Pension Troubles = S.&L. Collapse? Some Say Bank on It

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Pension Troubles = S.&L. Collapse?
Some Say Bank on It

By Mary Williams Walsh, The New York Times
December 7, 2003

In 1985, a financial consultant named Alan Greenspan was hired to write an opinion letter on behalf of a fast-growing California savings and loan association. The future Fed chairman praised the institution's managers for building it up "to a vibrant and healthy state, with a strong net worth position."

As it turned out, the institution, Lincoln Savings and Loan, was taken over by the government in 1989 at a cost to taxpayers of about $3.4 billion.

The collapse of the savings and loan industry in the late 1980's is being evoked more and more to describe the possible dangers ahead for ailing pension funds. If even the sharp-eyed Alan Greenspan can fail to spot an S.&L. crisis in the making, what can be said about the way Washington is handling the $1.6 trillion in retirement money?

Many business executives say the similarities are exaggerated. But a group of academics and a few officials are paying heed as they seek the best way to secure the pensions of some 44 million Americans.

A hearing of the Senate Committee on Aging in October dealt specifically with the comparisons. The Treasury Secretary, John W. Snow, has mused publicly about whether history is repeating itself.

"When you think about pensions, we've got a brewing problem here that has some — I don't want to overstate here — but has some analogy to the savings and loan crisis of some years back," he told The Wall Street Journal last summer. "You've got a lot of accounting rules; you've got a mismatch of liabilities and assets; and you've got moral hazard."

The key in the 1980's, say experts who are making the comparison, was an overriding impulse to overlook warning signs — to assume that a sick industry will get better if only given time and a little regulatory relief. The S.&L. system didn't melt down until 1989, but its troubles started more than a decade earlier. Years of inaction in between made the eventual bailout worse.

Now it is pension funds that are showing signs of trouble. The law requires that companies set aside enough money to pay the pensions they promise, but at the moment there doesn't seem to be enough. If employers were forced to pay every penny, right now, their funds would be more than $350 billion short.

That doesn't mean a $350 billion bailout — or any bailout — is looming. But the numbers suggest that if the pension system melted down, taxpayers could be on the hook for tens or hundreds of billions of dollars.

Companies say the danger is all but nonexistent. Pension funds, after all, do not work like banks and are not generally susceptible to runs. They typically pay out benefits over many decades, not one day to the next. The glacial pace of the pension world, companies say, means today's shortfalls will be recoverable in years to come.

But those who see parallels argue that the population is aging, and warn that companies — especially those with older workers — risk running out of time to cover their shortfalls. To these analysts, the slow pace at which pensions are paid serves only to obscure the risk.

Now, many companies are running into a law requiring employers with big pension deficits to speed up their contributions sharply. These payments can be huge, and executives aren't eager to pony up.

Why, they ask, demand strict compliance with the rules when the pension sector has just survived an excruciating downturn, the economy is strengthening and pension plans seem poised to recover on their own?

Rather than cracking down, they say, the government should ease the rules. Both the House and the Senate this week are to finish work on a pension-relief bill. One measure would give companies a two- or three-year break on the special, accelerated contributions.

Another would let companies use a new method to calculate the pensions they owe — a method that would make the total amounts look smaller, reducing the amount companies must set aside today.

This approach takes economists like Zvi Bodie back to the early 1980's, when the savings and loan associations had alarming shortfalls, and Congress eased the rules.

"It's so striking, the similarity," said Professor Bodie, a Boston University professor of finance and economics who has written of the lessons of the S.&L. crisis for the pension system.

Hundreds of savings and loans became insolvent after interest rates rose sharply in the late 1970's. The government closed some of the sickest ones, using the S.&L. insurance program to compensate depositors.

But the closures were costly and politically unpopular, recalled George J. Benston, an Emory University economics and finance professor. They added to the federal deficit, he said, and angered the U.S. League of Savings Associations, which ratcheted up its political contributions and lobbying.

As a result, hundreds of stumbling savings and loans were allowed to stay open, and even encouraged to grow, Professor Benston said. Regulators lowered their capital requirements, and let them puff up what little capital they had with accounting gimmicks. Meanwhile, Congress granted them the freedom to get into new lines of business. They ventured into new. speculative deals: real estate, venture capital, even junk bonds.

Today, said Professor Bodie, it is pension funds that are making unorthodox investments, trying to recoup stock-market losses by adding hedge funds, private equity and other risky vehicles to their portfolios.

For the savings and loans, the strategy backfired when their investments soured. And because the Savings and loans had been encouraged to expand before they failed, their losses were much bigger than if the regulators had simply closed them in the first place. Analysts now estimate the total cost at $150 billion to $200 billion.

The presence of federal deposit insurance prolonged the crisis, economists say. Depositors stayed cheerfully put, knowing the government would make them whole if an S.&L. failed.

Today, the existence of government pension insurance may be encouraging risky behavior by companies and their pension managers, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College.

"Heads they've won, tails the government loses," she said.

The agency that insures pensions, the Pension Benefit Guaranty Corporation, is now technically insolvent, having taken over a number of large bankrupt pension plans in recent years. It owes retirees more, over time, than it has the money to pay. Unlike the S.&L. guarantor, it has many years to make all the payments it owes. But at some point, it will have to tap new resources.

No one can say when — or which resources. Congress has the power to raise the premiums that the agency charges companies. But so far Congress has shown no interest in doing so.

This may turn out to be another echo of the past, Professor Benston said. The hopelessness of the S.&L. situation was clear by 1988, he said, but Congress staved off any announcement of the taxpayer bailout until 1989. By then, the presidential election was over.