Surely Not A Surprise To Anyone Paying Attention

Annie

Annie

Not So Junior Member
http://reason.com/news/show/130843.html

The Next Catastrophe

Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode.

Jon Entine * February 2009 Print Edition

Funds worth trillions of dollars start to plummet in value. Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protectedwake up to a sinking feeling of uncertainty and gloom.

Sound like the great mortgage-fueled financial crisis of 2008? Sure. But it also describes a calamity likely to hit as soon as 2009. State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.

From January to October 2008, defined benefit funds—those promising a predetermined amount of retirement money to the payee—averaged losses of 26 percent, according to Northern Trust Investment Risk and Analytical Services, making it the worst year on record for corporate and public pension funds. The largest public pension fund in the United States, the California Public Employees Retirement Security System (CalPERS), lost a staggering 20 percent of its value in just three months last year. In May 2008, Vallejo, California, became the largest city in the state ever to file for Chapter 9 bankruptcy, thanks largely to unmanageable pension obligations. The situation in San Diego looks worryingly similar. And corporations with defined benefit plans are seeking relief in Washington as part of a bailout season that shows no sign of slowing down.

If the stock market remains in a funk for even a few more months, corporations that oversee union pension funds and state and municipal leaders responsible for public retirement pools may be faced with difficult choices. First on the docket might be postponing cost-of-living increases and reducing health care coverage for retirees. Over the longer term, benefits for new employees will have to be shaved and everyone is likely to see an increase in personal payroll contributions. Corporations will have to resort to more cost cutting and layoffs of their own just to guarantee the solvency of their pension funds. And things could go from bad to terrible if the managers of those funds do not quickly revise their investment practices.

During melting markets, all pension funds come under siege. If you’re covered by a “defined contribution” plan, contributions are invested, usually by your employer and usually in the stock market, and the returns are credited to the employee’s account. Your retirement savings grow if the market rises or, as is the case now, bleed when it crashes. You carry the risk on your shoulders.

The risk shifts to the employer under “defined benefit” plans, in which future outlays are guaranteed. That seemed like a great idea for business as recently as 2007, when the market was rising and the pension funds of America’s 500 largest companies held a surplus of $60 billion. Now they’re at a deficit of $200 billion, with fund assets dropping like a lodestone.

The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, and those dire numbers are increasing...
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and that is one of the reasons Obama will 'own' the problem...
 
i can't wait to hear the excuses from the dems who said "it happened on bush's watch, all his fault" when things happen on obama's watch....my guess is they will still blame bush and not even recognize their political hypocrisy
 
I'm not a fan of the defined benefit plan (although my business is essentially 100% funded via defined benefit plans). I know in California Arnold at one point tried to get all new government employees to get off the defined benefit plan but the unions fought him and won.

Unfunded pensions are going to be a massive problem in the future. It's easy for politicians to approve future pension benefits because they don't come due on their watch. So they get the political benefit without having to deal with the consequences.
 
Yurt said:
i can't wait to hear the excuses from the dems who said "it happened on bush's watch, all his fault" when things happen on obama's watch....my guess is they will still blame bush and not even recognize their political hypocrisy
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Bush will be to blame for just about everything bad that happens.
 
Yeah, Obama is responsible for the last 30 years of corporate America substituting pension for shitty 401ks.
 
A sure thing is just not reality. Past performance is no indication of future performance. If people cannot really accept this, they should just stay out of the market. For years common sense has ignored this very reality, and preached that " a diversified portfolio is always a sure thing". I guess not. Politicians and technocrats will do anythig and everything to "restore confidence in the system". Maybe that is not a worthy endeavor. Maybe this much money in the hands of a few is just a bad idea in general.
 
Nothing is more irritating than being directed to search results in a link. Pick one and put it in your sig. Rotate them if you wish...

AAAAaaaargh.
 
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