PENSION PLANS AREN'T THE PROBLEM ... THE POLITICS ARE

A month ago I posted on the topic of federal pensions.

I explained how pensions should not be seen as a public burden, especially since many private corporations deliberately underfunded pensions for years - fattening profits and bonuses in the process - and then dumped their "private" obligations on the American taxpayer - the Pension Benefit Guaranty Corporation, or PBGC - when their companies went bankrupt.

Over time the Pension Benefit Guaranty Corporation ended up providing a semblance of stability for many pensioners, who might have been wiped out in retirement were it not for the federal government, and it's wise management of these bailed out "private" pension plans.

All was going well until President Bush appointed former Lehman Brothers executive, Charles E.F. Millard, to run PBGC. If you're wondering, yes, Lehman Brothers did declare bankruptcy in 2008, the largest bankruptcy in U.S. history at the time ... (funny you should ask).

Anyways, it turns out that Mr. Millard didn't like the cautious investment plan used by his predecessors. So he decided to take much of the $64 billion in federal pension money from the PBGC and dump it into Wall Street ... right before George Bush's policies helped drive the economy off a cliff in 2008 (one of the reasons the PBGC is running in the red).

It would be one thing if former Lehman executive Millard's decision simply lost billions for the PBGC. However, because PBGC is a publicly run agency Millard's failed decision in 2008 has lent credibility to the claim from the Right that "government doesn't know how to run anything" and breathes life into their argument "that pensions are underfunded because they're too expensive."

Nothing could be further from the truth.

The PBGC is running deficits because it routinely takes over the pension plans of failed private firms like Lehman Brothers who regularly underfunded pensions in order to fatten their bottom line and then dump their "private" pensions (over 22,000 for Lehman) on to PBGC,

Did I mention that Charles Millard was an executive at Lehman Brothers? Oh, yeah, I did ...

Anyways, commenting on these dynamics at the state level we have former Bakersfield City Council member (and my friend) Mark Salvaggio.

Drawing information from California's pension investment agency, CalPERS's website, Mr. Salvaggio writes:

Investments, not taxpayers, fund 63 cents of every pension dollar at CalPERS. Historically, this percentage has been as high as 75 cents on the dollar.  Public pensions are a shared responsibility, as every dollar paid to CalPERS comes from three sources:  63 cents from CalPERS investments, 22 cents from CalPERS employers, and 15 cents from CalPERS members.

Retirement benefits are paid from the CalPERS pension fund which is a trust fund that can be used only for payment of member benefits and related expenses.  CalPERS pays out nearly $12 billion in pension benefits each year to retirees and beneficiaries using investment income and cash contributions from employers and members.

Investment returns have delivered income to CalPERS to the tune of over $200 billion in twenty years; employers' income has been about $56 billion, and members, through payroll deductions, have paid in $34 billion.

Do the public pension naysayers know the average pension is only $25,000 a year for more than 20 years of public service?  The average age of retirement is 60.  Seventy eight percent (78%) of all retirees earn $36,000 a year or less in pension benefits.  Pension costs for the State of California are less than 5 percent of the State's $86.1 billion general fund budget.

Salvaggio closes with these comments:

Let's not let the "emphasis" being placed by some on the over $100,000 a year pension retirees distort what the vast majority of other retirees receive in retirement pay.  We should not forget another fact:  in terms of pension spiking abuses, most occur in top management, not among rank-and-file public employees.  The same can be said about the granting of "stress-related" disability retirements.

In a few words, whether you look at the federal level, or the state level (at least in California), the claim that "pension plans are too expensive because of 'out of control' obligations" is simply not true. Failed obligations in the private sector, federal bailouts, poor investment decisions by irresponsible appointees, Wall Street's collapse (by their own hand), and a poor understanding of pension contribution-distribution levels at the state level are to blame for "underfunded" pension plans.

Put another way, the pension debate is a red herring. It distracts voters from the fact that the private sector has failed on many fronts, and masks a larger issue that we need to address: Conservatives want to dismantle or destroy one of the key benefits that unions and labor depend on to unite their core constituencies.

My question is, Where's their indignation for the golden parachutes and payouts given to the CEOs and other corporate executives who run their companies, and the economy, into the ground?

- Mark

THIS IS WHY PENSIONS ARE UNDERFUNDED ...

Want to know why many public pension funds are sucking wind these days? While the right wing blogosphere wants you to think it's due to spiraling costs and overly generous pension plans this simply is not true. Corporate arrogance, market fraud, and our recent market collapse have done more to underfund and rob pensions of their market value than anything else.

Here's how it happened ...

Take My Pensions, Please
In the area of corporate theft - what William C. Black might call "control fraud" - we need to begin by understanding that when large firms file for bankruptcy protection they can, and they will, dump their pension obligations on the federal government, through the Pension Benefit Guaranty Corporation (PBGC). 

But dumping private obligations on the American taxpayer isn't necessarily the problem. The PBGC has traditionally been a conservative investor and trustee of pensions (more on this below). What we've learned is that in an effort to boost their bottom line corporate chieftains would deliberately pay less into their employee's pension plans.

This tactic boosted profits, allowed corporate executives to pay themselves more in the short-term, and helped keep stock prices artificially high. But it also left the federal government with big financial holes to fill when "private" pension plans were dumped on to the American taxpayer during corporate bankruptcy proceedings (as I pointed out last year).

These financial holes - again, made possible because the private sector deliberately underfunded pensions - now make it appear that underfunded government guaranteed pensions are out of control. In fact, many of these once private plans were underfunded to begin with, and became a burden for the federal government American taxpayer only after companies like Bethlehem Steel, U.S. Air, Nortel Networks, etc. declared bankruptcy and dumped them on us.

I'm From Wall Street & I'm Smart ... Seriously
Today the federal government is now left trying to fill in shortfalls with new investment strategies that don't always pan out. Apart from the general risk of market collapse, the American taxpayer has to deal with overly zealous market players in key government positions who make extremely dumb investment decisions, as the following makes abundantly clear.

If ever there was a story that should put an end to the "Public-Pensions-Are-Too-Expensive/Let's-Cut-Benefits" crowd, this is it.

WASHINGTON - Just months before the [2008] 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.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

Got that? Believing in the magic of the market - in spite of red flags that were going up all around him - Bush administration PBGC director, Charles E.F. Millard, implemented a new aggressive market strategy. He began directing billions of dollars in public retirement funds away from safe government bonds and into the stock market, right before the market collapsed.

Guess who has to live with the consequences of this decision after 2008? Not Mr. Millard.

On the bright side, for Wall Street and the institutional players who were able to get their hands on these retirement funds, many of Wall Street's fat cats and investment firms won big fees and, no doubt, even bigger bonuses for bringing in these accounts.

I'm Not Just Ignorant, I'm Arrogant Too
We now know that corporate America deliberately underfunded private pension plans. We also know that they dumped their underfunded pensions on the American taxpayer when they declared bankruptcy. Then, in an effort to make up anticipated shortfalls, Mr. Millard - a former managing director of Lehman Brothers - took public funds and dumped them on to Wall Street right before the market collapsed (no word on whether Millard shoveled the money into Lehman Brothers, or toward other institutions where his buddies worked).

It was like throwing money down a drain.

Not only was this a classic case of "Heads you win, tails we lose", but it was a case of corporate welfare and public subsidies at its finest.

Incredibly, Mr. Millard isn't too concerned over the losses. As a former Wall Street genius, Millard said that his "new investment policy is not riskier than the old one." Asked whether the stock over bonds strategy was a mistake, especially given the subsequent decline in stock and real estate prices, Millard offered the classic sociopath's "Don't blame me" response,

Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it.

I don't know which is worse. Millard's arrogance or his ignorance.

Either way, putting more public money - like trillions of dollars in social security funds - into our current market environment would be little more than an undeserved market reward, and another bailout, for Wall Street.

At the end of the day, they don't deserve it. And we can't afford it.

- Mark

Update: Here's an update, which focuses on the implications of the market crash and total obligations as they compare to corporate pensions.

THIS IS NOT GOOD ...

From the world's largest credit insurer, Allianz, Euler Hermesa is telling us that a record number of companies will go bankrupt in 2009. Specifically, Allianz expects 200,000 insolvencies to occur in Europe while 'an explosion' of failed businesses will plague the US. What does this mean?

According to HSBC, corporate debt spreads are now implying cumulative default rates of 30 per cent for investment grade companies, as compared to 20 per cent during the Great Depression.

Got that? The percentage of businesses expected to file for bankruptcy in the United States during 2009 will surpass anything we saw during the Great Depression. Nope, this is not good ...

- Mark

NEXT UP ... RISING CORPORATE DEFAULTS

And the news just gets better ...

After hovering around 1-2% during the easy credit era, global default rates among corporations are projected to quadruple this year, and could get worse.

As a point of comparison, during the Great Depression, Moody’s Rated companies experienced its highest rates of debt default at 9.2% in 1932. The U.S. as a whole experienced a 21.2% corporate default rate during this time according to the U.S. Bureau of Economic Analysis.

But trouble may already be here. According to the RGE Monitor, the total value of corporate-bond defaults – defined as missed payments, bankruptcy, or restructuring – already exceeds the total for all of 2007. And it’s only February. As well, the amount of new grade “B” rated deals is approaching 90%, up from about 65% in 1997. This is important because …

The B ranking, four to six levels below investment grade, means holders of the debt only have a “small” assurance of being repaid over “any long period of time …”

Making matters worse in our contracting debt markets is the amount of total debt being carried in this country ...

This tells us that Americans aren't in any position to take on any more debt, no matter what the Fed does with interest rates. What we should be wary of now is an unforeseen event, which increases the risk of financial matters getting worse (referred to as event risk), especially since the U.S. economy is already in a precarious position.

Keep this in mind the next time someone tells you market fundamentals are strong.

- Mark