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More Adventures In Pension Reform: Why Are The French Striking, And Could It Happen Here?

The CGT union railway workers gather in front of a banner “Let’s demand the reopening of SNCF … [+] stations and ticket offices” as they take part in a demonstration of employees of the state-owned rail operator SNCF called by CG union on November 5, 2019 in front of the Gare du Nord in Paris to defend SNCF’s internal public service, denounce their living and working conditions, closing lines and ticket counters. (Photo by Michel Stoupak/NurPhoto via Getty Images)
NurPhoto via Getty Images
If all occurs as expected, transit workers nationwide will be on strike in France tomorrow. As Forbes contributor Alex Ledsom explains, national rail workers, Paris transport workers, and Air France air and ground crews will be on strike. Postal workers and teachers are expected to join in, as well as ambulance drivers and hospital workers. Truck drivers have announced they intend to block major roads beginning on Saturday. Ledsom further reports that “the strikes may last weeks.”
Why? French President Emmanuel Macron wants to reform pensions for public sector workers, doing away in particular with provisions that allow these workers to retire as early as their mid to late 50s, or even in their early fifties, in the case of Paris subway conductors, or at age 52.5 with 37.5 years of work history, in the case of mariners. As Reuters reports,
“After Greece and Italy, France is the third biggest spender on pensions among developed nations, spending 14% of national output on pensions, OECD data shows. In comparison, Germany spends 10%, the United States 7% and Britain 6%.”
And because French government is so centralized, this is all a matter for the central government, rather than waves of state and local reform.
It all lends itself to being mocked very easily. But it seems worthwhile to ask the question: how does that compare to the U.S.?
Consider the mass transit workers in Chicago, Illinois — the bus drivers, the subway station attendants, the mechanics at the garage. They are provided a pension by their employer, the Chicago Transit Authority. Their normal retirement age is 65, at which point they receive 2.15% of highest-four-year-average compensation times service, up to a maximum of 70% of pay. Employees may retire as young as age 55 with a 5% per year reduction, or with no reduction with 25 years of service, if hired before 2008; if hired after 2008, the reduction is always applied with the small exception of those retiring at age 64 with 25 years of service. (Curiously enough, the plan does not provide the Cost-of-Living Adjustments which receive the blame for the underfunding of the state plans.)
The plan flies somewhat under the radar relative to the plans for which the City of Chicago or State of Illinois have direct liability. Its funded status? Eh, it’s 50% funded based on GASB accounting, based on an inappropriately-optimistic valuation assumption; maybe more like 43% funded with a realistic assumption. For funding purposes, it’s 53% funded; state law requires that it set its employer and employee contribution to make up the difference between this level and a 60% funded status in a rolling 10 year timeframe; only beginning in 2040 must it set a funding target of reaching 90% funding in the year 2059. To fund this, employer contributions are now set at 20.647% and employee contributions at 13.324%; unlike the usual state and city plans, employee contributions vary each year rather than being fixed at a given rate.
What about railroad workers — employees at CSX, Union Pacific, and the other lines that criss-cross the country? They receive their retirement benefits through the Railroad Retirement Board, a system which is structured to provide benefits that match Social Security’s benefit formula (”Tier 1”) plus a supplemental benefit of 0.7% of pay per year of service, that is, a formula that resembles traditional employer-sponsored benefits (”Tier 2”), payable as early as age 60 without reduction for those with 30 years of service, or payable between the ages of 62 and 67 following the usual reductions applied to Social Security benefits, with less than 30 years of service.
To fund these benefits, employees and employer each pay contributions equivalent to the usual FICA contributions plus additional contributions which now stand at 4.9% for employees and 13.10% for employers. The financing structure of the system is complex because of its connection to Social Security. What’s more, even though this is a program for private-sector employers, it does not follow any of the norms of private sector (or even state and local public sector) pension plans, but instead measures the 75-year surplus or deficit based on required contributions. As the actuarial report explains:
“The railroad retirement program is a social insurance program rather than a private pension plan. A private pension plan should build up funds in an orderly way over the working lifetimes of the participants. With a fully funded program, the value of the accumulated assets will be sufficient to discharge all liabilities for the accrued benefits. Pay-as-you-go funding, where the pension costs are charged to the retirement years as the benefits are paid, is not acceptable for a private pension plan because of a lack of participant security. Because private pension plans can terminate, they should, ideally, be fully funded to protect the rights of active and retired participants.
“For a social insurance plan, however, the situation is different, and full funding is not necessary. The program is expected to operate indefinitely. Because the program is compulsory, new entrants will constantly be entering the program, and they and their employers will be paying taxes to support the program.
“Unlike some other social insurance programs, the railroad retirement program relies on payroll taxes from the employer and employees of a single industry.”
Here’s a third instance: mariners.
There is, as it happens, a pension plan for seafarers, or, more specifically, for members of the Seafarers International Union, Atlantic, Gulf, Lakes, and Inland Waters, AFL-CIO, which, as its website says, “represents professional United States merchant mariners sailing aboard U.S.-flag vessels in the deep sea, Great Lakes and inland trades.” Unlike the plan for railroad employees, it has no connection to the federal government; instead, it is a multiemployer plan.
Now, I’ve spent a considerable amount of time discussing such multiemployer pension plans as that of the Central States/Teamsters, which is on the verge of insolvency. But the Seafarers Pension Plan is whole ‘nother story: according to its 2018 plan year Annual Funding Notice, it is 143% funded, with assets of $1.6 billion and liabilities of $1.1 billion for a participant group of 19,754. Why is it so well funded? Beats me. Immediately following the “Great Recession” market crash, its funding had dipped to 91%, but it’s recovered in the meantime, and even on the more conservative “current liability” basis, with a lower interest rate, it’s fully funded (based on the Form 5500 government filings). Absent some secret government subsidies or special arrangements, the plan is expected to stand on its own two feet.
In addition, according to the plan document available online, the normal retirement age of 65 for a seaman and 62 for a boatman, with an unreduced “early normal pension” is available at age 55 with 20 years (7,300 days) of service, for workers who continue working until their retirement date, or a reduced pension for those who leave prior to age 55, again with 20 years.
This means that the Seafarers’ benefits are the most directly comparable to the French generous early retirement provisions. But, again, absent some hidden loophole or extra subsidy, they are not government funded, but setting aside sufficient employer and employee contributions to afford these early retirement benefits.
Of course, all that being said, we certainly do have groups in the US with generous and unfunded early retirement benefits — that is, state and local public workers and teachers, in those states with woefully large pension debts. Would the prospect of pension reform in, for example, the state of Illinois produce a similar strike? Eh, given the many obstacles it faces, in the form of a constitutional amendment, a head-in-the-sand governor, and the like, we’re unlikely to find out.
As always, you’re invited to share your comments at JaneTheActuary.com!
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