The economic crash that began in 2008 is a triple whammy for ordinary Americans: their jobs, homes and retirement incomes are all at risk.
Too little money has been set aside to keep the promises made by both private- and public-sector pension plans. As a result, the American dream of a golden retirement is fading fast.
Standard & Poor’s estimates that the funding shortfall for corporate pensions and related benefits was $578 billion in 2011.
As bad as that sounds, state and local governments’ problems are even worse. According to the National State Budget Crisis Task Force, public pensions are underfunded by $1 trillion to $3 trillion.
Employers typically offer defined-benefit or defined-contribution pensions. Corporations have gradually closed their defined-benefit plans and replaced them with defined-contribution plans such as 401(k)s, though many still owe money to retirees who were part of the old defined-benefit systems. Most local governments continue to offer defined-benefit plans.
Defined-benefit plans provide post-retirement benefits that are typically a percentage of average salary during an employee’s last few working years. The employer promises to pay a fixed retirement benefit regardless of how the plan’s investment portfolio performs.
When private pension funds cannot meet their obligations, the federal Pension Benefit Guaranty Corp. steps in. This agency guarantees the pensions of about 44 million participants in about 27,000 corporate defined-benefit plans .
The Pension Benefit Guaranty Corp., which is primarily funded by investment income and insurance premiums collected from corporations, pays beneficiaries up to $54,000 annually when a company cannot meet its pension obligations. But the cost of rescuing failed corporate plans has saddled the corporation with a $26 billion deficit.
So who backstops the Pension Benefit Guaranty Corp.? Maybe it is time for the agency to set the insurance premium the way other private insurers and the Federal Deposit Insurance Corp. do. This would avoid a repeat of Fannie Mae.
There is no equivalent of the Pension Benefit Guarantee Corp. for state and local government defined benefit plans, which are ultimately backed by taxpayers.
One cause of unfunded pensions is the Great Recession. Pension funds invest in a portfolio of assets whose returns are expected to pay the lion’s share of the plan’s obligations.
The funds commonly assume they will earn 8 percent. With compounding, it is a handsome return. But in this environment, the chances of doing that are between slim and none without shifting portfolio composition toward higher-yielding but riskier assets.
The political class in Washington, D.C., has been less than honest in dealing with the retirement time bomb. Part of the two-year transportation funding bill that was finally signed last month updates the Pension Protection Act of 2006 by increasing the premiums the company sponsors of pension plans must pay to the Pension Benefit Guarantee Corp.
The law allows pension plan sponsors to ignore current interest rates when calculating their obligations and pretend rates are closer to their 25-year average. That means plan sponsors can make smaller pension contributions over the next I0 years.
This will exacerbate the funding crisis, but provide government with a short-term tax windfall. Since firms get a tax deduction for contributions to their pension funds, they pay more taxes if they put less money into them.
As a result, the provision is supposed to generate $9.5 billion for the Highway Trust Fund. The ploy fills the shortfall between current federal fuel tax revenue and projected transportation spending without raising the 18.4-cent federal fuel tax, which has not increased since 1993.
If the pension plan blows up, the Pension Benefit Guarantee Corp. will be the ones to pick up the shortfall. And that, of course, means you.
originally published: August 18, 2012
