Is Your Pension Plan Safe? Or is it the next big ‘surprise’? Billionaire investor Warren Buffet calls pensions ticking “time bombs.”

In the Los Angeles Times on 6th April 2010: “The state of California’s real unfunded pension debt clocks in at more than $500 billion, nearly eight times greater than officially reported.”

24th February 2010: US banks continue to struggle, as the number of banks on the brink of failure continued to rise and the government’s fund to protect deposits fell sharply into the red.

The Federal Deposit Insurance Corp. said Tuesday that its deposit-insurance fund fell to $20.9 billion at the end of 2009, a $12.6 billion drop in the final three months of the year, as bank failures continued at a pace not seen since the savings and loan crisis.

“The Deposit Insurance Fund (DIF) decreased by $12.6 billion during the fourth quarter to a negative $20.9 billion (unaudited) primarily because of $17.8 billion in additional provisions for bank failures. ”

“The DIF’s reserve ratio was negative 0.39 percent on December 31, 2009, down from negative 0.16 percent on September 30, 2009, and 0.36 percent a year ago.”

The December ratio was the lowest on record for the combined bank and thrift insurance fund.

You can download and read the fourth quarter 2009 FDIC report here.

Since I first wrote this article in October 2008: “The amount by which U.S. pensions are underfunded has almost doubled since October to $373 billion, increasing pressure on companies to give more to retirement plans as the global recession saps earnings. ”

According to The Washington Post on 11th October 2009, “After losing about $1 trillion in the markets, state and local governments are facing a devil’s choice: Either slash retirement benefits or pursue high-return investments that come with high risk.”

“Some pension experts say the funding gap has become so great that no investment strategy can close it and that taxpayers will have to cover the massive bill. ”

“State and local government officials had predicted before the crisis they would have $3.6 trillion in their accounts by now, according to the Center for Retirement Research at Boston College. Today, they are $1.2 trillion short of that mark. ”

“There have been some extreme examples of the way an underfunded pension plan can dramatically affect the retirement income of certain workers. In 2005, a federal court allowed United Airlines to default on its underfunded pension plan. Retirement pay for workers, especially pilots, dropped sharply. Some were receiving as much as $12,000 US Dollars (USD) per month and saw this amount drop to $2000 USD. In other companies, pensions drop by a few hundred dollars a month, but this can still dramatically affect ability to live well or survive if pension income is small.”

In July 2008 Martin Hutchinson wrote that: “Since the global financial crisis struck last fall, the largest 1,500 U.S. public companies have lost a combined $280 billion from their pension funds.”

In 2008 the S&P 500 index is down about 36% as losses and write-downs from mortgage-related investments at banks worldwide swelled to $660 billion and profits fell 33 percent on average for the 68 companies that reported third-quarter results since October 7th 2008 so with US pension funds, typically “40-50% is invested in equities” if those pensions funds weren’t hurting before, they are now.

Many people are told not to worry because even if your company goes bankrupt – and many have – the Pension Benefit Guaranty Corporation (PBGC) guarantees your “Pension benefits at normal retirement age.”

“The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation created by the Employee Retirement Income Security Act of 1974. It currently protects the pensions of nearly 44 million American workers and retirees in 30,000 private single-employer and multiemployer defined benefit pension plans. PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans.”

The most recent example was when: “The Pension Benefit Guaranty Corporation (PBGC) has assumed responsibility for a pension plan covering 760 former employees of publisher Rand McNally. The federal corporation stepped in because the pension plan was unable to pay benefits to its members when due and faced abandonment, following the sale of substantially all the company’s assets.”

And there have been many examples of much larger companies going bankrupt: Bethlehem Steel, Delta Pilots, Eastern Air Lines, Grand Union, Kaiser Aluminum, LTV Steel, Outboard Marine, Polaroid, Reliance Insurance, Singer Company, TWA, United Airlines and US Airways to name just a few are amongst the ‘clients’ of the PBGC.

But what would happen if the Pension Benefit Guaranty Corporation went bankrupt?

Finance Professor “Jeffrey R. Brown says the troubled Pension Benefit Guaranty Corp., which steps in when private-sector employers with under funded defined-benefit plans go bankrupt, was $14 billion short of the cash it will need to cover pensions based on the latest estimates released a year ago.”

Again, we must note that this shortfall was from a year ago and we’ve lost about US$1 trillion in market value since that time.

And it’s not just underfunded pensions that’s a ticking timebomb: “Credit Suisse estimates that state and local governments have a cumulative $1.5 trillion shortfall in commitments for retiree health care. ”

“Accounting standards have called for state and local governments to report their unfunded pension liabilities since 1986. But accounting standards have only recently been established that call for reporting the size of unfunded retiree health liabilities. While few state and local governments have as yet officially reported these unfunded liabilities, some studies have estimated that they may exceed $1 trillion dollars nationwide in present value terms.”

“The PBGC estimates that, measured on a termination basis, total underfunding in the single-employer defined benefit plans it insures exceeded $450 billion as of September 30, 2005. (More than two years ago) This is a measure of total underfunding exposure in the defined benefit system; this measure does not assume that all plan sponsors are going to fail.”

Our Current Global Financial Crisis

In case you’re concerned about the bonuses of those Wall Street ‘geniuses’ that caused this global financial crisis, worry no longer because: “Financial workers at Wall Street’s top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year – despite plunging the global financial system into its worst crisis since the 1929 stock market crash…”

While Lehman Brothers has collapsed totally, days before it collapsed Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m and former Lehman boss Dick Fuld walks away with the US$485m in salary, bonuses and options he ‘earned’ between 2000 and 2007.

If you are as disgusted as I am with this situation, please visit our Discussion Forum entitled: Are you not yet screaming, hysterically angry? here.

Please Check To Make Sure Your Pension Fund Is Healthy!

You have a legal right to obtain information about your plan’s funding by requesting the information in writing from your plan administrator. The easiest way is to ask your employer or plan administrator for a copy of the “Summary Plan Description,” or SPD. The SPD will state whether your plan is covered by the Pension Benefit Guaranty Corp (PBGC) program although I must confess that my personal opinion is that the PBGC probably fail too…

Written by Scott Oliver, author of 1: How To Buy Costa Rica Real Estate Without Losing Your Camisa, 2: Costa Rica’s Guide To Making Money Offshore and 3. ¿Cómo Comprar Bienes Raíces en Costa Rica, Sin Perder Su Camisa?

Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.