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Tuesday, September 27, 2016

Why ZIRP May Mean Zip For Millions Of Pensioners

Why ZIRP May Mean Zip For Millions Of Pensioners

Even if you are not one of the 44 million Americans lucky enough to be in a private-sector traditional pension plan, you should care because if enough fail, your tax dollars will be needed to clean up after them. Defined benefit pensions, properly funded, are the most economically efficient way to finance old age. Congress has failed since it enacted ERISA, the 1974 Employee Retirement Income Security Act, to impose rules to get the most benefit with the least risk out of traditional pensions. Instead, campaign-donation-seeking lawmakers have enabled rules that encourage the private pension system to shrivel and weaken.

In July the 100 largest company pension plans had their worst recorded month and now owe $533 billion more than they have assets to pay, the Milliman benefits consultancy says. Other consultancies have issued similarly dire reports.

The core problem has been too little money put into pension plans. Putting in too little money, as noted economist Martin Feldstein pointed out more than three decades ago, inflates stock prices by obscuring corporate liabilities for future pension obligations. This distorts current investment decisions and creates future risks for investors and workers when these pension obligations come due.

Pension funds come from workers, who set aside what would otherwise be current cash wages to provide for their old age. Not putting that money into the pension plan is a subtle, but widespread form of wage theft. Companies argue that they make funding estimates based on what the law allows, which is true. But then it is usually what the law allows, not venality, that is the scandal.

Compounding the thievery are 12 years of abysmal stock market returns. From its 2000 peak, the total market, with dividends reinvested, is down a fourth in real terms, prices of Vanguard’s total stock index fund show.

Further pressing down on pension plans is ZIRP, the Federal Reserve’s Zero Interest Rate Policy. The Fed says its policy is needed to stabilize the economy, but of course there are other stabilizing options like Congress making investments in infrastructure and research that put people to work while making commerce more efficient and profitable.

Artificially reducing interest rates reduces returns on bonds and cash. This, in turn, requires larger cash infusions, which are even harder in these hard times.

The Fed has been holding the interest rates it controls at next to nothing for almost four years and plans to keep doing so for another two.

For a benefit due in three decades, reducing the expected annual interest rate from 7 percent to 2 percent requires more than four times as much cash today. One way to avoid putting in more money is to freeze pension plans, an especially cruel policy for workers with long tenure.

By 2004 just four of the 1,000 largest companies with pensions had frozen, but five years later 310 had, according to the National Institute for Retirement Security and the Watson Wyatt compensation consultancy. More freezes are a certainty.

If you want to know about the health of your pension plan go to pensioninspector.com. Registration is free for individuals. David J. Tananbaum, a veteran pension actuary, has compiled years of Form 5500 annual reports by pension plans, analyzed them and applied a simple A to F grading system.

  • When it comes to bailouts the only ones that count are investment banks, large corporations and the super rich. In fact, if Romney wins and he has a majority in Congress what is likely to happen is a major effort to remove regulation, including those designed to protect our pensions. The focus will be on paving the way for corporations to increase profits, even if doing so means destroying the middle class.

  • CPANY

    You hit the nail on the head, Mr. Vila. But try to convince those poor ignorant saps that will vote for Romney just because he’s white. When their pensions go down the drain, they’ll scream like stuck pigs, but it will be too late. Unfortunately, I’ll be in the same boat as the jerks that voted for Romney, which really aggravates me.

  • One thing that threatens the pensions and other forms of retirement is the Feds insistence on keeping interests rates near zero. Anyone who saved for retirement is also getting shafted. This supposed to help the housing market but its mostly helping the banks.

  • howa4x

    States are worse

  • onedonewong

    Lets see CRS/FES the federal govt pension plan is unfunded to the tune of $560B more than ALLLL the private pensions plans combined and yet Obama REFUSES to force civil servants to contribute more.
    Under barak GM Chrysler and Toyoda all dumped their defined pension plans on the tax payers when he bailed them out. As a matter of fact EVERY company that he bailed out did the exact same thing

  • rustacus21

    … that never ending nightmare continues. This scam is rivaled only by the bank & investment house thievery & the mortgage meltdown, but has still gone unnoticed by much of the American public. This is the underside of the Union fight, which guarantees that a viable pension system is available to Union employees, upon retirement. Under fire, these types of stories have remained buried, at the expense of more important ‘scandals’. But imagine the outcome if Social Security privatization starts to gain traction? For this reason, it’s mind boggling that this presidential race is as close as it is, w/such realities lurking in the backdrop, that Americans, hungry for sensation, have & continue letting escape their attention…