While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis

The author, Lowenstein, is a financial journalist who dedicates, basically, three sections of his book to three different pension collapses and a fourth and concluding section where he attempts to provide solutions to what the nation's pension crisis. He uses the three different pension collapses as case studies that are intended to illustrate in what condition the US's pension system is in at the private, quasi-governmental and local government levels. The three case studies cover General Motors (the private sector), New York City's MTA (quasi-government sector) and the city of San Diego.Each of these is covered in some depth in terms of history and development of the unions with respect to each organization, the parallel history and development of the pension funds and, most importantly, the cause of the pension crisis in each organization. The cause, for each, was basically: a) pushing adequate funding down the road instead of handling the problem immediately; b) increasing costs of health care; c) increasing life spans of the covered. Eventually, due to these three factors, all three organizations' pension funds brought about a serious crisis in the financial viability of each organization. There were differences in each story, for example in GM's case management kept pushing funding down the road while in San Diego the City used the pension fund's reserves, instead of raising taxes, to keep running the city and providing public goodies such as stadiums. The theme of all three stories was that the increasing liabilities brought about collapse.Each of these stories is well told. However, the problem is that they are presented as analogies with respect to what is happening to pension funds around the nation in the private, quasi-governmental and public sectors. To do this the author needed to tie together the three different stories to what he posits is a national crisis. To do this he needed to present statistics discussing liability to reserve ratios, returns on reserves, health care cost projections as well as life-span increase projections, among other things. In other words a macro analysis was needed. Unfortunately the author does not provide such a discussion. Hence the reader can see how the three case studies lead to the disaster that they did but the reader is unable to ascertain whether this problem is currently prevalent and characteristic of pension funds in the nation as a whole. Hence the book, to a large degree, defeats its purpose.In the last section of the book Lowenstein provides his list of solutions to the problem. One is the conversion of pension funds to an annuity form. Unfortunately this, as even Lowenstein himself admits, would only work for those funds that are already properly fund. What he does not mention is that this may not work if investment returns are less than what annuity companies have estimated them at (as is not the case with record low returns) and/or if there is not adequate insurance available to annuity funds. Considering AIG and other bank insurance providers in the current economic downturn this is not an unrealistic scenario to contemplate.A second solution he provides is to convert pension funds to 401(k) style funds. Unfortunately, this too poses a number of problems. One is that, as Lowenstein admits, this does not really solve the problem for those who cannot contribute enough to their own retirement. Considering the fact that median household (with 2 working partners and children) income in the US is about $50,000 this is not hard to see why. Other problems with this, that Lowenstein leaves unsaid, is that many company controlled 401(k)s have much higher administrative costs then they should. Nearly all are well above Vanguard's gross administrative fees. A solution to this would be to switch the administration and control of the funds from employing companies to the employees themselves but there is, at least as of yet, not movement on the political horizon by either Democrats or Republicans to make such a move.A third potential solution would be to change pension fund accounting standards. Currently the Federal Accounting Standards Board (FASB) assumes pension funds will have an annual return of 8%. Considering the fact that this implies that all pension fund money will have to be in stocks (as opposed to a large percentage in bonds, the way they should be) and stocks will be performing over the next few (and perhaps many) years poorly to what they have been performing in the past a not very good assumption in terms of its impact on pension fund solvency. A good idea would be for the FASB to significantly reduce its assumption of returns. Three or four percent would be far more realistic than its current eight percent. Unfortunately Lowenstein does not even discuss this option.

You might recognize Roger Lowenstein's name. He is the author of  When Genius Failed , the definitive history of the 1998 Long-Term Capital Management collapse. While America Aged is a good history of the pension crisis and would be a good compliment to Dora L. Costa's The Evolution of Retirement .The root of the problem is that the pension and health bills are paid by future generations but the benefits are enjoyed today by the current workers who receive payment, the current tax payers who temporarily dodge payment, and the current politicians that can take credit. This is a classic example of moral hazard in action.One of Lowenstein's key themes is that "retirement" is a relatively new concept. It was never considered a guaranteed "right" that all Americans are entitled to until very recently. Is his historical recap, Lowenstein writes,"But in the United States, until very late in the nineteenth century, pensions were almost unheard of... Most people worked on farms on in small shops or mills. As they got older they didn't stop working, they simply worked a little less. If old age did catch up with them, they turned to their families for food and shelter. The `problem' of old age was in any case not widespread.... Retirement was less one of life's standard passages, like adolescence or middle age, than it was an infrequent and brief preamble to the grave."So what was the impetus for the creation of "retirement"?"The man who tended a farm could gracefully age on the job; the factory worker couldn't. Shop stewards and department managers wanted the graybeards out, to make room for younger blood.... Pensions were created by companies that reckoned it to be in the corporate interest. They were a tool for managing labor, not an entitlement due to labor...."The transformation of retirement from a benefit to the company to a benefit for the worker was gradual, but it greatly accelerated during World War II. The government froze wages while still allowing firms to grant noncash benefits such as pensions and health insurance.The American private pension and health system was not really planned; it evolved based on labor market conditions from a bygone era mixed with muddled and ill-conceived government regulations. Yet because it has become the status quo, it is treated as somehow being sacrosanct and untouchable. But as Lowenstein writes, "...there us no reason for [pensions and] healthcare to be tied to the workplace (any more than there is for companies to provide schooling, shelter, or basic needs.) In any case, they can't afford it."On thing is certain: This problem is not going away. With the coming retirement of the Baby Boomers, pension and health funding at the corporate, city and state, and national levels will be the next major fiscal crisis for the United States.

Overall this book provides a useful summary of the challenges that Defined Benefit pensions have faced in the past few decades by concentrating on three case studies.The last chapter of the book was frankly a disappointment. The entire defined contribution/401(k) pension system was readily dismissed with minimal discussion. Lowenstein is certainly correct that the 401(k)was not really intended to become a primary retirement mechanism and that ERISA does not provide the same level of protection for DC plans as it does for DB plans. Beyond that, however, he provides no meaningful analysis of them.Retiree Medical plans/OPEBs could have also used somewhat more coverage. Lowenstein dips his toe in this subject but never really get very far into it. When he returns to the concept of medical care, he presents a somewhat incongrous argument in favor of a direct public subsidy health system. While he presents it for the perspective of a voucher system, there seems to have almost no consideration of the very real prospect of government failure as he describes in the section on San Diego.The author's prescription for ERISA-like regulation of public sector pensions(presumably combined with economic basis pension accounting)is a very good one. Unfortunately, Lowenstein never addresses what is one of the more interesting questions of the pension accouting system- if the concept of deferral is elminated by stricter funding regulations, would these entities have ever offered DB plans in the first place?

.....reading Roger Lowenstein's 'While America Aged' will,or should bring the 'dawn of realization' to us all, that actions and decisions taken now with regard to pensions and healthcare will have a very long financial 'wallop on the wallet' not only on us in later life, but on our children and grandchildren. Also unrealistic agreements for unaffordable and underfunded employee benefits, might well far from benefit the employee, and leave him/her unemployed through bankrupting his/her company.The author looks closely at three examples of where a combination of employee benefits were allowed through strident union leaders, weak employers and feeble politicians and public officials, to escalate above and beyond that which was feasible in terms of being economically viable ie. affordable. It was very much the case of "lets get the rats off our backs now by committing the future management, shareholders, citizens etc to unsustainable, and unreachable liabilities way down the line......we'll be way out of the firing line by then, and somebody else will have to sort it out!"The first example vividly illustrating this problem were the General Motors and the United Auto Workers, where from the 1950's onwards powerful union negotiating, and weak management, allowed a wholly unwarranted escalation in employee benefits and thus much higher labour costs, which in the face of the increased competition from Japanese car manufacturers with massively reduced labour costs, led to plummeting sales and bankruptcy.The New York City public transit system is the second case where the threat of disruption to the city's transport - absolutely pivotal for the city to function commercially - brought about fairly frequent irrational demands from the unions and capitulation by the city managers. The Transport Workers Union won subway workers benefits so generous that they could retire by the age of 55, with a pension based on their last years salary, which surprise, surprise led to payable pensions being highly inflated by many spurious overtime credits bolstering the final years take-home pay. The concessions gained by the Transit Workers, were of course, used as a negotiating bludgeon by other public workers to push up their pensions accordingly. Whilst current demands have been greatly tempered and commonsense returned to the equation, the city still faces huge liabilities.Finally, the City of San Diego municipal workers were also granted more than economically sustainable pensions, but then the city not only deliberately skimped on the annual contributions needed to be reserved to cover the pension liabilities contracted but went to great lengths to hide this blatant under-funding from the public gaze, with the complicity of the Mayor, City Councillors, Pension Fund Trustees, high ranking city officers, accountants and actuaries etc.I purchased this book purely because of the excellence of the authors coverage of another seemingly potential yawn inducing situation ie the world of quants and algorithms as exposed in 'When Genius Failed' which was thoroughly enlightening and enjoyable. How right I was! This book is highly readable, interesting, insightful, and difficult to put down once started, and if anything I enjoyed it a tad more even than 'When Genius Failed'.

Actually I agree with Jonathan. It is an interesting subject. The problem I have that it is not an easy read for a non american. Too many names for instance. There is just too much name dropping of local politicans I cannot relate too, too much of local legislation and politics. Lowenstein has shown he can write a good story but I guess he needs more pages to tell a story in a good way. This book is too dense, Too much non-interesting information for a reader an ocean apart.