Congress Just Quietly Formed A Committee To Bail-Out 200 Pension Funds

Authored by Simon Black via SovereignMan.com,

The US pension system has gotten so bad, Congress is actually planning for its failure.

As the government was working on the recent, new budget deal and subsequent boost in government spending, Congress quietly snuck in a provision that forms a committee which would use federal funds to bail out as many as 200 “multi-employer” pension plans – where employers and labor unions jointly provide retirement benefits to employees.

As is often the case, this rescue “plan” is too little too late. The US pension system is beyond repair. And if you’re depending on pension income to carry you through retirement, it’s time to consider a Plan B.

Before explaining how dire the situation actually is, let’s take a step back...

Pensions are simply giant pools of capital used to pay out retirement benefits to workers. Typically, employers and employees contribute a percentage of the employees’ salary to a pension throughout his or her career. Then, upon retirement, the pension is supposed to pay a fixed, monthly amount to the retiree.

There are both government and corporate pension plans. Boston College estimates the nation’s 1,400 multiemployer plans (corporate) are facing a $553 billion shortfall. And around one-quarter of those are in the “red zone,” meaning they’ll likely go broke in the next decade or so.

But Congress’ committee, assuming it works, wouldn’t even rescue the red zone plans, much less the remaining 1,200.

And it doesn’t even begin to address the real problem – the $7 trillion funding gap faced by the government’s own pensions. Congress is stepping in because the Pension Benefit Guaranty Corporation (PBGC) – the pension equivalent to the Federal Deposit Insurance Corporation (FDIC) – is completely insolvent.

Like the FDIC, the PBGC is an insurance program funded by premiums paid by its participating members (pensions). Its entire income is made up of premiums collected and the investment income it earns on those premiums.

So, as the markets crash, not only will the PBGC’s portfolio get slaughtered… so will those of the pensions it guarantees (which will then require more funds). And as these pensions fail, the PBGC will collect less in premiums. It’s a vicious circle.

But things are plenty bad already.

The PBGC, which only covers corporate pensions, had a $76 billion deficit in 2017. It has total assets of $108 billion on its books compared to potential loss exposure of more than $250 billion.

By its own estimation, its fund to cover multiemployer pensions (which makes up $65 billion of the deficit) will be insolvent by 2025.

Pensions are in such bad shape today for the simple reason that investment returns are too low. And pensions can’t cover their future obligations.

Pension fund managers invest in assets like stocks, bonds and real estate in hopes of generating a safe return.

Most funds require a 7%-8% return in order to meet their future liabilities.

But with interest rates near record lows, these funds are having to take on more risk in order to meet their minimum return requirements. They’ve reduced their bond allocations and started buying more stocks, private equity and other riskier assets.

Some funds, like Hawaii’s pension fund, went even further and dabbled in the incredibly risky strategy of selling put options. By selling a put, you collect a small premium if markets stay calm or rise. But you’re exposed to unlimited losses if markets crash – like they did when the Dow fell 2,400 points in a week last month.

At the end of last year, equities made up nearly 54% of public pension fund portfolios. The $209 billion New York State Common Retirement Fund has over 58% of its assets in stocks. Kentucky’s $20 billion pension for teachers is 62% in stocks.

These giant funds, which are supposed to pay for public and private employees in retirement, are piling into stocks at record high valuations. And when the volatility hits, it will be devastating.

Consider that America’s largest pension fund, The California Public Employees’ Retirement System (CalPERS), lost 5% of its assets ($18.5 billion) in just 10 trading days leading up to February 9.

Pension funds should never experience that kind of volatility. But the current macro environment is forcing them to make dumb decisions in hopes of generating a minimum return.

Luckily, if you’re a smaller investor, you still have plenty of solid investment options available – even if you’re investing with tens of millions of dollars. But these strategies get more difficult if you have hundreds of billions of dollars. So these pension funds are forced to buy stocks and real estate at all-time highs. It stretches valuations and creates huge risk.Still, pension fund allocations to equities are near all-time highs. So, ask yourself, what will happen to your retirement if the stock market falls just 20%? What about 50%?

There’s zero chance these funds will be able to pay out retirement benefits. They’re taking huge risks at all-time highs and they have zero downside protection (the PGBC is broke).

It’s smart to consider some other options like a self-directed IRA, solo 401(k) or a SEP IRA – which allow you significant latitude in making better, safer and stronger investments.

Plus, they allow you to put more money away toward retirement before tax. And there’s no downside to that. You’ve got make long-term plans for retirement. The pension system is broken. So the time to take action is now.

Comments

MANvsMACHINE ThinkerNotEmoter Wed, 03/21/2018 - 18:20 Permalink

The government should be forced to explain how they’re going to be able to pay out Social Security benefits in 10-20 years when the math proves that they can’t.

Once they are forced to admit that there will be nothing left to pay out, anyone still contributing should then ask why they are still contributing when they won’t get any money back.

In reply to by ThinkerNotEmoter

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In reply to by Unknown User

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In reply to by BuddyEffed

ScratInTheHat waspwench Wed, 03/21/2018 - 20:28 Permalink

That's right! They started to plan to take 401Ks back in 2006! Doesn't anyone wonder why they have setup the new 401Ks so that you have to opt out but they still make a 401K account that is unfunded if you do opt out? It’s so they can show that 401Ks are underfunded and need to be nationalized! They are making it look underfunded when it is just a bunch of people that didn’t want their money going into a 401K! 401Ks are government controlled accounts folks! They can and will take that money when the SHTF!

In reply to by waspwench

gregga777 DinduNuffin Wed, 03/21/2018 - 17:20 Permalink

The Golem Suchs Feral Reserve System looted the pension funds, via ZIRP and QE, to bail out the criminal Anglo-Zionist Banking Gangster Kabal. The pension funds have been driven to "picking up pennies in front of a steamroller" to use Taleb's hilarious visual description. Lots of workers are going to get squished. 

 

In reply to by DinduNuffin

dizzyfingers BabaLooey Thu, 03/22/2018 - 11:30 Permalink

Pension crisis could start a revolution, Teamsters’ Hoffa warns

Video of interview Maria Bartiromo, a misleading headline given he was talking about Social Security re: "revolution," but still entertaining /worth watching/being aware of, text intro includes “International Brotherhood of Teamsters President James Hoffa said the government has no right to take away pensions from hardworking Americans. …”

In reply to by BabaLooey

lew1024 Hongcha Thu, 03/22/2018 - 07:02 Permalink

Amply aided by a CIA-controlled media!

Most people everywhere get their understandings from the sources available to them. Those are the ones easily controlled, so most people CAN'T understand the reality, have no clue, their opinions are formed from the propaganda.

We here in the alt-media and informed social media are still a minority.

Don't blame people in general, work to change their sources of information.

In reply to by Hongcha

swmnguy Stuck on Zero Wed, 03/21/2018 - 18:09 Permalink

I bet it's the opposite; way cheaper to bail out the pensions than to keep pumping plasma through the corpse that is Wall Street.  Besides, the pensioners spend their money into the real economy, while Wall Street just stuffs it up each others' asses.

But this has been the plan all along, since the 1980s when Wall Street and the C-Suites started the campaign to get rid of pensions and replace them with 401k and IRA plans.  Great idea; shift all the risk and burden of saving for retirement onto the employee, thereby enormously devaluing the benefit offered.  And flooding money out of the bond market and into the stock market, too.

Then they got Congress to change the funding guidelines for pensions, so they could deliberately underfund them.  How else can one explain professional financial managers with a very binding fiduciary obligation arguing in the late '80s and early '90s that they should be allowed to assume 8% annual returns in perpetuity, mostly in the bond market, and set contributions accordingly?  That's what you do when you have no intention of coming up with th emoney you're obligated to provide.  Remember, employees accepted lower wages in return for the pension, as part of an overall compensation package.  It's a retroactive, unilateral pay cut the bosses intended.  They weren't going to pay the money.  They used it to pay themselves bonuses and buy back their stock, as it's turned out.

So for allowing the employers to default on their obligations, I suppose the Federal Government is obligated to bail out the people who got set up to get screwed.  I'd like to get at least a good perp walk out of this; certainly somebody remembers whose brainchild this was and could testify against them.

In reply to by Stuck on Zero

JuliaS swmnguy Wed, 03/21/2018 - 20:05 Permalink

And don't forget Glass-Steagall which also ended up inflating the stock market. You can't make ends meet and are forced to gamble with your savings. Meanwhile they take your other savings too and pour them into the same casino pot, creating an illusion of low risk and sustained payout.

It reminds me of a comedy sketch where a crook pickpockets a guy, hands him half of his own money back, saying: "Get lost!"

They are bribing us with our own money via measly subsidies, they extort more money with goons hired by the same money. They steal from us via fiat dilution, and on top of that, they jack up taxes, criminalize barter and steal out in the open via civil forfeiture (what a fancy name for robbery in broad daylight).

Fuck every single last one of them. The government, the banks, the enforcement agencies, watchdogs and whatever. They are the enemy. All of them! Not an inconvenience or nuisance, but a goddamn cartel of terrorists. And they're telling me I should be afraid of towel-heads half a world away that don't even have boats, nevermind ICBM's or aircraft carriers.

Oh, and there's a fee for keeping me safe from those boogeymen. MIC says: "Bend over. Don't worry. We brought protection!"

In reply to by swmnguy