The 44 million Americans who depend upon a government-backed, cost-of-living-adjusted, defined-benefit pension fund for their retirement checks have likely been laughing at their neighbors who have seen their own retirement savings dwindle in their own 401K funds. The laughter is about to turn to tears:
Just months before the start of last year’s stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.
. . . analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.
“The truth is, this could be huge,” said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. “This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities” in pension plans that would be passed on to the agency.
I’ve been warning about the looming pension disaster for months. One big pension fund failure will be all that it will take to bankrupt the Pension Benefit Guarantee Corporation, particularly now since a larger portion of their assets are in equities. While the PBGC is not mandated by law to guarantee insured pension funds with tax dollars, the political pressure to bail out such funds (particularly if the failures are in the public sector or a heavily-unionized industry) will be enormous.
The total bill could end up saddling taxpaying workers with another half-trillion dollar transfer of wealth to non-working Americans. At some point the taxpayer is simply going to run out of money, or at least the tax rate will be pushed well to the right of the peak of the Laffer Curve (if we’re not already there). Additional bailouts then could only come through greater borrowing and the result could be hyperinflation, concern about which is already increasing.
The economic collapse has already exposed the fallacy of a prior economic truth: that real estate always goes up. Before this is all over other fallacies are likely to be exposed, including the belief that in an eighty-year life span, you can expect to work for only forty years.
As if taxpayers didn’t have enough to pay for already, now we’re in the auto repair business too.
Bonus Question: How much incentive does GM or Chrysler now have if, when they do the cost-benefit analysis of quality measures, the price of failure is no longer borne by them?
All may not be lost. The decision to reallocate a greater proportion of investments to equities, while made last year, was slowly implemented. Governmental inefficiency may have saved billions of dollars.