You made me promises, promises,
Knowing I’d believe.
You knew you’d never keep.
Those lyrics are ripped from the early ’80s band Naked Eyes’ hit song “Promises, Promises.”
I use the word ripped, not because it’s a term used in the music business, but because of its more common meaning, as in ripped-off.
Because that’s what we’ve been – ripped off.
This time, which has been going on for a long time, I’m talking about how grossly underfunded both private and public pension funds are, and how we’ll all suffer the consequences.
I’m going to strip out the mumbo jumbo so you see the truth with your own naked eyes.
Retirement is getting further and further away for most Americans. And if they get there, they may not be reasonably compensated by the pension plans they thought they were paying into along with their co-payers, their private and public employers.
That’s because a lot of those co-payers aren’t paying up.
And that’s only part of the problem…
Here’s the other, even more insidious, naked truth. The investment return assumptions inherent in pension plans’ calculations are so unrealistically high that the chances of funds ever meeting future obligations, or “promises,” is halfway between slim and none.
Don’t worry, I’ll come back to the co-payers not paying up. But first let’s talk about assumptions (as in, making asses out of you and me).
Pension Plans are Based on Unrealistic Projections
The average assumption in the great majority of pension plans is that their assets will appreciate at 8% per year. Now, with compounding, that’s a really great deal.
Too bad the actual hand we’ve been dealt, courtesy of a no-interest rate (actually its closer to zero) Federal Reserve policy, for years now (and rammed-down low rates for years prior, thank you Big Alan Greenspan, with his goofy Ayn Rand hat now sitting in a corner facing backwards somewhere; or at least he should be), makes fixed income returns impossibly low. Low to the point that the “bond” portion of plan asset portfolios are causing the hole they are all slipping into to get bigger and bigger.
As a result of low return investments on the fixed income (make that failed income) side of portfolios, plan managers have nowhere to go but further and further out on the risk spectrum (read equity markets, private equity, and hedge funds).
And, given how swimmingly equities have performed over the past 10 years (my goodness, they’ve been essentially flat, how stunning; are we turning Japanese? I really think so), maybe some plans made out like bandits (that’s a joke) by wisely cherry-picking stocks. Or, on the other hand, maybe a lot of them loaded up on equities right around 2007.
Oh, the humanity!
The point is obvious. Return assumptions of 8% annually are facing the reality of 4% to 5% at best – and that’s on a good day.
Between that underfunding (it’s coming, I promise) and absurd investment return assumptions, S&P estimates private pensions are about $354.7 billion short on the front end of obligations. They’re another $233.4 billion short if you add in OPEB stuff (Other Post Employment Benefits, promises of stuff like life insurance and medical benefits).
But those numbers are a day at the beach compared to public shortfalls in their thousands of state and local plans and “systems.” That number is somewhere between $1 and $4.6 (wait for it…) TRILLION.
And Then There’s Those Pesky Contributions
So why aren’t private and public employers putting in their share of contributions? Well, it’s about the money, stupid.
Some of them, like the many corporations sitting on more than a trillion dollars in cash, don’t want to put that money into the promise pools, because they promise that they’ll find better uses for it (like bigger bonuses and salaries and benefits for executives) to make their companies more, well, profitable. You see, then they can pony up on those pesky promises. That’s capitalism under the cronyism system.
As far as public pension funds, well, you know what’s going on there. There’s no money, honey.
How can underfunded public plans get additional contributions when there’s no money at state and local levels to contribute? (Well, not exactly additional, but the ones they were supposed to have put in already, but forgot, or actually took out; yeah, funds were taken out to pay for other spending items; it’s just criminal.)
Okay, exhale, because there’s been a brilliant resolution to that riddle.
Leave it to our experienced legislators, you know, Congress, those amazing magic wand wipers, to come up with an elegant and transparent solution.
It’s Highway Bill S. 1813. That’s right. Who would have guessed the answer could be found in a highway funding bill? Simply brilliant.
It works like this: Under Section 40312 (you can Google any of this, I’m not making this up), “pension smoothing” is allowed. Pension smoothing lets plan administrators and puppeteers spread out pension asset shortfalls over multiple years so that pension plans don’t have to face the piper now and make employer contributions they don’t have, or would rather keep as dry powder for the next Great Recession.
If you call that kicking the can down the road, hey, you’re just another cynic. Because what this does is actually raise about $9.5 billion in taxes over 10 years by setting aside contributions from being contributed (and written off) so they can be taxed.
If you’re not getting it, let me help you here. It’s a Highway Bill because the $9.5 billion will go to the Highway Fund so the punters in Congress don’t have to raise the federal gas tax to pay for highway building and improvements. So that pension plans get deeper and deeper into doodoo. It’s about keeping taxes low, don’t you know? It’s an election year, don’t you know?
Seriously, here’s what I think: The fabric of the dream of retirement is unsustainable, because the “safety quilt” is already threadbare.
You want the rest of the facts on this situation, the cold hard facts? Read my article next Monday over at www.moneymorning.com.
In the meantime, by the way, this pension fund mess isn’t the only “pyramid scheme” running in our economy. My colleagues just released a new investigation. If you haven’t seen it yet, I urge you to take a look today. Just click here.