Our Pension Fund Scheme is Unsustainable

20 | By Shah Gilani

You made me promises, promises,
Knowing I’d believe.
Promises, promises
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

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.


20 Responses to Our Pension Fund Scheme is Unsustainable

  1. Robert in Canada says:

    I am amazed at how high the US Dollar manages to stay relative to the CDN Dollar.

    The CDN Dollar is backed by tangible hard assets such as oil, wheat, copper, gold, and millions of square miles of un-developed land that is loaded with natural resources.

    Canada does not print dollars, our debt is small and shrinking, and we get more Dollars the old fashioned way – by selling more stuff than we buy.

    The US Dollar should really be worth less than half of a Canadian Dollar but it’s about equal and holding, often it’s worth more than a CDN Dollar.

    It just goes against all laws of economics and reason.

    • Veronica says:

      I bet the answer lies in Wall Street’s shananigans – they are like a ruling class over the whole world at this point, but don’t worry they are trying their level best to get us all sufficiently mad that there WILL be a revolution eventually – just a matter of time. Keep on with your sensible ways Canada, you are a great, great country !

    • BH says:

      During financial disasters, debtors need cash to make payments on their overdue loans. Although the handwriting is on the wall that the US dollar will ultimately loose its status as the world reserve currency, this has not occurred yet. Debt denominated in US dollars needs to be paid off in US dollars, which creates a demand for them. Likewise, the Euro crisis makes dollars desirable as an alternative.

      Eventually, the deflationary forces will complete their cleansing action and the dollar will fall like a rock. But until then, the dollar will remain “illogically” strong.

  2. Chicken Little says:

    When we get into hyperinflation (which is quite likely based on history–
    and is the cruelest form of regressive tax) — these big pension
    payouts won’t be worth zilch.

    Also, in that case the interest on the national debt will be the biggest
    part of our so-called budget.. —

  3. mardoc says:

    when I was 17,back in the 1950s,;Even at that young age,I just knew the planned pensions for people my age would fizzle!My mantra then and always was ,”TAKE CARE OF YOURSELF”,as you (even then) couldn’t trust ANY politicians for anything.But,I was crying in the rain,as no one listened!I retired at 45,and always lived within my means;if I had no money,I did without!But ,with my wife helping,we are still alive and debt free.Do your own carefully researched retirement plans;also forego the credit cards!

  4. Larry says:

    Just look at WHO the authorities actually ARE ‘evaluating’ the worth of any one of the world currencies and you can understand WHY the events we see aren’t logical (given the circumstances we’re ALLOWED to know).

    It’s all a grand ‘Ponzi Scheme’. No word in the NY Times, Wall Street Journal and certainly no mention in the local (corporate) newspapers but revealed on Euronews was the exact SAME scheme Prudential-Bache perpetrated on elderly investors years earlier- with the blessings of the Bush family and THEIR co-conspirators.

    Recently bankers in Spain, and their high-flying partners, have been revealed to have hoodwinked the elderly, indigent and thousands others who couldn’t even read (let alone understand what they were duped into signing) ‘investment’ agreements to buy the shares in these banks which invested depositors’ money in fake shares/bonds, options and real-estate transactions – all so the financial ‘experts’ could earn millions from the commissions.

    Have you ever seen the film ‘Trading Places’ starring Dan Aykroyd and Eddie Murphy (amongst others)? Pay attention to Eddie’s comments as the ‘Duke Brothers’ explain their business. “You-all are bookies – right?”

    Trouble is – (at least in the USA) those people in Govt and charged with the sworn duty to safeguard against crooked financial schemes are actually (in most cases) the SAME people perpetrating those schemes!

    Let’s not forget Hank Paulson ranting and wringing his hands (practically crying on camera) that the world economy would collapse if firms like Goldman-Sachs were not bailed out by the taxpayers.

    Paulson had a LOT to lose if GS went under. After-all before he took the post in Bush’s administration he was President of GS! As President he was awarded millions of stock options and, even though disclosure laws required he report any INCOME (wages, investment instruments, partnerships, etc) – no law required he report option holdings because they had no worth until they were sold or exercised.

    If GS survived – Paulson’s shares would be worth millions of US$ (a comfy nest-egg upon leaving Govt employ).

    If GS shares tanked – those options (un-exercised) would be worthless. Little wonder he was SO adamant TARP be passed!

    Face it. The rats are scavenging the carcasses of the passengers for all they can – just before the ‘ship of state’ sinks beneath the waves. This has been the way of the world over thousands of years as unbridled greed trumps commonsense.

    Hey, why not lay-off EVERYONE and sell-off EVERYTHING?! As expenses fall, share prices will rise and, eventually all firms will be empty shells consisting of nothing more than paper (legal entities) with no real value except high-priced shares which ‘bankers’ (like those un-indicted) will sell to those people collecting unemployment and SSI benefits! That’s the ticket!

  5. Kevin Donnelly says:

    Promises, Promises, are better than reality
    Whether it’s for pensions,healthcare or Social security.
    Your money’s safe, the Dollar’s sound
    There’s quite enough to go around
    All you need is faith in us
    to get you what you need
    Our banks are full of numbers like the ground is full of seed
    Just hang around, be satisfied
    But, Please don’t mention — greed!

  6. Mark says:

    No matter your age or how close to retirement you are, buy a few junk silver dimes every month. Maybe 20 bucks worth. This might be our currency in 4 years. If i’m wrong I don’t think you will lose much, maybe 20% at the most. However having a currency you can use at all might be worth the investment, in Zimbabwa they used airport liquir bottles for currency. I don’t think we are anywhere near that point, however 4-5 years from now It might be where we are at. So keep that in the back of your mind.
    I’m going to try to retire on SSI, a 50% teamster pension, and a very small 401K ten years from now and few silver dimes, wish me luck.

  7. Ray says:

    Just another scheme that puts politics ahead of the best interests of the country. Recall the same process for The Middle Class Tax Relief and Job Creation Act of 2012.

    The ‘scramble’ for revenue is starting to heat up. They are now very seriously working to tax internet sales across the country. Congress is sly, cuz they say the bill leaves it up to the states – so look at state financial conditions and what do you think the scumbag politicians will do.

    You don’t have to be a rocket scientist to understand that it is all about debt and spending, but these sociopaths will take your first-born before enacting proper financial reform for the good of the country and future of the citizens.

  8. None of the Above says:

    If we choose to base our economic and social systems on bad fiction (the novel Atlas Shrugged by Ayn Rand and the film Wall Street), then we can expect any outcome we wish to write, just because we want it that way. That’s how fiction works, correct? No American film can have an unhappy ending. The customers wouldn’t like that. People forget that the film Wall Street did not have a happy ending for Gordon Gecko: he went to prison.

    The message I got from Atlas Shrugged was, “Drop out as soon as possible. The world does not value your work.”

    Vote for me. Just write in “None of the Above” on the line below the “official” candidates.

  9. Benton H Marder says:

    Canada and Siberia have the largest fresh water reserves in the world Canada and Siberia may well become the ‘Northern Resource Areas’ for the USA and China—by conquest. There is another serious aspect: What happens when the fiat currencies do their usual thing? I commend Janet Gleeson’s little book, “Millionaire”, which is a brief non-technical work on John Law and his times. Yes, this all goes back to Louis XIV and the French Regency, What goes around comes around.

  10. Tom Hegarty says:

    I’ve got an idea !
    Let the US government produce a new Dollar off its’ own presses and tell the Fed’ their services will no longer be required, thank you all the same!
    (Some say that is what JFK was going to do before he was eliminated by forces unknown?)

  11. RUSS SMITH says:

    Hi!, Patrons Of Wall Street Insights Et Al:

    I get a big kick out of newsletter writers explaining first that real estate prices have bottomed; then going into a long explanation about the 650 trillion $ derivitives mkts. plus then the total collapse of the US $ in its’ final stages of depts & inflation etc. The whole entire mess is the direct results of we the people relinquishing OUR gold to those who have been storing it “for the people (ha! – ha!) for all these decades in such repositories as Fort Knox; when Article 1; Section 10 of the Countrys’ founders state we are to use only specie gold and silver coins as our money without any paper money allowed. They saw the devastation of paper money in France that resulted in The French Revolution of 1789 via the French Assignants but following the collapse of France previously via the distribution of paper money before under John Law. Our founding Fathers decided that they wanted to insure OUR Republic’s posterity against such largress & so they provided US their forever insurance policy that provided that the only entities having control over the Nations’ gold supply would be its’ citizens only and never bankers nor politicians. As we can now more clearly see/understand, the exact opposite has taken place and now OUR country is floundering and falling under the weights of emense indebetedness that it can never tender towards total repayments without an end in sight. Not even Dr. Ron Paul in todays’s deteriorated economic climate would see to it, if he were to appear on the 2012 election ballot and emerge as OUR President, that we the people received our gold minted by the US Mint to be sent out to US for FREE will he? Who maintains the authority over OUR gold out of OUR possession? Actually, this gold should have been delivered to foreign creditors when they asked for it on August 15, 1971 causing President Nixon to close the US Gold Window instead. On the face of those US $’s was imprinted the following dialogue: “This note is legal tender for all debts public & private and is redeemable in lawful money at the US Treasury or any Federal Reserve Bank.” The Bretton Woods Agreement of 1944 determined that the US $ was to be defined as being 1/35th of a troy oz. of gold in an alloy 9/10ths fine. Had our foreign creditors been able to take possession of OUR gold at that time @ $35/troy oz. they now would have gold valued at more than $1,500/troy oz. wouldn’t they? A broker said the other day that gold is NEVER your gold until you have it in your possession. It would prominently appear that neither OUR foreign creditors nor we the citizens of the US have the gold Nixon withheld in our physical possessions do we? Why not?


  12. eric taylor says:

    I did support partial privatization back in the 1980’s, but no one
    listened well then, or now, and Bush bungled the social security
    plus that many Democrats would have supported (the plus would
    guarantee the original payout be insured, like Chile did for their
    100% privatization). Unfortunately the support collapsed when
    Bush tried to use the opportunity of a partial privatization to short
    change government pensions to save the rich alot of money?!

Leave a Reply

Your email address will not be published. Required fields are marked *