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Welcome to the Third World, Part 3: Disappearing Pensions

One of the things that separate the “rich” world from the rest of humanity is the expectation that a lifetime of work is rewarded with a comfortable retirement. Whether through an employer’s pension or 401(K), or government plans like Social Security and Medicare, citizens of the US, Canada, Europe and Japan take it for granted that some baseline income and healthcare benefit is out there waiting for us when we need it. And we plan our saving and investing accordingly, presumably putting away less than we would if our retirement had to be completely self-funded.

So imagine our surprise when it turns out that pension plans, from company-specific to federal, don’t have nearly enough money to keep their promises. Consider this story on private sector pensions from yesterday’s Wall Street Journal:

Pension Trusts Strapped
Retirement trust funds created to cover billions of dollars in medical costs for unionized workers and their families are running short, forcing the funds to cut costs, trim benefits, and ask retirees and companies to pony up more cash.

The biggest such fund—a trio of United Auto Worker trusts covering benefits for more than 820,000 people, including Detroit auto-maker retirees and their dependents—is underfunded by nearly $20 billion, according to trust documents filed with the U.S. Labor Department last month.

The funds, known as VEBAs, or voluntary employee beneficiary associations, are being hit by rising medical costs and poor investment performance. Their funding comes in part from company stock, rather than just cash payments, making them vulnerable to the market’s volatility.

In Pittsburgh, the United Steel Workers union is laboring to provide benefits to tens of thousands of employees covered by more than 30 VEBAs. “No matter how good your investment performance is, you are not going to be able to keep up with health-care inflation,” says Tom Conway, vice president of the USW. “The trustees are having to take a serious look at increasing premiums, and the retiree contribution has to be bigger.”

According to VEBA trust officials, the funds for all autos averaged a 9.7% rate of return in 2010. They decline to say how the funds have performed in 2011 but, in response to written questions, they say the fund has adopted a more conservative assumption of 7% going forward. At GM, the fund currently has total assets of $33.23 billion and total benefit obligations of $44.68 billion, resulting in an $11.4 billion, or 26%, shortfall.

Some thoughts
“The biggest such fund—a trio of United Auto Worker trusts covering benefits for more than 820,000 people, including Detroit auto-maker retirees and their dependents—is underfunded by nearly $20 billion, according to trust documents filed with the U.S. Labor Department last month.” … How exactly does a pension plan get underfunded by $20 billion? Don’t people notice when the underfunding hits, say, $20 million? And isn’t someone obligated — on pain of jail time — to adjust the cash flows to bring them back into balance? It seems like a number this big would take a long time to accrue, which means a lot of people over a lot of years have to violate their fiduciary if not legal duties.

Clearly there was a scam being run, and the mechanism was the projected rate of return. As stocks, real estate and bonds all soared during the credit bubble decades, pension funds got addicted to 10% annual returns and didn’t seem to recognize that those returns would have to revert to mean eventually. As a result they didn’t adjust their expectations downward. So now that stocks have literally returned zero for an entire decade and bonds by definition can’t earn more than a few percent a year, these pension funds are stuck with widening gaps between what they owe and what they’ll have down the road. And they’re surprised!

“…the fund has adopted a more conservative assumption of 7% going forward.” Pension funds hold the majority of their assets in bonds, and US ten-year Treasuries now yield 2%. So how do you get to 7% if half your assets are generating a third of that rate?* The answer is you hope for massive inflation to send stock and real estate prices through the roof. But of course this raises beneficiary living costs and diminishes the real value of future benefits. Looks like a lose-lose from here.

Meanwhile, Social Security and Medicare are in even worse shape, with unfunded liabilities totaling somewhere north of $50 trillion. Their cutbacks will dwarf those of the above private plans.

The message to First World beneficiaries: Don’t expect any plan, government or private, to carry you in comfort through 30 years of retirement. Like most of the rest of humanity, you’re on your own.

* Of course, had a hypothetical pension fund loaded up on gold and silver a decade ago, they’d be massively overfunded today and would be raising benefits rather than cutting them.

23 thoughts on "Welcome to the Third World, Part 3: Disappearing Pensions"

  1. Funny how things go down the old memory hole. Things like about 20 years ago, many large corporations found that their pension funds were overfunded because of better than expected performance in the stock market. A law was passed that allowed the companies to take the excess funds. If that had not happened, they would have been fine.

    1. “If the baby boomers live longer than 65…”

      Actually, the first of the baby boomers, born in 1946, will turn 66 in the coming year. I always thought that the country would go broke as a consequence of the boomers burning through their trust funds, SS and Medicare. Instead, the jig is just about up as we barely start to tap into them. It doesn’t help matters that they exist only in theory, lol.

      My hats are off to them on their ability to contain and mask the inflation from their money printing. Won’t be long, though, before the lid blows off.

  2. I have a pension with AT&T, and they are now sniveling on cnbc that there pension plan is unfundable because of the drop in the market……….this is there method of informing me that the government will be taking ove rmy retirement plan like they did with GM, which will pay less benefits will they cap SS and treaten to stop it…….these are money i paid into for over 58 years which they stole ………I am 63 years old and have joined the ranks of the useless eaters………..I’m raising 3 grandchildren along with my daughter and wife……….OUR LEADERS plans are to slowly drive us into 3rd world status right in front of our eyes………… I am a Marine Corps Vet and i won’t go down easy.

  3. I am convinced that pensions, 401K’s, IRA’s were MEANT to screw people out of their money from the very beginning. It was all a rigged CASINO from the very beginning. I have worked at the same job for almost 25 years. I have heard it all – invest in STOCKS, BONDS @ 8% per year and RETIRE A MILLIONAIRE. Yeah, maybe, but that million bucks might buy you a hamburger, nothing more. And with the Federal Reserve artificially holding interest rates at almost ZERO, investment funds are earning next to nothing.
    It’s all a rigged game boys and girls. It’s all a rigged game.

    1. Bingo. The Hegelian dialectic keeps us occupied on Fox and MSNBC with screaming heads and sex scandals and “stars”. Meanwhile, our currency and as a consequence, our savings, are being debased to nothing. This scam is old not new. It was bread and circuses 1700 years ago. Then it was mercantilism, then communism. It is about control. Always has been, always will be.

  4. The reason it is not delt with at 20 million is the mangers are still taking their paychecks from the recipents. Now they need goverment help to keep the stealing alive. They will get their money too. Why? It is obivous.

  5. Very good points on private industry pensions. Also, government worker pensions are just as bad off, if not worse. Most estimates place the pensions of state and local governments (all combined) at between $1 and $3 trillion underfunded.

    And of course social security is fully funded, but only if congress can somehow find the many trillions they have spent after breaking the lock off the social security trust fund lock box and looting the contents.

  6. This is another example of the shell games that fiat money allows the Masters to play. The assumed rate of return for public pensions alone averages an estimated 8%. Even the governmental CEOs laugh about the rates they assume. They know that the Federal Government will bail them out. And we all know that the “bail out” will simply be more monetization of the debt. The plan for the Masters is a slow enough monetization that the sheeple will not notice.

  7. Thanks for this John. Nothing new, but it makes me thankful of a day I met a gold bug in a bar in Albuquerque (sp?). Bought 100 double eagles years later when headed to Indonesia for a staff job at an oil company. Paid $250 ea for the coins and put them in a safety deposit box in Farmington. Lost my 401K in the tech bust. Lucky I didn’t have access to those coins or I would have sold them to buy tech stocks. Made back my 401K losses in gold and silver since. Quit the 401K when company dollar matching ended about 10 years ago. Good thing too. Still have the 100 double eagles.

  8. one day soon this game is going to end. stock up on food, water, gold and silver. we are blind if we think this is going to end good.

    1. Stocking up on food and water is silly. Both have limited shelf lives, especially water. It’s better to locate yourself near some local agriculture.

      1. Sorry, why is having food and water stored “silly”? Most canned food can last easily 5 years, whole grains and beans last forever, and a berkey water filter can supply an entire family with at least drinking water. Just because you are “positioned” near agricultural land means nothing, if you don’t have some seeds, and gardening knowledge. Bad advice.

        1. Yeah, it sure is news to me that water has a short shelf life, lol. Maybe the dude is saying that those perfumie sissy bottled waters lose their flavor quickly, lmao?

          Fresh water in natural underground aquifers has been there for hundreds of thousands of years, if not millions.

          The easiest way to get started collecting and storing water is to hook up a rain barrel to your down spout. Then use that water to water your garden. That is a far better source of irrigation water than the chemically treated stuff from the tap.

  9. Not to worry about your pension or any other “fiat” US dollar-denominated assets (be it a CD, savings account, pension, IRA, insurance policy, etc., etc.) because for the most part the money will become utterly worthless long before most benefits fall due anyway.

    I figure it this way: The day is soon coming when the vast majority of Americans will face the realities of abject poverty and have to pool their individual income streams in order to enjoy those habits we almost all have, like living indoors, eating cooked food, and leaving our children in even deeper poverty than we are or will be.

    Trust me in this also: When the American people wake up one morning facing poverty in terms of both finance and hope, most if not all of them will be looking for the members of the federal House of Representatives and the Senate to provide them a little payback. Those in government will run and they will hide, but they will also in time each and every one be found and severely punished, they and their families, for their ill-conceived folly and theft of the wealth of the workers on Main Street that trusted government to do a far better job at governing than they actually accomplished.

    At least food for thought, is it not?

    Respectfully submitted,

    Thomas Avery Blair, EA

    P.S.: Pray for our nation and our government…it is all in Gods’ own hands now…just as it should be and as it always has been.

  10. Prepster411 – look at the plan rules closely – my plan does a 1.5X match (good) but I can’t rollover unless I leave the job (bad) – BUT: I can take up to $50K in loans from my fund.

    If I say, forget to pay them back, my 1.5X match is still in the 401k casino game, and all I pay is a 10% IRS penalty (and income taxes of course).

    So, basically investing w/matching up to the limit of loans is probably a good idea. After that, well, you’re putting a lot of trust in the .govvies to not tax your 401k @ 95% or something…and if you’re a prepper, you know where real value lies.

    Keep prepping!
    PGH PA

    PS: I am not a CPA or anything, but if you do build a fund and get to roll it over, look into Self-Directed IRA’s…you could “direct” the fund manager to invest in gold and silver, or real estate, such as an income generating apartment or even your own home…imagine, you could buy your own house as an “investment” then pay yourself (your IRA investment co.) rent/mortgage! That might actually by much better if the investment co. could write off repair costs that you can’t. Hmmm….

    1. self directed ira’s can include physical precious metals, true. You may not take physical possession of them though. A custodian must hold them. If a person invests in an etf, they own nothing.
      3 assumptions of “retirement” accounts are flawed
      1 investments will keep up with real inflation (not cpi)
      2 persons will drop a tax bracket when they retire (many do not)
      3 the rules (tax rates) will not change. Highly unlikely
      consider paying cheap taxes now and take control of your money

    1. I’m not too sure it would be a good idea to bury your fiat currency, in about 20 years $1 million will buy a chocolate bar. Maybe bury some gold.

  11. I’m not sure why anyone in their 20s or 30s would want to lock up their money for 35+ years in a 401k that basically is controlled by the government, even for the tax write off. If employer matches, maybe I’d be tempted, but that money is very hard to get at if you need it before retirement age. In an era of peak oil and rampant money printing, the era of 10% “real returns” is history.

    1. I used my 401k to start a business tax-free. I did not want to leave it exposed to the whims of government. If there is anything our government has proven, it is that the rules will be changed during periods of financial difficulty. What would make anyone believe their 401k’s won’t be additionally taxed or monetized years down the road?

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