Tuesday, November 01, 2005

A Place Somewhere

In a post regarding "The End of Pensions," Brad DeLong notes:

I think Andrew misses an additional important aspect of the situation. When pension funds (and health benefit programs) become large relative to the size of the firm, the retired and the sick join the bondholders and the stockholders as claimants on the firm's cash flow, but the retired and the sick don't have any place in the firm's corporate governance structure, and claimants on a firm's cash flow should have a place somewhere.
I agree. Last April, I suggested that DB plan participants be moved ahead of all other unsecured claimants in bankruptcy, in the context of how to protect current and past workers if the PBGC were eliminated. I don't know if that's enough, but it is a start, and I would equally well recommend it for all deferred compensation claims of rank-and-file workers, including retiree health benefits.

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10 comments:

Anonymous said...

retiree health is a big opportunity.

i do not think this is very well-funded pretty much across most corporations in america.

doing heatlhcare for older people more efficiently may also be a good idea for everyone.

Anonymous said...

If those collecting Pension and other Healthcare benefits are "ahead" of all other claimants, there is the potential that either:

1. The capital markets would close to those companies that have underfunded programs
2. The borrowing costs to either re-finance debt or incur new debt will increase

Either of these two issues could create potential liquidity crisises in the future.

Robert Schwartz said...

Leaving aside the obvious constitutional problems, you would assure that no company that needed to borrow money would ever maintain a DB plan, which from a taxpayers perspective is probably just as well.

Anonymous said...

"[Y]you would assure that no company that needed to borrow money would ever maintain a DB plan, which from a taxpayers perspective is probably just as well."

From your statement, I believe that you assume that all companies that maintain a DB plan will go bankrupt.

I stand by my comment that this proposal will create a "liquidity crisis" amongst all companies that have DB plans and debt. What will happen to companies that need to re-finance their debt?

Unfortunately, given this idea whilst its intentions appear to be good will cause the marginal cost of debt to increase.

Anonymous said...

over the last 5-10 years: if large employers that had pension plans gave out smaller pay raises and bonuses, and took the amount saved on smaller raises and put it into a defined benefit plan, there would be no big problem. as it stands, execs and senior management loot companies and leave the PBGC with the bill. If too many companies do this, it will ultimately leave the bill with taxpayers.

This is why more disclosure should be required for large, publicly traded corporations in the U.S. Everyone should know for sure where the money is going when it comes to compensation-

Anonymous said...

a speech given by a Dartmouth student and linked to by Samwick possibly alluded to the looting that goes on in corporations. it is worse than New Orleans- to whom much is given, much is required.

Anonymous said...

on the sick and disabled:

there is also a decently significant adverse selection problem as I see it currently.

companies that have a disproportionate amount of benefits that accrue during the last few years of service (eg, years 25-35) create huge huge huge incentives for older people to fake sick and fake disabilities during known times of corporate employee downsizings. Fake cast business and fraud detection businesses are probably a bull market. Honest sick and young people, on the other hand, are young and naive. They assume the system works without manipulation. They get axed.

I would be willing to bet this is a pretty significant phenomenom.

Arun Khanna said...

Brad DeLong's statement, "I think Andrew misses an additional important aspect of the situation. When pension funds (and health benefit programs) become large relative to the size of the firm, the retired and the sick join the bondholders and the stockholders as claimants on the firm's cash flow, but the retired and the sick don't have any place in the firm's corporate governance structure, and claimants on a firm's cash flow should have a place somewhere."
1. Where exactly do bondholders have a place in the corporate governance structure?
2. Is DeLong proposing that all claimants be represented in the firm's corporate governance structure. Does sick with deficits Uncle Sam with tax claims on firms get represented too? What about other claimants?
3. What about the equity holders option implicit in limited liability?
4. DeLong's proposal for distressed firms (which typically have large pension liabilties relative to market value of firm assets) is essentially a wealth transfer from bondholders to company retirees. The bond market will price this potential wealth transfer and the firms in distress are likely to become bankrupt. In bankruptcy, the company retirees DeLong seeks to help will probably end up becoming worse off.

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Mark said...
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