claims in his letter that he is writing as an expression of that duty, seeking as a concerned shareholder to ensure that his fund’s investment does not lose value. But his explicit support of striking workers belies that claim, and makes it clear that, quite to the contrary, he is placing his political interests above his duty to those fund participants – or, rather, his duty to the taxpayers of the state of New York who will have to make good the investment losses or foregone gains of a pension fund that places political objectives above returns.

Separately, last week, the California Globe reported that “CalPERS is Heavily Invested in Chinese Companies.”

“California’s public employees should know that their retirement funds have invested in companies controlled by the Chinese military, which manufacture parts for the DF-41 missile, along with a range of aircraft, unmanned aircraft systems, and airborne weapons.

“For that matter, these pension funds not only invest in Chinese companies (and index funds, tracked by mutual funds, that are heavily weighted with Chinese companies) directly involved in manufacturing military equipment and surveillance equipment, they also invest in Chinese companies involved directly or indirectly in human rights, labor rights, and environmental protection violations all over the world.

“California’s largest public employee pension fund, CalPERS, provides a case in point. Despite its quest for the elusive 7 percent annual return, CalPERS nonetheless foregoes investments in Iran, Sudan, assault rifles, tobacco products, and thermal coal. Yet CalPERS continues to invest in Chinese companies.”

The article continues by expressing concerns that this is not garden-variety indifference but driven by the Chinese ties of the Chinese-born Chief Investment Officer at CalPERS, Yu Ben Meng, who served as deputy CIO at China’s State Administration of Foreign Exchange (SAFE), from 2015-2018, and who was quoted in the Chinese state-run paper: “In a person’s life, if there is an opportunity to work for the motherland, this responsibility and honor is unmatched by anything.”

Is this overly alarmist? The report does not quantify the degree to which CalPERS invests in these companies, or whether their investments have shifted in this direction specifically following Meng’s appointment, or whether the investment staff themselves are making the decisions about which investments are acceptable or must be shunned for social justice reasons. (In fact, some of these categories of divested companies are based on legislation, others on investment staff or investment committee decisions.)

And these are but two examples of the temptations, or, to put it more neutrally, the challenges for asset managers who are simultaneously politicians, or who have other motivations, such as the furtherance of human rights objectives, however they understand them. Individuals investing in IRAs have the option to elect from among funds which profess to follow a set of principles with which they align, whether they be the Ave Maria funds following Catholic/pro-life principles, or the various funds offered by the mainstream mutual fund providers which use “environmental, social and corporate governance” or “ESG” criteria for selection (for example, in this Kiplinger’s list). Individual stock investors may invest in one company or another based on their opinion of the company’s political views. But taxpayers who “invest” in one company or another insofar as their states’ pension funds do so, have no choice but are forced to come along for the ride, whether it’s politicians placing their political priorities above the performance of the investments, or seeking return at all costs even without regard to human rights.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.