One More Bailout for Uncle Sam to Deal With? by Nilus Mattive,
Publisher, Easy Street Investing
Last week, the Pension Benefit Guaranty Corporation — the
entity responsible for insuring private pension plans of all stripes — dropped
a bombshell …
The PBGC said it ran its biggest deficit ever during fiscal
2014. What’s worse, the PBGC said it
will be insolvent within 10 to 15 years!
To put this in perspective, the $62 billion shortfall
reported for 2014 is almost double the $36 billion reported for 2013, and marks
the 12th-straight year of deficits at the PBGC.
This is important news whether you currently receive a
company pension, are entitled to one in the future, or are merely a U.S.
taxpayer. Let me explain why …
Exposed: JPMorgan's gold strategy ...According to recent
reports ... megabank JPMorgan made money trading during every single day of
2013. That's a perfect record for the whole year! The odds of that happening by
skill alone are simply astronomical. And this isn't a fluke. In fact, over the
last 5 years, JPMorgan has earned profits on about 90% of their trading days.
Internal Sponsorship - The PBGC is there for workers when
their companies break retirement promises. Yet, ironically, the PBGC itself has
been underfunded every year since 2002! To its credit, the organization was
doing a decent job of getting back toward the black for a while. It cut its
deficit slightly in 2005 and then made major strides in 2006 … 2007 … and 2008.
Obviously that was a temporary trend.
And even the folks in charge now say the problems are irreversible without
changes to the system.
So Here’s the Critical Question: Where Does the PBGC Get Its Funding? The PBGC is a federal corporation created
under the "Employee Retirement Income Security Act of 1974." That basically means it’s a
quasi-governmental agency, much like Fannie Mae and Freddie Mac were.
(Yes, feel free to either shudder or snicker at this point.)
Essentially, the PBGC builds up a kitty by collecting
premiums from working pension plans, and then uses that money to dole out
benefits when companies go bankrupt or otherwise abandon their plans.
The PBGC currently guarantees basic pension benefits for
about 44 million U.S. workers and retirees taking part in nearly 30,000 defined
benefit pension plans.
Before I go any further, here’s a quick refresher on defined
benefit pension plans. They’re the dying
breed of retirement plans that guarantee participants a set amount of money —
paid monthly for life — generally based on the number of years of service
performed at a company.
To operate these plans, companies have to sock away money
for each covered worker. More importantly, they have to hope their investment
assumptions work out well enough to produce enough in future returns to cover
promised payouts.
When their investment portfolios don’t perform as planned —
and that happened across the board during the financial crisis — companies must
either dig deep into their corporate coffers or discontinue their plans.
You can see why very few old-line companies are offering
defined benefit pension plans to their new crop of workers. And why they’re
having a hard time keeping their existing plans solvent.
We should all remember that the PBGC basically faces the
same challenges … plus a couple of additional hurdles.
Like private companies, it has a set amount of money in its
kitty. And like private companies, it has to hope future investment returns
allow that money to grow fast enough to cover future outlays.
But it CANNOT borrow from its regular operations to cover
its deficit. After all, it doesn’t have a regular business to fall back on …It CANNOT
discontinue its operations, obviously … And given the fact that fewer companies
are choosing to continue offering defined benefit plans, it has fewer and fewer
healthy plans to collect premiums from!
So Where Might the PBGC Get the Moneyto Correct Its Massive
Deficit? Here’s the thing … the PBGC
does have a lot of money in its plan. And
it’s unlikely that anyone currently receiving benefits is going to suffer in
the short-term.
Because benefits are paid out monthly, the PBGC has some
leeway. Plus, a greater number of failed plans means more immediate funding for
PBGC because most companies leave behind some money when they close shop.
However, none of that makes the long-term health of the PBGC
any better. It really only has a few ways to solve its systemic underfunding.
Obviously, if its investment portfolio has a rip-roaring
rally, everything will be just peachy.
But the idea of investment gains making up much ground is a
long shot. Especially once you realize that the PBGC’s portfolio has traditionally
been 30% stocks and 70% bonds!
That kind of an asset allocation certainly helped the PBGC
avoid an even bigger catastrophe during the financial meltdown. However, it
also means their portfolio probably missed most of the rally over the last few
years.
The second option is for the PBGC to cut the amount of
benefits it pays out to current recipients or to reduce the amount it offers to
future workers covered in the event of plan failures. Remember that the PBGC
already imposes a cap on how much it pays out workers — $57,477.24 a year to
anyone 65 years or older.
Still, I don’t see it being able to reduce payments to
anyone already covered. Only the idea of a smaller guarantee to future
recipients is a possibility. They could simply maintain current payout levels
and let long-term inflation work its magic. But really — the PBGC simply needs
to get more money into its coffers.
A lot of experts have been calling for higher premiums being
charged to member pension plans. And that may certainly happen. Yet there are
two big drawbacks to this approach, as I see it:
First, as previously noted, there are already fewer and
fewer companies offering defined benefit pension plans.
Second, charging the good plans higher premiums will only
give companies one more reason to STOP providing defined benefit pension plans,
which would exacerbate the existing problem.
That leaves just one place for the PBGC to get its money …
you and me! One More Bailout for Uncle Sam to Deal With?
The story is just like all the others — whether it’s Fannie,
Freddie or Social Security. These programs start with great intentions. They
run fine when things are going well. But when things go bad, they become
taxpayer money pits. They’re beasts that need constant feeding, growing
hungrier and hungrier with time.
In its defense, the PBGC has never taken a dime of taxpayer
money yet. Still, this latest financial report painted a very grim picture. And
as the hole gets deeper, the solutions only get more extreme.
Source: Nilus Mattive, Publisher, Easy Street Investing
Posted on: http://www.uncommonwisdomdaily.com
Uncommon Wisdom Daily is a free investment newsletter
published by Uncommon Wisdom Daily, a division of Weiss Research Inc.
Comments
The bulk of the organizations who offer a Defined Benefit
Pension Plan are full of government and union employees. This includes cities
and counties, with teachers, police, fire, etc.
It includes the federal government and utilities like power plants and
the phone companies, These employers did not considered the rising cost of
pension plans like the private companies did.
Over the past few years, many cities have declared bankruptcy. Detroit
and others have ceased paying pension checks to retirees.
After 1989, Congress tightened pension funding rules as the
stock market went up and down like a rollercoaster. The 401K Defined
Contribution Plans were already in place.
Many of us in the private sector terminated our pension plans and
created Age Weighted Contribution Plans to ensure that older workers would not
be hurt. We continued to contribute 5% of payroll to the “Age Weighted”
Plan. Most employees transferred their
pension payout funds to their “Age Weighted” Plan. This allowed employees to
choose the investment options. It allowed companies to remove a troublesome
liability.
Norb Leahy, Dunwoody GA Tea Party Leader
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