Here Come Pension Fund Benefit Cuts

Talk to anyone who is involved in the management of a pension fund and they will tell you the unspoken horror is that every pension fund in the country is underfunded – most of them horrifically underfunded.

A large Teamsters pension fund – 407,000 beneficiaries – just received notice that benefit cuts are coming  because the fund has to financially reorganize:  Teamsters Pension Fund Cuts

For decades corporations have been underfunding their true future benefit obligations as a means of manipulating GAAP net income for the purpose of maximizing upper management net income-based performance compensation.

There will be a wave of this coming.  Many large pension funds admit to being underfunded by 30-50%.  But these valuation assessments include an unrealistically high long term ROR assumption of 7.5% (some even higher).  Plus every pension fund invested in illiquid alternative assets like private equity deals is more than likely marked too high on the value of those investments.

When the Fed finally loses its ability to keep interest rates artificially low and a safety net under the stock market, most pension funds in this country will be wiped out.

19 thoughts on “Here Come Pension Fund Benefit Cuts

  1. I always found it amazing how people could work maybe 30 years of their 80 year lives. So for 5/8ths of their lives somebody else is taking care of them. This simply cannot continue in the long run and was foolish to believe in to begin with. Grandma and grandpa’s generation made out like fat cats. I’m jealous.

    Don’t you love how the younger guys are always the one taking the biggest cuts? The same will happen w/ social security. The old timers will have their checks left alone while the younger ones (who btw paid more into the system) get the shaft.

    1. I actually disagree, and believe it or not I think that lowering the retirement age and reducing the workweek is the only “solution”, although we’re well beyond the solution stage now. This is because robots and computer automation have displaced a lot of workers over the decades so it takes many fewer workers these days to “produce” the same amount of goods and services as it did 50 years ago. The only way to keep unemployment low while competing with robots for jobs is to grow the economy at a rate in line with the increase in per-hour average worker productivity due to computers. This is what the Fed has been trying to do, in vain, because for various structural reasons the economy can no longer grow. That is one reason why unemployment is skyrocketing and there is absolutely nothing the government can do about it until they reduce the work week and retirement age. And, of course, fix the wealth distribution system so that the upper 0.00001% can no longer hoard 70% of the economy’s wealth, or whatever the actual figure is. But those reforms won’t come until long after the system crashes, if ever.

      It’s true that IT employs a lot of people as well, but it can also be said that maintaining typewriters 50 years ago also required a lot of workers. I’d estimate that only 1 out of a hundred employees in a company work for IT.

        1. Keynesian Marxist!? lol, I’m about as far from that as you can get. I have just put in the effort to learn about where wealth production actually comes from. Keynesians think it comes from charts and mathematical formulas, and right wing capitalists think it comes from private individuals and companies striving to earn profit in a free market. Neither is correct, although each has some contributions and insight to provide.

  2. There is an easy fix for this. Move the retirement age up to 75. Problem solved. You should be able to get by on all of the bonus money you received.

  3. To your point about “performance compensation” for years I’ve been saying our current culture has created an environment which rewards narcissistic sociopaths the most if they are in leadership positions.

    Although the information is not positive your insights are appreciated, keep up the good work!

  4. It’s not a laughing matter but rather amazing that the people who are about to get their pensions, 401k’s, IRA’s, etc., wiped out still foolishly contribute to their own demise. The hamster wheel phenomenon is still misunderstood by them. They are clueless about this usurious system that’s slowly stealing their sweat labor.

  5. I’ve got to agree with George and disagree Bill here. Changing the age to 75 won’t fix the problem long term. The day will come when you have to move it to 80. And then 85. And then 90 etc… The problem is how we create money. When you create money as debt and then add interest on the debt it is only basic arithmetic that say’s that one day the debt will overcome the collateral/principle.

    If you had Government created money backed by specie of Gold & Silver and certain commodities. We’re rich. For me the most important trait of money is it has to be a store of value. Debt is not money and money is not debt.

    1. I agree with you 100% Paul. My post was a weak attempt to be funny. When these retirement funds go broke then they can either not pay retirees or pay them in freshly printed money that is rapidly approaching intrinsic BTU value. Heck, digital money is worth less than that. If you are not already retired and have been drawing funds then you are F’ed. If you can start early withdrawal then that is probably a smart move to make.

      I have total respect for Mr. Kranzler and people like you who make thoughtful posts here. Dave is one of the smartest straight shooters out there. As bleak as things are he could have said screw it and gone over to the dark side. Instead he decided to stay here and try to smarten us up to what is really going on. We may go down in flames but we went down with a bunch of good guys. That is worth a lot to me.

  6. I have a pension with U of Clownifornia from an earlier life and I believe it promises something like 7-8% return, which is laughable. I can do a lump sum rollover at age 50 and you can bet I’m gtfo’ing out of that. Bird in the hand and all that.

    1. I’ve got a friend with a similar situation in the nyc teachers union.
      I’m not sure what his rollover option is at 50 though, although for him that’s about 8 years away, so I’m not sure that option would still be there 8 long-years from now.

  7. The entire system is screwed up.
    For example. all you need to do is work 10 years, the 40 quarters, to get soc sec and Medicare. So someone working since 16 thru 66 pays in 50 years–someone coming here say at age 50 and works to 66 pays in 16 years and assuming both earn the same, they get the exact same benefit.

    Then, if one had a spouse that works and the other does not, the working spouse gets that “earned” benefit (regardless of the years in total worked) and the non working spouse gets 1/2 of the spouses social security–and both spouses get medicare.

    next, someone earning 50k for 40 years and someone earning 100k–and lets say both paid fica medicare tax on their entire compensation–they get disproportionate benefits on soc security, the lower paid gets a higher percentage. Then the higher income personmif with other income say from investments, pays a higher medicare rate–this year soc sec gets frozen for 2016, due to no inflation, while medicare goes up substantially in 2016 due to inflation; go figure.

    Anyone with half a brain can figure this out that it will not work. Congress has sat on their collective tuchisses for 50 or more years knowing all this.

    the above barely scratches the surface. or Tuchiss.

    I am from IL so I also understand the monumental fuck up here. They allowed spiking of wages so someone can retire at age 55 with a benefit predicated on age 65 retirement. The state and Chicago far under paid into the system—-because they could not afford it for the last 30 years and the unions and educators were too dumb to figure it out.

    The higher retirement benefits came from striking teachers every 3 years asking for higher pay–which was affordable to payout, so the school boards promised the money in the future. which of course cannot be paid. Geniuses, all of them.

    These are the people who were teaching the kids and we wonder why the kids are not prepared?

    Now illinois has been forcing businesses and highly taxed people out of the state, and we have an influx of, shall I say people who do not contribute to the system that much. How will even higher taxes solve the problem.

    Now daves point: the demographics–the ponzi schemes of not only the soc sec and medicare systems, but corporations and their ponzi retirement plans.

    Stay tuned–there are going to be a lot of people pissed off. With no alternative or recourse. and a deteriorating society.

    Other than that, all is ok.

    1. I agree a lot of people will be pissed off, but not over this. Few have the intellect or the interest in understanding what is going on in the financial system. We here are what I call the “hyper alert” and see a landscape of risk and fraud where others frolic blindly. The scum running the show have plenty of distractions queued up for the masses and they will channel their frustration into their sport team losing, or their inability to get their drug of choice easily/cheaply.

      I made a prediction to a friend some years ago that if things really get bad, the master planners will pull alien bodies out of storage from area 51 or wherever. They may not be real but it doesn’t matter because the point is to distract.

  8. Seems to me that GAAP accounting requires corporations to properly account for unfunded liabilities. It’s the municipalities that have gotten away with gimmicks. Even though there was a GASB change, municipal pension calculations use unusually high rates of return to make the numbers look better.

      1. Can you elaborate? I don’t disagree that there are surely some corporations that intentionally under fund pensions for compensation reasons. But, unfunded liabilities still need to be on their books. Municipalities are in far worse shape because they used their own accounting rules (GASB) for decades. I think it’s important to add municipal pensions to the conversation. Rhode Island passed legislation cutting state worker and retiree benefits. Who would be responsible for putting the teamster’s pension in its current situation?

        1. If you want to pay me for my time to give you a detailed analysis of GAAP pension accounting, you can contact me at the email address connected to this blog. It’s very complicated and takes a lot of time. Every big corporate pension fund is significantly underfunded. And if and when some or most of them have to go through liquidation and sent to the PBGC, the assets will end up being worth 50-70% less than where they’re marked now.

          I have a friend who liquidated a big pension fund of a large auto supplier back in 2008 and he said they ended up
          send a portfolio to the PBGC that was worth about 40 cents on the dollar.

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