Most Pension Are Probably Underfunded
Executive Summary
- How Bad is The Problem?
- Deficit Levels
- Oregon Pension Funds
- The Problem With The Stock Market for Pensions
How Bad is The Problem?
Our last post looked into pension fund skimming. After writing it, we began to wonder how underfunded the typical pension is. What we found was surprising and disconcerting. One of the big issues, which we noted in our previous post is that the PBGC (the quasi-government pension insurance fund) stopped publishing its list of most underfunded pensions. However, the actual level of underfunding always ends up being worse than the published level of underfunding, and the accounting rules around pension fund reporting are extraordinarily weak. However, the public only
However, the public only find out about this when a company goes belly up as in the case of LTV Corp. LTV Corp stated it had an 80% funded pension, but after it fell into receivership, LTV Corp actually had a pension funding of only 52%.
The balance of which they dumped on the PBGC government insurance fund (i.e. onto other corporations that pay into the fund, however, the way the fund is going, it may need a government bailout). No charges were brought and no executives were penalized. This means that pension skimming is one of the legalized forms of theft in the country and one of the easiest ways to make money. Until this changes, this will continue to happen, and the PBGC will not be able to pay for all the companies that fail to keep their pensions funded.
Deficit Levels
Some of the deficits are staggering. In 2005, PBGC estimated that GM had a pension deficit that it estimated at $31 billion, but GM itself only estimated $10 billion. If history is any guide, PBGC is right, and GM is wrong. Airlines are famous for dumping their pension obligations. This includes:
- United Airlines
- USAirways
- Delta
- Northwest
US airlines have recently made a habit of skimming their pension funds in order to fund executive compensation, and then declaring bankruptcy and dropping their underfunded pension obligations onto the PGBC.
The airlines are straightforward on this point.
Northwest’s CEO, Douglas Steenland, bluntly told the Senate Finance Committee last June, “Northwest has concluded that defined-benefit plans simply do not work for an industry that is as competitive and vulnerable from forces ranging from terrorism to international oil prices that are largely beyond its control, as is the airline industry.” In that, he merely echoed Robert Crandall, former chief of American Airlines, who told another Senate committee in October 2004: “All the [older] legacy carriers must get rid of their defined-benefit pension plans.” In all, the pension funds of those airlines are short $22 billion. – https://www.time.com/time/magazine/article/0,9171,1122017-10,00.html#ixzz0WyagP1Pb
Oregon Pension Funds
Another datapoint comes from Oregon. A study was performed and determined that of the 36 largest employers in Oregon 34 had a deficit, and the total underfunding came to $25 billion.(this was in 2008 after the stock market crash) – https://blog.oregonlive.com/business_impact/2009/07/pensiongraphic2.jpg
Nationwide the underfunding is estimated to be roughly $1 trillion.
The Problem With The Stock Market for Pensions
Thus, this pension underfunding seems to be the next big thing on the horizon. Financial types often say that no one should be surprised that pensions are underfunded because the stock market recently declined. However, this obscures the fact that simply being invested in stocks allows executives to more effectively skim the pension. Because of the unstable nature of the stock market, when it goes up, executives can call it underfunded and skim it. Pensions really should not be invested in stock, but employers should contribute enough into
Pensions really should not be invested in stock, but employers should contribute enough into the their pension plans so that they provide sufficient retirement funds if they are invested in ordinary money market funds. I need to emphasize here that these are retirement funds, they are not play money, and only play money should go into the executive fraud-casino that is the stock market.
Finally, I would hope that no one comments that this is the reason that employees need to put their faith in 401k programs. To find out why 401ks are one of the worst things to happen to retirement funds in the US, see the several articles on this topic by selecting the 401k category to the right.