REAL CRISIS: 450 Billion in Underfunded Pension Programs

[bonddad]

The financial press has been talking about the Pension Benefit Guaranty Corp for awhile, the but the story is on the sidelines. However, after looking at the books and the coming storm, this is the real financial crisis we face, not social security. This is a great issue and we should seize on the initiative now.

Before I get into an analysis of the problem, let me explain a few concepts. The PBGC insures defined benefit retirement programs. Fancy name. All it means is the plan guarantees the recipient a specific benefit at a specific interval. For example, a plan will give an employee $100 per month. Pretty simple. Think of it as a plan that says it will pay you 80% of your salary for retirement.

(Caveat: there is no math, although I will be discussing it. There is also no test).

Here's how the investment scheme works (generally). You start to invest money with a plan when you are 25 years old. The plan says it will pay you $100 month when you retire and retirement is 40 years away. The person managing the fund starts with a simple formula called a present value formula. All he does is compute what the future payment is worth in today's dollars. For example, if you invested x dollars at 4% today, the value of that investment would be y in 40 years. Thanks to computers, the manager can perform millions of calculations to figure this whole thing out.

Here's a drastic example to illustrate the point. Let's say I have to pay you $100 in a year. How much do I have to invest on January 1 at 10% to give you $100? Roughly $91 is needed (10% of 91 = $9.1). Now, let's say I assume a rate of return of 20%. Now I only need to invest about $84 to get you $100 on December 31 (20% of 84 is $16.8). Here's the catch: if the manager assumes a rate of return that is too high, he'll tell the person paying into the fund that he doesn't have to contribute as much money to the plan.

OK, the math is over. Take a deep breath and relax.

What happens when an employer continually contributes less then is required to meet its future obligations? The plan is called underfunded and it means exactly what it says. There simply is not enough money in the pension plan to pay all of the defined benefits required by contract. To make current matters worse, Congress has allowed defined benefit plans to assume a higher rate of return so they could lower their annual payments to their plans. And the results have not been good.

Now we get to the Pension Benefit Guaranty Corporation.

Here is their mission statement from their website:
"PBGC was created by the Employee Retirement Income Security Act of 1974 to encourage the growth of defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum. Defined benefit pension plans promise to pay a specified monthly benefit at retirement, commonly based on salary and years on the job.

PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over. PBGC pays monthly retirement benefits, up to a guaranteed maximum, to about 459,000 retirees in 3,287 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 934,000 people."

Conceptually, they operate in a manner similar to FDIC. Retirement plans pay the PBGC a premium for the coverage. Additionally, the corporation gets assets from plans it takes over. This allows them to pool all assets and create what is essentially a large mutual fund. This increases their ability to diversify risk and increase their buying power. So far, these guys look just like a regular investment company.

According to their latest annual report, the PBGC had a 23 billion dollar deficit for the year. They also do not have the resources to fully meet all their obligations. In the big scheme of things, this is easily managed.

Now for the scary part.

According to their report, the dollar value of underfunded plans that are classified as below investment grade and subject to possible termination is 96 billion. This number was 82 billion in 2003 and 35 billion in 2002. To make matters worse, the amount of total underderfunding for 2004 was 450 billion dollars for 2004, up from 350 billion in 2003, a 28% increase. I can't estimate what percentage of these plans will terminate and come under government control.

What I can speculate about is why. My guess is companies are deliberately underfunding their defined benefit plans with the intention of having the government take them over. I can't prove this, but it makes sense. These plans are corporate albatrosses. Dumping them is in the corporation's best interest. They don't care about the effect this will have on the PBGA.

So, we have a real potential for crisis here. Not an imagined one. But we're not hearing about. Well, now we know.

http://www.pbgc.gov/

[EVDebs]

1. The real crisis is Globalization. This is the excuse corps have to

dump pension and healthcare plans, as the Bush administration desires. Already in the July 2004 Businessweek article "The Benefits Trap" we see that the rationale to drop the pension/healthcare benefits to US employees is simply for corporations to claim they are 'competing' with cheap overseas labor markets:

""Perhaps most important, in the global economy, long-established U.S. companies are competing against younger rivals here and abroad that pay little or nothing toward their workers' retirement, giving the older companies a huge incentive to dump their plans. ""
http://www.businessweek.com/magazine/content/04_29/b3892001_mz001.htm

The end result is in US companies dropping US employees and either offshoring the jobs or just bringing the foreign workers here to the US on H1B or L1 visas in order to displace the US employee and have the US worker train his/her replacement as a further added insult to injury ! You can see this proven in the Northeastern Univ article
""Nation's immigrants account for bulk of labor force growth since 2000--Native-born workers eclipsed by great wave of immigration""
http://www.eurekalert.org/pub_releases/2004-01/nu-nia010804.php

Furthermore, the Dept of Labor facilitates this process by not preventing the displacement of US workers but putting roadblocks in front of the Office of Inspector General of DOL who could investigate frauds in the visa programs and/or impose fines. See the recent change to the Form 9035 H1B form's language which spells this out:

""3. A number of statutory requirements and authorities under the INA, as amended by the American Competitiveness and Workforce Improvement Act of 1998, sunset on October 1, 2003. The specific program changes that occurred included:
A reduction in the cap on the number of available H-1B visas from 195,000 to 65,000 per fiscal year;
The elimination of the Recruitment and Hiring and the Displacement and Secondary Displacement attestations that previously applied to "H-1B dependent" employers and to employers found to have committed a willful violation or misrepresentation of a material fact on the application;
The elimination of authority granted to DOL to investigate H-1B employers if they have "specific, credible evidence" that a violation has occurred; and
The elimination of the $1,000 fee that is required to be paid by employers of H-1B nonimmigrants to support low-income scholarships and job training programs for workers.
The recruitment and displacement attestations noted above, and the instructions relating to them, were previously outlined in Subsections 1 and 2 of Section F. Due to the possibility that these attestations may be reenacted by the Congress, the Department has temporarily blanked out these portions of the application and instructions.

The previous edition of this application form, displaying an OMB Expiration Date in the upper-right-hand corner of 31 AUG 2003, should no longer be submitted by employers seeking to hire H-1B nonimmigrants."" http://workforcesecurity.doleta.gov/foreign/preh1bform.asp

What this shows is that the old forms and the 'attestations' (that no US workers were to be fired and displaced in order to simply hire foreign workers on visa) along with any possible penalties or fines were simply NOT going to be enforced by the Bush administration's Department of Labor.

Any frauds etc. in the visa programs were NOT going to be investigated or prosecuted. The US workers' rights were to be ignored.

Globalization is truly a Race to the Bottom. It will cost this country dearly ... and already is.

[madrchsod]

2. the railroad retirement fund

is solvent and will be for years to come. interesting isn`t it...

[happyslug]

3. But that is a GOVERNMENT run pension program.

It was part of the solution to one of the Railroad strikes of the late 1800s (Thus was heavily modified when Social Security was adopted to reflect part of the Plan is Social Security, Often called "Tier 1" and another is a true pension plan called "Tier 2", these names are NOT used in the Statute but are used in the Regulations and write ups on Railroad Retirement).

Since it is a FEDERAL Government Run Plan it is fully funded (Like most state's pension plan but few municipal pension plans).

http://www.rrb.gov/hb1.html

[Name removed]

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