Pension concerns cloud region’s economy

REGION – The Grand Traverse region's economic vitality is being threatened as an auto industry restructuring looms and "baby boomer" retirees are being hit with huge declines in their net worth, financial experts say.

An already worrying situation could worsen if a nightmare scenario comes to pass: the shutdown of one of the Big Three or a major auto supplier. That could sentence many retirees to months of financial uncertainty and possibly years of hardship.

As things now stand, many have endured 20 to 30 percent declines in their stock portfolios, based on the overall performance of the markets. But that's nothing compared to impact of a major auto industry insolvency.

"It will be devastating for northern Michigan if we have a bankruptcy in the auto industry," said Kirt Kilbourne, vice president for investments and branch manager, Stifel, Nicolaus & Co.

In addition, the recent declines in families' net worth and prospects of pension meltdowns may deter potential early retirees from moving to the region.

With their independent sources of income, retirees have been one of the mainstays of the economy, shoring up everything from home prices to retail sales. Over the last decade, the early retirement of many baby-boomers has only increased the trend.

Now they are among the hardest hit.

"The fabled baby-boom generation has had more equity market exposure than any generation to come down the pike," Kilbourne said.

As their portfolios declined, they have cut back sharply on expenditures. Restaurants have been among the chief victims of the lower spending, he said.

"That generation has seen a decline in their spending that is astronomical. They were, quite frankly, the group of people who have been eating out four times a week," Kilbourne said.

There are few statistics on the economic impact of retirees in the Grand Traverse region. But across the country, economic developers have touted retirees, flush with their savings and pensions, as a pollution-free way to add jobs and vitality to a region.

A 2007 study by consulting firm Arizona-based Thomas, Warren & Associates showed that people age 55 and up who migrate to other areas at retirement have higher average per-capita incomes and spend more on property and consumer goods than younger people.

The Grand Traverse region also has a somewhat higher than average share of residents over 65. That age group represented 14 percent of the population in Grand Traverse and Kalkaska counties, 18 percent in Benzie and 19 percent in Leelanau. The figure was about 12 percent for Michigan as a whole, according to the U.S. Census Bureau's 2006-2007 American Community Survey.

Those figures don't reflect thousands of part-time residents or early retirees. For instance, one-third of the nearly 3,000 people age 55 to 64 who live in Grand Traverse County full-time may have voluntarily left the workforce and retired, census data suggests.

This conclusion is based on the fact that about 37 percent of people between the ages of 55 and 64 in Grand Traverse were not working in 2006 and 2007, compared to 14 percent between the ages of 45 and 54.

To the extent that they rely on the stock market for income, they have taken a beating. The major indices, including the S&P 500, the NASDAQ Composite and the Dow Jones Industrial Average, declined by 32 to 40 percent in 2008.

"For what I consider to be risk assets, it has been a sharp and severe downturn, no doubt about that," said Jerry Pearson, the J.P. Morgan managing director who covers most of Michigan from Traverse City.

But as bad as 2008 was, he still urges investors to look at the long-term. Share values may end the decade about where they started in 2000, he said. "But if you look at it from 1990, over the last 20 years, this looks kind of average, in the 8 to 9 percent area. Everything depends on where you measure it from."

Interest rates may be a greater hardship right now than share prices, since retirees often rely on fixed income investments, he said. "As their bonds come due, they are finding that the interest rates that they can lock in are low."

Financial advisors say they have counseled their clients to scale back their lifestyle – and then resume higher spending levels when the economy improves. "There are going to be times when spending is going to perhaps be more frugal and other times more liberal," Pearson said.

Kimberly Simpson, vice president and investment officer at Northwestern Bank, agrees. She counsels her clients not to cut into the principal of their investments. She believes many are following her advice.

Still, most of her clients are holding up well, she said. "The bulk of our customers are retirees, and most are getting a pension and Social Security. They do not have debt at this point in their life, so from a balance sheet standpoint, they are in pretty good shape."

But that could change for some of them if their pension fund goes bust.

The Pension Benefits Guaranty Corp, a federal safety net, is designed to protect retirees' pensions. But the latest statements from the agency suggest it would be hard-pressed to pick up the pieces if an automaker were to go under.

In theory, this federally-sponsored insurance program is supposed to have workers' pension needs covered. But in practice, it mostly relies on major corporations to fund their plans adequately, and then it takes over responsibility for the relatively few that fail.

The PBGC's maximum payouts are based on the retirees' age when the PBGC steps in.

It won't pay out more than more than about $54,000 a year (or $4,312 a month) to retirees who are 65 when their plan crashes – no matter what the originally scheduled payments were supposed to be.

Based on 2008 figures, younger retirees face more drastic PBGC maximum payouts: $1,509 a month for plans that terminate when the retiree is 50, $1,940 for 55, and $2,803 for 60.

Similarly, the PBGC, which is funded by insurance premiums paid by participating employers, is not equipped to handle a bailout on the scale of one of Detroit's automakers. Indeed, in a worse-case scenario, it could become as insolvent as the corporations it was designed to shore up.

Detroit News recently quoted outgoing PBGC chief Charles E. F. Millard as saying that the Big Three face a $41 billion shortfall in their pension funds. In November, PBGC sent letters to the automakers saying that it was concerned about their use of pension funds to pay for employee buyouts.

Those payouts have drained their funds to some extent, he told The News. So have declines in the pension funds' stock portfolios.

As a result, the automakers or Congress could conceivably seek cutbacks in retirement payments. Millard, however, isn't backing that course. He recently told the financial magazine Barron's that the Big Three should retain their pension obligations in any bankruptcy or restructuring.

Kilbourne agrees, saying that companies should feel obligated to honor commitments – even if they are in financial distress. "In my mind, a deal is a deal. The way I see it, the pensions ought to come first – before the secured lenders and the debt holders."

Health care, which the PBGC doesn't cover, is one of those commitments in his view.

"All these people who retire semi-early aren't on Medicare yet, but they could end up paying huge amounts for health-care coverage."

The details of the Big Three's restructuring are yet to emerge, however. George Erickcek, an economist at the W.E. Upjohn Institute in Kalamazoo, said it is still "conjecture as to how that will play out."

So far, the stock market's effect on people in or near retirement is bad enough. Aside from steep declines in their portfolios, their homes have plummeted in value and become difficult to sell. If they can't sell their home, the funds they need in retirement may never materialize.

"As people have had to cut back on their consumption and retirement plans because of a decrease in the value of their 401(k), it is more likely they will find themselves retiring where they are living," he said. "We have heard reports that, in some instances, people may want to move to a retirement community and simply have not been able to sell their house."

"At the same time, for those already living in Traverse City, I see an increase in the supply of older retirees looking for part-time work," Erickcek said

That represents both a challenge and an opportunity, he said. While they have a great deal to contribute, the business community may be hard-pressed to come up with new jobs for them. Given that they frequently have high-level executive experience, it "can be very difficult to plug these people into the economy." BN