Below is today’s (5/15/12) lead editorial from the WALL ST JOURNAL. While we concentrate mostly on government pension problems, this worthy piece delves into the PRIVATE defined benefit morass — the “multiple employer”pensions the private sector unions have put in place in a number of industries.
Like public pensions, dishonestly is rife in this sector. Maybe even more so. Consider this excerpt:
Labor’s actuarial reading of one SEIU fund for health-care employees finds it 100.4% funded. Credit Suisse’s fair-value reading finds it 49.6% funded—or some $6.8 billion in the hole.
The reason this problem is important to us all is that these pensions are “insured” by the Pension Benefit Guaranty Corporation, a federal agency. When the money runs out to pay these guaranteed pensions (and it surely will), the payout obligation shifts to — you guessed it — us taxpayers.
Sadly, it appears that this eye-opening editorial has a MAJOR error, one that unnecessarily detracts from the fundamental message.
The story asserts that the maximum pension payout covered by PBGC is only $12,800. But according to my understanding of the maximum, confirmed by what I’m reading on the PBGC website, the pension maximum guarantee is $55,841 a year. Another WSJ reader wrote in complaining of the same error.
Actually I wish (and HOPE) that the $12,800 figure is correct. Ultimately this agency’s guarantee is backed by the taxpayers of America — yet another in a myriad of hidden, unreported, unfunded taxpayer liabilities we simply cannot pay off unless perhaps we dramatically debase our currency (further).
WALL ST JOURNAL
REVIEW & OUTLOOK
May 14, 2012
The Union Pension Bomb
Multi-employer plans look to be in big trouble.
Imagine the panic if investors discovered that many of the nation’s biggest public companies had hidden liabilities so large as to make them worth a fraction of their value. That’s something akin to the shock created by the recent Credit Suisse report on multi-employer pension plans.
In “Crawling Out of the Shadows,” analysts David Zion, Amit Varshney and Nicole Burnap address the big but opaque world of pensions in which companies across an industry pay into a single asset pool. These 1,400 union-run retirement vehicles have long been poorly run and underfunded. (See “The Next Pension Bailout,” August 16, 2010.) But Credit Suisse has dug deeper and found how really big the mess is.
Among the findings: Multi-employer plans in the U.S. are underfunded by some $369 billion. An estimated $43 billion of that off-balance-sheet liability belongs to the 44 S&P 500 companies that are exposed to multi-employer plans. The other 88% of the $369 billion is borne by small, mid-cap or private firms that may be even less prepared to cover the obligations. The report says Safeway’s $6.9 billion in liabilities amount to 76% of the company’s market cap, for example.
All of this ought to be especially embarrassing to Washington, which requires annual filings to the Department of Labor on multi-employer plans and measures their financial health. But Labor uses an “actuarial” reading of the numbers, which envisions an average (and hefty) 7.5% rate of return on investments, smoothed over five years. Even under that generous view, about 500 plans—or 37%—are less than 80% funded and thus considered financially troubled.
Credit Suisse applies a more realistic “fair value” reading—which uses a lower rate of return and current liabilities. By that standard, only 4% of multi-employer plans are healthy and many are exposed as accounting scams. One example: Labor’s actuarial reading of one SEIU fund for health-care employees finds it 100.4% funded. Credit Suisse’s fair-value reading finds it 49.6% funded—or some $6.8 billion in the hole. [RIDER’S EMPHASIS]
. . .
Go to the link for the full, riveting editorial.