In all of the attention we are paying to the housing/foreclosure crisis and general chaos on Wall Street, we are forgetting another major component: pensions and retirement funds. The 'guaranteed income' that tens of millions of Americans currently depend on in the form of pensions, 401 (k) payments, and annuities is in more danger than ever before.
Wall Street's problems contine to reverberate across the nation's economic system. Even those whose incomes were though secure and 'guaranteed', may find themselves in economic crisis, if the curerent problems with investment security continue.
If stock prices continue to fall, pension funds will find themselves unable to meet their commitments.
Pension failures will result in more credit card default, more foreclosures, and more personal bankruptcies as people who counted on payments stop receiving them or receive less than they expected. This will lead to ever lower real estate prices, lower demand for all kinds of goods and services, and more business bankruptcies. (Brasschecktv.com)
This does not bode well for the increasing numbers of Baby Boomers who are currently retiring. These retirees will depend on private and public retirement funds, in terms of pensions, retirement investments and Social Security. Unfortunately, the investments which generate their income, have drastically decreased in value, from mortgages, mortgage-backed securities, real estate investments and beyond.
To make matters even worse: long before Wall Street crashed, the nation's pension guarantee programs warned of problems. In 2008, the New York State public employees pension fund dropped by some $30 billion. (Buffalo News, 11/4/08).
Boomers with pension plans have counted on monthly retirement checks at the end of their career, but more employers are ending their plans or halting future benefit accruals. Those at greatest risk include boomers in their late 40s and early 50s, who are still at least a decade from retirement but too old to save enough to make up the difference in their pension benefits. (12-28-05 USA Today)
Pension problems have been rising for nine years, generated by stock market twitches and crashes. Investment based, pension value depends on the stock market, which we have seen, is no sure thing. State and local government pensions have been underfunded and troubled for years. So much so that the federal pension guarantor says it doesn't have enough money to cover the failure of more than a few troubled pension plans, and even then, there are limits.
According to the Washington Post, age and ceiling rates for the government's pension guarantee are based on age and have limits. Unfortunately, as far as true "guarantees" are concerned, the fund also has monetary limits as well. Simply put, the Corporation does not have enough money to bail the pension industry out of a catastrophic failure, nor do "high value annuitants" have a guarantee that their income will remain the same should their pensions fail.These plans are insured by the government's Pension Benefit Guaranty Corp. up to a certain limit, which is currently about $44,000 a year for a 65-year-old. (Ibid)
With all of the business failure, bankruptcies, and downsizing, many companies have long since seen pensions as a drag on their bottom line. Major industries have been accused of declaring bankruptcy, just to get out from under their pension obligations.
People are foaming at the mouth today over bailing out banks, insurance companies, manufacturing industries, but if things get any worse and if current trends continue, we will be bailing out pension funds left and right in the future.
Insofar as past instability in the stock market is concerned, the Pension Benefit Guarantee Corporation (PBGC) has been been staring at the tiger's teeth for more than a decade. The ongoing meltdown on Wall Street continues to create instability both in the market and in the corporation's fiscal strength; the future stability of PBGC remains jeopardised because of industry's bankrupt strategies. Companies are simply declaring bankruptcy, walking away from pension obligations and dumping their mess in the laps of the taxpayers' PBGC.
The stock market swoon that began in 2000 and the recent decline in interest rates have combined to shrink the invested assets and boost the liabilities of defined-benefit plans, leaving many of them underfunded. This means that their assets are less than the value of the benefits they promise. At the same time, a number of big, old companies, particularly in the airline and steel industries, have gone broke, leaving behind underfunded plans that have been or will be turned over to the PBGC, which itself is underfunded. So far the PBGC has been able to pay insured benefits, but some worry that someday it may require a taxpayer bailout. (Ibid)
We have already bailed out the banks, car companies and mortgage businesses. Now we are looking at another possible taxpayer bailout of companies who used bankruptcy as a way to dump their pension obligations.
The steel industry, and the airline industry are but two industries which experienced massive failure over the past decade. Both industries have grossly underfunded pension funds as a result of their bankruptcies. Due to the massively underfunded pension funds in both industries, the possibilities of default remain high.
The Government Accounting Office (GAO) addressed the issue in a 2005 report titled, "COMMERCIAL AVIATION: Bankruptcy and Pension Problems Are Symptoms of Underlying Structural Issues", noting:
Considerable debate has ensued over airlines’ use of bankruptcy
protection as a means to continue operations. Many in the industry
have maintained that airlines’ use of this approach is harmful to the
industry. This debate has received even sharper focus with pension
defaults. Critics argue that by not having to meet their pension
obligations, airlines in bankruptcy have an advantage that may
encourage other companies to take the same approach. (my emphasis)
(GAO, 2005)
Airline pensions alone are underfunded by nearly $14 billion. And this does not take into account the massive hit the funds took in the latest stock market crash. GAO notes that in the near future, the industry's pension obligations may well exceed available cash in the pension funds.
Airline defined benefit pensions are underfunded by approximately $13.7
billion, according to airline financial reports filed with SEC.30 This
underfunding is down from $21 billion at the end of 2004 as a result of the termination and transfer of US Airways’ remaining pension plans and all of
United’s pension plans to PBGC. Under existing law, minimum pension
contribution requirements for the remaining legacy airlines that still
operate plans are estimated to be at least $10.4 billion from 2005 through
- These minimum contribution requirements contribute to airline
liquidity problems. Estimates suggest the combined costs of the minimum
pension contribution carequirements, long-term debt, capital leases, and
operating leases will exceed available sh. (Ibid)
Half a decade ago, GAO analysts noted the incidious relationship between bond rates , interest rates and pension fund value during a stock market decline.
Bond yields underpinning the interest rates used to calculate pension
liabilities on a current liability basis have been trending lower since the early 1980s, causing the value of future liabilities to grow.
(Ibid)
State, municipal and union pension plans are also having problems. Nearly 50 percent of the largest union pension funds in the country are teetering on the edge. According to the Washington Examiner,
Almost half of the nation’s 20 largest unions have pension funds that federal law classifies as "endangered" or in "critical" condition due to being underfunded, an Examiner review of federal actuarial reports shows.
Pensions with less than 80 percent of the assets needed to cover present and projected liabilities are considered "endangered," while those that fall below a 65 percent threshold are classified as "critical" under the Pension Protection Act of 2006. (Washington Examiner, 6-7-09)
Whether it's a union pension plan, or a company plan, the nation's pension funds are severely underfunded and in crisis to the tune of more than $400 billlion. And, as we've mentioned before, that value depends on the stock and bond market. If those markets fall, the funds will be even more underfunded.
Volatile markets have saddled U.S. companies with a $409 billion deficit on pension plans, reversing a $60 billion surplus a year earlier, and will cut into earnings in 2009As of Dec. 31, 2008 pension plans among members of the Standard & Poor’s 1500 had $1.21 trillion of assets and $1.62 trillion of liabilities. At the end of 2007, pension plan assets totaled $1.66 trillion and liabilities totaled about $1.6 trillion.
The shortfall suggests that more companies will have to pump cash into their pension plans to ensure they can meet their commitments to retirees.
Estimated pension expenses will increase to about $70 billion this year from $10 billion in 2008, reducing overall profitability by about 8 percent. (Blogger in response to article,
"Underfunded Pension Plans: Hard Asset Solution", http://seekingalpha.com/...
For many municipal pension funds, the crisis is already here. Pension fund managers are scrambling to deal with pension shortfall problems, particularly in California.
The city of San Diego has been underfunding its employee pension plan since 1996. Today's pension deficit is estimated at more than $1.4 billion, though some estimates put it as high as $2 billion. (http://www.signonsandiego.com/news/metro/pension/index.html )
Clean living and longer lives of retirees are wreaking havoc on pension plans which where designed for shorter lifespans. From municipalities to private pension funds, the problem is: how does a pension plan designed for mortality rates of an earlier era cope with today's retirees who live longer and draw more in retirement benefits than their predecessors?
Nationally, cities are struggling to pay what they've promised. And it's not just municipalities. In some ways, the situation is similar to that faced by the Social Security fund or even private companies; people are living longer, and the number of people paying into retirement systems is falling behind the obligations. (Newspaper Tree, El Paso, http://newspapertree.com/... )
Employers, public and private are caught between the demographic nightmare of retirees who are living longer and volatile stock and investment markets which bleed value from already stressed funds.
The increasing stress on retirement funds is coming to a head.
Virtually all of the companies in the Standard & Poor 500 that manage traditional pension plans will be underfunded by year's end, according to a Merrill Lynch report. The total shortfall is expected to reach $640 billion. (Ibid)
While conservative groups point their fingers at union pension funds, claiming corruption has caused a bleed off of funding in the union pension plans, the truth is pension funds across the nation have been grossly underfunded for decades. This crisis is exacerbated by the catastrophic meltdown on Wall Street, which has generated record unemployment, massive depletion of real estate equity, bank failure, bond market decline and pension and retirement fund depletion.
The retirement plans are caught in a crossfire: massive layoffs mean fewer people contributing to retirement funds, and the devaluation of homes generates concurrent losses in plans which invested heavily in the real estate market. All told, thousands of public and private retirement plans are headed for catastrophe. The only question is: can we scrape up the funds for another bail out?
ABOUT THE AUTHOR:
Monica Davis is an author, columnnist, radio personality and public speaker. She is has written 5 books and hundreds of articles on a variety of subjects including, lynching, black farmers, food security, alternative energy, economics and politics. She is published in the US, Great Britain and India. Her articles have been read into the Congressional Record and used by home schoolers in New Zealand. Ms. Davis has conducted seminars and presentations on black farmers and the plight of farm women at universities and museums. Her book, Land, Legacy and Lynching: Building the Future in Black America has been cited in several doctoral dissertations. Her author website is: http://www.lulu.com/... She may be reached at: davis4000_2000 [at] yahoo.com