Pensions: Do You Know Where Your Retirement Is?

As you know, dear reader, I have been following the pension issue for the last year. Here are just some recent headlines: from Texas, “Without a Fix, Teacher Healthcare Fund is Empty Next Year”, from Modesto, California “City Considers Freeze on Hiring and Promotions as Pension Costs Loom”, and “Emotions Run High as Kentucky Retirement Systems Pension Hole Grows.” These stories go on and on and on.

What’s the basic problem? Politicians and employers generally promised too much in retirement benefits. Taxpayers and companies paid too little into the pension funds to cover those benefits. Pension fund managers tried to make up the difference by earning big returns and failed. As more people retire, the sh*t is hitting the fan.

Who is responsible for these shortfalls? Why, you, dear reader.

Let’s do some basic math. The objective in your pension fund is to earn the national average return of 7.4% per year. They have the usual 60/40 pension portfolio…60% bonds and 40% equities, real estate, private equity and all the other stuff they load in there to see if they can get a better return. Let’s say that, generously, they’re getting 3% on the 60%. It would be more but the Fed has been keeping rates low. How much do they have to earn on the other 40% to hit the 7.4% rate of return and stay solvent? The answer is 14%.

­They have to swing for the fences to get 14%. You cannot afford a down year, you cannot afford a recession. Teamsters and other unions are poised to take huge pension hits. Airline employees already have. As baby boomers get set to retire, the shortfalls are mounting fast and almost no one seems to see it coming.

To “guarantee” private corporate pensions, the U.S. government established The Pension Benefit Guarantee Corporation (PBGC) in 1974. The PBGC does not rely on taxpayer funds, at least not yet. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC and recoveries from the companies formerly responsible for the plans. But the PBGC is supposed to protect the retirement incomes of more than 40 million American workers in nearly 24,000 private-sector defined benefit pension plans. Funding is nowhere near adequate.

Today, the PBGC is running out of cash to cover union pension funds. The PBGC is already covering for 71 penniless union pension funds that rely on it to support their retirees. Last week the agency officially began making pension payouts for Teamsters Local 707. This New York union’s pension fund — covering 4,000 retired truckers across the city and Long Island — hit rock bottom in February. Local 707 alone costs PBGC $1.7 million a month, agency officials said.

In order to stay afloat, PBGC doesn’t try to cover a retiree’s full pension. The payouts are cut, often down to about one-third of what the worker is due. In essence, unions brought this upon themselves by demanding benefits that could not be met. What happens when the PBGC runs out of money? They will come looking for the guarantor, you the taxpayer.

Public unions would be in the same boat as the private unions except politicians 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 are often in bed with the public service unions who then support their re-election campaigns. The best case estimates are that public pensions are now underfunded to the tune of about $2 trillion.

There is a pension crisis brewing. Just like the federal debt crisis, it reflects a basic fact: America has been living well beyond its means and the bills are starting to come due. Do you think the authorities are going to print the dollars to inflate away these liabilities with increasingly worth-less dollars? I do, dear reader. I do.