Another Blip *AHEM*

Annie

Diamond Member
Nov 22, 2003
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Just saying, something for the new administration to look forward to:

The Next Catastrophe: Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode. - Reason Magazine

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...
 
I think I'm going to build a hut and live on a deserted island.





I'll probably end up with a box as a house anyway if this keeps up.....
 

First off, yes, all pension funds invested in stock has lost major portfolio balance. However, that does not mean they are lost forever. The markets will rebound, and smart companies that have some cash on hand are actually pumping money into those funds by buying even more stock, now that it's cheap.

In good times, pensions actually show big gains...which smart funds pull out of stock and into Treasuries.


The biggest thing pensions do wrong is they do not tie their benifit date to the average life expectancy. Classic pensions were NEVER designed to provide income for 30 years. They were designed to provide benifits for a year or so. When the UAW pensions and Social Security were first negotiated, they kicked in at age 65 when the average life expectancy was 63!!! Today it 80 but they still start paying at 65!!!! By all rights, today, in historical norm, we wouldn't hit retirement now until 80!
 
That's a good point. A more thoughtful, semi-sane version of social security would have tied the payout date to average life expectancy.

Actually, a semi-sane version would have simply had people required to put a little money into a FDIC insured savings account every check, thus avoiding the whole Ponzi-scheme part.
 

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