STUMP » Articles » Pensions Puzzle: What Happens When the Money Runs Out? When Does it Run Out? » 12 March 2016, 07:48

This is not just a public pensions problem.

This is hitting private pensions. This is hitting Social Security-like programs.

The underlying issues tend to be the same: there is financial strain as you have more retirees compared to active workers, and the program never saved up enough money in advance (or, in the case of U.S. Social Security, there had never been anything saved in advance.)

Trouble starts well before saved cash completely dries up. Sometimes, short-term shifting occurs. But it gets more and more desperate, searching for money wherever one can find it.

Let’s look at a couple.

PRIVATE PENSIONS: CENTRAL STATES

I knew this was coming this summer, but I forgot it when I made my predictions for this year. Current retirees for this Teamsters-associated pension may get their pensions cut, and they’re not too happy about it.

Here’s just one recent event:

Members of Central States Pension Funds hold protest outside Stutzman’s office

FORT WAYNE, Ind. (NBC33) – Calling itself a grassroots organization, a group of retirees and members of the Central States Pension Funds held a protest outside Representative Marlin Stutzman’s Fort Wayne office Tuesday.

The group tells NBC33 for 40 years, members’ pensions were guaranteed protection once they retired.

However, in 2014, organizers say lawmakers added verbage to a spending bill that would do away with the pension protection guarantee.

Organizers say more than 22,000 Hoosiers collecting or waiting to collect a pension are impacted.

There’s going to be more of this. By the way, the “guaranteed protection” was not much for plans like this. When private pension plans go bankrupt in the U.S., the PBGC takes over… and retiree payments are often cut. Especially for this type of plan, a multiemployer plan, where the guarantees are extremely low.

I am not sure if this is the exact guarantee for this plan, but it gives one an idea:

Generally, PBGC’s guarantee is based on a pension for each year of service a person earns under his or her pension plan. As a monthly benefit amount, we guarantee a payment equal to:

100% of the first $11 of the monthly benefit rate, plus 75% of the next $33 of the monthly benefit rate,
times the participant’s years of credited service.

The guaranteed monthly benefit, therefore, is limited to $35.75 per month (($11 × 100%) + ($33 × 75%) = $35.75) times a participant’s year of credited service. The guaranteed benefit is not adjusted for inflation or cost-of-living increases.

That is puny. Let’s say you have 40 years of service. The amount being guaranteed is $1430/month or $17,160/year.

It’s more than zero, but it’s not a very rich guarantee.

I don’t think people were ever told how small that guarantee had been. It won’t make them happy about current cuts, of course, but it gives people an idea of what might be reasonably counted upon.

NOT JUST CENTRAL STATES

The thing is, Central States is just the first of the multiemployer plans to propose a cut before the funds are completely depleted.

It won’t be the last:

Four hundred thousand Americans just found out they are not going to get the pensions they were promised. It is part of a trend sweeping the nation—it’s called the suddenly poor life.

The Central States Pension Fund told its members on February 16 that they needed to take a massive cut in benefits—or the fund would be completely empty in 10 years.

Members face a 40 to 61 percent cut in benefits depending on age, what company they worked for, and various other factors. The average loss appears to be approximately $1,400 per month.

This is the best-case scenario.

If the pension plan goes bankrupt and falls back on the government-backed Pension Benefit Guarantee Corp., people will get even less.

…..
Tens of millions of Americans are not going to get the benefits they are planning on! This is an underappreciated trend that will have a profound effect on America’s economy.

……
But here is the scary thing no one is talking about. Even ignoring the massive, unpayable federal liabilities, tens of millions of unsuspecting Americans are headed for the suddenly poor life.

And don’t think the Pension Benefit Guarantee Corp. (PBGC) has your back. As of 2015, the fund had $88 billion in assets and $164 billion in obligations. If just the Central States Pension Fund mentioned at the top of the article decided to continue paying out its money till it was gone and then declare bankruptcy—it would completely wipe out the Guarantee Corp.

In 2014, the PBGC estimated that it would be completely out of money by 2022 and it had a 50 percent chance of collapsing within the next eight years.

Yet the PBGC is supposed to cover the pensions of 40 million Americans in the event of failure. In other words, the insurance plan for grossly underfunded pensions is grossly underfunded.

It has been that way for a very long time.

But there will be no bailout. No bailout of Illinois. No bailout of the PBGC. No bailout of Puerto Rico. No bailout of Social Security.

Because the money to bail those out comes from…. where?

I’ve been seeing various political messages around Social Security recently, demanding that politicians “give back” the trillions of $$ pissed away over the decades from the FICA “contributions” aka taxes that went into the pot with everything else.

Going to tell you right now: those politicians don’t have trillions of dollars to “give back”.

They can try to extract those trillions out of taxpayers (the people demanding the “give back”) and the bondholders (many of which are domestic — it ain’t just foreigners holding U.S. debt)… but are there enough of those to fill those coffers to make the program “whole”?

LOOK TO EUROPE FOR THE FUTURE

Europe is ahead of the U.S. on the demographic decline. The WSJ covers: Mismatch of lifespans and birthrates means too few workers are paying into state pension plans.

I’m not going to quote the article, because these three graphs say everything I want to show from the piece.

On the left, the percentage of the population over age 65; on the right, the percentage of the population 20-64.

As one can see, Europe is much farther along the trajectory. If we split off Japan from Asia, you would see an even more extreme trajectory. Their population has already started to shrink in absolute numbers.

Next, the number of people contributing to pension systems compared to retirees (the lower the number, the more stressed the system):

That is affected not only by population structure, but how many people actually work, actual retirement age (which may be below 65), etc.

Lastly, the percentage of GDP spent on pensions:

The point isn’t that there shouldn’t be pensions, or that there can’t be — but what is the amount being promised/paid versus what can be sustained?

PUBLIC PLANS: BLAST FROM THE PAST

I see that John Bury has excerpted an old prediction of when pension funds would run out:

That figure comes from this Rauh paper from May 2010. As noted by Bury, Illinois issued some pension obligation bonds in 2010 and 2011, which wasn’t included in Rauh’s analysis.

But some of those drop-dead dates are quite close, aren’t they?

Many conditions have changed since Rauh’s paper, but there still are issues. He didn’t include Puerto Rico in his analysis, and they’ve basically got a pay-as-they-go pension. That’s what happens when the pension fund runs out — it comes straight out of government revenue. And if one couldn’t pre-fund the pensions, one finds it more and more difficult to pay current pensions, as with Europe.

THE END TRAJECTORY

It does start with a decreasing fundedness ratio, and then you find that you have to put in more and more money… just to continue to have a decreasing funded ratio. Eventually that ratio goes to 0, and you’re at pay-as-you-go. It takes time to get there, and one can see it coming from years away.

Nobody should be proclaiming surprise at this. This trend has been known since I was a kid, but because the pig-in-a-python of the Boomers, which really was an unusual demographic phenomenon (that people treated as “normal”), they didn’t have to worry about the money drying up… quite yet.

This year, the oldest Boomers turn 70 years old. The people born at the Boomer peak (birth year 1957) will be 59. Those who work in the biz know these are key ages in retirement-related tax policy. Many Boomers are working on into older ages, but those generally aren’t the ages of highest productivity.

The Boomer money machine is gone, their Millennial kids are financially constrained, either with increasing college debt or the difficulty of getting a job without a college degree… and we Gen Xers, stuck in the middle, are so few compared to the Boomers who preceded us and the Millennials who come after. We can support only so much.

The problem is now.