Pu: Hey Rubbish, let’s talk about Pension Funds! Wow is that a scintillating subject! Full of twists, turns, and an impending government bailout! Wahoo! I live for this stuff!
Rubbish: Oh, Gawd. If we must. And I bet you have an awesome amount of research you want to share with us?
Pu: You betcha!
Rubbish: Neither of us have pension plans since we’re self-employed. Is this going to affect us or are you going to drag us through this fiscal swamp for your own amusement?
Pu: Pretty much for my own amusement although about 17% of Spartans will have a pension plan of some sort so they’re directly affected. Those with 401Ks and IRAs could well be affected by the government bailout. And for those that don’t have any retirement savings, you’re probably planning on using the equity in your home so you’re screwed but don’t know it yet.
There’s also a lesson here for everyone regarding how the “smartest people in the room” structured massively underfunded pension plans that have become “tribal knowledge” that everyone uses.
Rubbish: Let’s start with the “tribal knowledge” bit first. What do you mean?
Pu: When developing pension plans, companies, unions, cities, states and the federal government have made unsupportable assumptions of what type of income could be expected from investing pension funds for growth. Payouts were then based upon the “projected” return. Here is an easy to understand example.
A person decides to invest money in an account. He expects that the return will be 8% annually on the money. At the end when he retires, he can count on a certain total income to live off for the rest of his life.
The problem is that 8% is unsustainable, and like right now, he may be getting only 2%. His total income projections are off, and he will not have enough money to live off of when he retires.
Rubbish: I think I got sucked into that thinking. We used to hear all the time how the S&P grew at a 10% rate over a long period of time so if you were willing to take a bit of a risk, that’s what you could do with your retirement money. If you wanted to take a bit less risk, you could invest in dividend paying stocks, but everyone knew you could always get 5% from your local Savings and Loan.
Pu: This is essentially what happened with the pension funds as well. The pension funds expected to make a lot more from their investments. Reality is sucking in a big way here. There are many funds that are “severely underfunded” meaning they will not be able to meet their payout obligations.
Rubbish: Does this mean that the pension funds are another Social Security Trust Fund problem waiting to happen?
Pu: You got it. Another ticking time bomb. Here are the facts:
- More than 18,000 companies have under-funded pension plans.
- If every company in the country suddenly terminated their retirement plans, they would face a $450 billion shortage.
- America’s 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008.
- 50 states are collectively facing $5.17 trillion in pension obligations, but they only have $1.94 trillion set aside to cover the pensions.
- There are 71 union pension plans that have no money. Benefits to retirees are being paid by the PBGC. The New York union’s pension fund is one of these, covering 4,000 retired truckers across the city and Long Island. It alone costs PBGC $1.7 million a month.
Rubbish: What’s a PBGC?
Pu: The Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of more than 40 million American workers in nearly 24,000 private-sector defined benefit pension plans.
Rubbish: Oh, swell. So what does this all really mean?
Pu: It means that the PBGC guarantees all pension plans. If a pension program does not have enough assets to cover payments due, then the PBGC will make payments in place of the pension fund. The only good news is that in order to keep afloat, PBGC doesn’t try to match a retiree’s union pension. The payouts are cut, often down to about one-third of what the worker is due.
Rubbish: Well, not so much good news for the retiree! What about public unions for government workers? Are they in the same boat?
Pu: They are except they have politicians that keep raising taxes in a foolish attempt to stave off the inevitable. In many cases, it’s not as much foolish as it is corrupt. Politicians in bed with unions often have their own pensions to protect, at taxpayer expense.
Rubbish: So is the PBGC siphoning off my money to pay for this disaster?
Pu: The PBGC is a government agency, similar to the FDIC. It is not funded by your taxes PBGC collects insurance premiums from employers that sponsor insured pension plans, It takes the money and invests it. The returns are used to assist in paying pensions when funds go belly up.
Rubbish: At least it is not our tax dollars funding things.
Pu: Not yet anyway. The PBGC is on the verge of bankruptcy.
Rubbish: I smell a bailout!
Pu: The PGBC has approximately $2 billion dollars to meet the coming pension crisis. In 2016, the PGBC paid out $113 million to 65 failed union pensions. Unfunded liabilities, just like Social Security, is $23 billion.
The $23 billion does not count future failures. The State of California has about $59 billion in unfunded liabilities as of 2016. When the state’s financial status collapses, the PGBC will have to pick it up, just like elsewhere. Private pension funds represent about $450 billion now. The PGBC will have to cover these failures as well.
As the number of failures increase, the current $2 billion on hand will not last more than 10 years. At that point, the PGBC will be bankrupt. Congress will either have to give them taxpayer funds, or else the pensioners will lose their retirement funds as the pensions fail.
Rubbish: And, of course, Congress isn’t going to let that happen. Once again, the “chickens have come home to roost!”
Pu: I never understood that expression.
Rubbish: Me neither but it always seems to get a rise out of the Spartans!