The Coming Pension Crisis Part I
If you asked me what I consider to be the biggest risk to the U.S. financial system right now…
I wouldn’t say misguided monetary policy…
The worsening state of Social Security and Medicare…
Mounting deficits in Washington… or even the student loan bubble.
Make no mistake: I am concerned about all of those things. And we will talk about them on other occasions here in the Rich Life Roadmap…
But do you know what scares me the most?
The state of pension systems in this country.
In a nutshell, even despite a massive stock market rally, many defined benefit pension plans remain woefully underfunded.
I’m talking about millions and millions of retirement promises about to collapse under the weight of cold logic and uncaring math.
Just as a start, Bloomberg says 43 states saw their funding levels WORSEN in 2016 (the latest year for which comprehensive data is currently available).
Here’s more from that report:
“New Jersey, Kentucky and Illinois continue to lose ground and now have only about one third of the money they need to pay retirement benefits. And three states had double-digit declines in their pension funding ratios in the past year: Colorado, Oregon and Minnesota—though some of this can be attributed to actuarial changes in the way pension liabilities are calculated.”
Some of the other most problematic state plans include Connecticut (44.1% of promised benefits), Colorado (46%), and Pennsylvania (52.6%), where my dad currently collects a pension.
Meanwhile, what about private pension plans … especially those being run by publicly-traded companies?
There is no doubt that corporations have been ahead of their government counterparts when it comes to recognizing the unsustainability of their retirement promises.
Many have also made aggressive changes to head off future problems. Including the discontinuation of these benefits for new hires as well as buying out existing plan participants.
However, there are still plenty of underfunded programs out there. Problems are especially bad at so-called multiemployer pension plans.
As a recent article from The New York Times explains it:
“The situation has been brewing since the 2008 financial crisis, as investments plummeted, leaving many plans in the red. The slow economic recovery and recent stock market rally have not been sufficient to reinvigorate the plans, which are jointly funded by labor unions and employers whose workers participate in them.
“According to Boston College’s Center for Retirement Research, the nation’s 1,400 multiemployer plans are facing a $553 billion ‘hole’ of unfunded liabilities, meaning they don’t have sufficient assets to cover what they owe workers. About a fourth of these plans are in the so-called ‘red zone,’ where insolvency is more imminent, potentially within the next 10 to 20 years. Most of the participants in these plans work in the transportation, services and manufacturing industries. Their employers, many of which have been trying to withdraw from the plans, include companies like United Parcel Service and Kroger.”
Even some large individual corporate plans remain deeply troubled.
One example: General Electric, which has been losing Wall Street’s confidence for a whole host of reasons, has a massive pension gap sitting on its books right now. The company has the largest deficit of any S&P 500 company, a shortfall of roughly $30 billion.
Now, on the positive side, higher interest rates – which we’re starting to see – could help both public and private plans claw their way back a bit.
This assumes the stock market doesn’t drop precipitously in response to higher rates, of course.
Indeed, stock market volatility is an even bigger risk to many pension plans than it was in the past because more funds are allocating larger portions of their money to equities as a way to make up for lost time.
Bottom line: It’s almost certain that we will NOT see all pension promises and other postemployment benefits (OPEBs) honored over the longer haul.
So the choices are pretty simple…
In the case of public plans, promised benefits will either have to get cut or taxpayers will have to bear the burden.
In the case of private plans, it’s the same basic idea.
Some companies – including public ones – will take big hits and many corporate plans will ultimately fail. Millions of additional workers will get less than they hoped for.
And yes, there’s a quasi-governmental agency known as the Pension Benefit Guaranty Corporation. Technically, the PBGC is a federal corporation and is responsible for insuring corporate pension plans.
The only problem is that the PBGC itself is woefully underfunded to meet its projected obligations!
In fact, when the PBGC released its latest annual report for the fiscal year ended September 2017, it said its single employer fund still had a deficit of $10.9 billion while its multiemployer fund is $65 billion in the red and likely to run out of money by the end of 2025.
In other words, anyone currently receiving benefits from the PBGC – or anyone who may need coverage in the future – could be out of luck unless taxpayers end up pitching in.
As you can see, the ripple effects of this whole situation shouldn’t be discounted or brushed aside.
Do you have one of these types of pensions?
Whether you answer “yes” or “no” you’ll need to tune into tomorrow’s issue.
I’ll give you a roadmap to protect yourself. As you’ll see, even if you’re not in a pension system, you may still be at risk…
To a richer life,