This recession has taken a toll on most investments. Even though the stock market has improved recently, it's no where near its 2007 highs. Real estate prices are also still quite low. Given all of that, it probably comes as no surprise that many pension funds are in a lot of trouble. As you might have guessed, the government wants to help.
Pension funds are under certain regulatory constraints to maintain prescribed funding levels. Many have fallen below the levels where they should be, but Congress is considering a bill to extend the time companies have to replenish their funds. The New York Times reports on this possibility:
To discourage companies from joining the many businesses that have frozen pension benefits for workers, Congress would also give employers up to 15 years to fully fund their plans if they agreed not to freeze benefits.
Why might Washington care about this? Well, the obvious reason is that they don't want Americans who were promised pensions to suddenly not get what they expected.
But there's a more subtle reason: businesses that owe former employees pension payments might have to use profits for this replenishment if their investments' value do not rise quickly enough to meet the requirements the funds are under. As a result, revenue will be going towards pensions that could have gone towards more hiring. With unemployment near 10%, that's not good.
So what's the problem with this legislation? It puts the funds at risk. Pension rules are there for a reason -- so that people get the payments they were promised. What happens if pensions begin failing as a result? Well, the government already has a solution for that. Sort of.
In case you didn't know (and I didn't) there's a government body out there called the "Pension Benefit Guarantee Corporation." In a similar way to how the Federal Deposit Insurance Corporation steps in when banks fail, the PBGC steps in when pensions fail. And just like how the FDIC's insurance is funded by fees paid by depository institutions, the PBGC's insurance exists thanks to premiums paid by pensions. According to The Times, since 1974, the PBGC has saved the pension plans of around 4,000 companies.
Sounds great, doesn't it? Until you read this (via the Times):
It has a deficit of $33.5 billion.
If companies and their pension plans continue to collapse at a rapid rate, many economists worry that the (PBGC) would eventually need a taxpayer bailout.
This highlights two problems that I find pretty obvious:
First, the fees that pensions are paying for this protection must not be nearly high enough. If they were, then the PBGC wouldn't run out of money and particularly not by such epic proportions. $33.5 billion is hardly chump change, even by today's bailout standards.
Second, the pension guidelines the government has in place must be inadequate. Pension investments should have very, very little risk. With so many in danger, these funds must have had a lot more risk than they should have.
The author didn't know of the existence of the PBGC? And he write a Business blog???
It's true: as hard as it might be to believe, there are things even I don't know.
Cut him some slack Dan. Most employees aren't aware of the PBGC, nor are most employers, especially those with pension plans that aren't required to file 5500's.
This applies only to Defined Benefit Plans, not to defined Contribution plans. DB plans are funded with future money, ie, how much do I need to put back now to fund my workers retirement benefits in year 20XX. Those relied heavily on gains in investments, compounding, etc. to help defray the current year costs to fund the plan.
We've sadly been dowen this exact same road during the last depr...recession. Companies had *underfunded* their pension plans by relying on gains but the investments actually shrunk.
Defined Contributions plans jhowever, are funded entirely today, and the retiree gets whatever the balance is in the account after whatever gains or losses there are over the years.
I had thought most companies had dropped their DB plans due to the volitity of the market and the potential for a huge cost to fund the plan in a down economy (like we're seeing now). If not, then this should kill the DB plans off for good.
Companies should be required to fun a percentage of wages, today, into a fund they can't raid tomorrow under penalty of chopping off body parts. Give the employee plenty of rope to make their own investment choices for those funds, and let the chips fall where they will.
So the real questions is, is it fair to bail out the defined benefit plans for their stock market losses and not bail out the defined contribution plans that, let's face it, have lost just as much in value per dollar invested.
I have the impression the PBGC does not always pay the full amount of the pension. It either has a max amount, or there's some formula for deciding payouts when the plan assets are insufficient. Anyone know details?
In any case, the real problem isn't private corporate pensions, but state and city pensions like CALPERS. I don't think PBGC even covers those. I think the cities/states just have to raise taxes to make those whole, no matter how much money they've lost.
You are probably correct about government pensions, except for the employee contributions, if any. The rest is paid for with current taxes.
PBGC pays up to $54K per year per retiree--the statutory maximum. If a person retired prior to age 65, the rate is lower. Benefit changes that took place five years or less prior to the plan's bankruptcy are not covered by PBGC.
According to their literature, PBGC currently is on the hook for the retirement benefits of more than 1.25 million people, including those who have not yet retired but are enrolled in DB plans that are now bankrupt.
One of the main reasons that PBGC is in such dire straits is that one of its major revenue streams--investment income--went south with the stock market. In 2007, PBGC shifted the bulk of its investments to equities, just in time for the 2008/2009 beat-down.
The future for pensions looks even more bleak over the medium term. Government workers will demand, and receive, bailouts from their funds' disastrous investment decisions. Workers enrolled in DC plans (many of them soon-to-be-retired boomers) will see the DB and government workers get assistance, so they'll demand relief. Where will all this money come from? It'll be borrowed.