Rules Are for Schmucks: Playing with Pensions

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In 1963 the Studebaker Company went out of business because it could no longer compete successfully in the automotive market with Ford, Chrysler, and General Motors. Thousands of employees lost their jobs. But that’s the way the free market works, and life went on. Most of the younger workers found employment elsewhere, and the older ones assumed they still had their pensions to fall back on.

Except that they didn’t. When they opened up the Studebaker pension plan, they found that it was primarily funded with bonds and promissory notes from the Studebaker Company itself— all of which had become worthless. Men and women who had devoted their careers to Studebaker and were no longer able to work—especially doing the kind of strenuous manual work they’d done there, which was all many of them knew—were suddenly destitute. All that many could do was fall back on the charity of others.

Back then, unlike today, Congress was actually capable of doing things. So in 1974 it enacted the Employee Retirement Income Security Act, or “ERISA,” to assure employees that pension promises could be relied upon.

Although some business groups at the time derided ERISA as “Every Ridiculous Idea Since Adam,” it has stood the test of time. First and foremost, ERISA requires that pension promises be adequately funded, with real assets. Here’s how it works: Actuaries determine that for a given employee population, the pension payout in, say, 2030 should be $X. And in order to have $X in 2030, the employer needs to put $Y into the plan now, and invest it prudently. ERISA requires employers to reserve $Y now.

ERISA also cracks down on the shenanigans tempting anyone entrusted with large amounts of someone else’s money. Many is the company manager who has looked longingly at a pension fund and thought “If we could just borrow a quick million, we could pay it back with lots of interest, and then both the company and the pension fund would be better off.” ERISA says “Nope—every transaction with pension funds has to be strictly an arm’s-length transaction.” ERISA has other rules to protect employees as well, including rules about how quickly benefits need to vest. Gone are the days when a person who worked nineteen years for a company lost everything because the rule said you needed to work twenty.

ERISA is not without its glitches, but not even the most rabid anti-regulatory voices today are asking to get rid of it. That’s because it doesn’t force any company to offer even a dollar of pension benefits. All it says is that if you do make a pension promise, you have to be able to keep it.

So why, if ERISA is such a good thing, are churches exempt? And not just churches, but vast segments of the healthcare and educational markets, which are affiliated in some loose way with churches (probably so they can dodge tax payment)?

The answer, of course, is that the God expert lobby was as powerful in 1974 as it is now, and was able to secure the same kind of exemption that permeates so many of our laws. What’s particularly galling about the pension exemption is that it hurts so many thousands of people who are not religious at all. It’s one thing for someone who wants to be a nun to say, “I understand that my income in old age isn’t safe, and I’m willing to trust in God to take care of me.” It’s entirely different to impose the same burden on a nurse, a receptionist, or a caretaker working at a religiously-affiliated hospital or school, who may have no religious beliefs at all.

There is a glimmer of hope. Last December, a judge in California ruled that Dignity Health, a religiously affiliated hospital group in that state, does not automatically qualify for the ERISA exemption, despite the fact that the IRS previously said it did. Judge Thelton Henderson was more concerned about the employees of Dignity Health than he was about bureaucratic niceties, and said they were entitled to a day in court to present their case that the pension promises made to them should be protected by ERISA.

There are big bucks at stake here: the plaintiffs allege that the Dignity Health pension is underfunded by some $1.2 billion.

There seem to be three possible outcomes:

1. The employees could win their case, meaning that the religious organization that runs Dignity Health would have to start making up the $1.2 billion shortfall. This may mean that the organization has less money to devote to proselytizing.

2. The employees could lose their case, but the trustees of the Dignity Health pension plan could pray hard and win the Powerball several times in a row, enabling the company to keep its promise.

3. At some point in the perhaps not-too-distant future, retirees of Dignity Health will receive a little notice saying “We’re sorry, but that pension you earned is going to have to be paid out only ten cents on the dollar. But don’t worry—you will remain in our prayers.”

Let’s hope reason prevails and it’s number one.

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