Friday, December 19, 2014

Mass Looting of U.S. Pensions?

J.D. Heyes of Global Research reports, The Mass Looting of Pension Plans Begins as Federal Law Altered to Reduce Pension Payouts:
No doubt in a sop to their corporate masters, a bipartisan group of lawmakers reached a deal just days ago to allow, for the first time, pension benefits of current retirees to be severely cut.

As reported by The Washington Post and MSN, the deal was necessary, say its backers, in order to save some of the most distressed pension plans. But what it will really do is pull the economic rug out from underneath millions of aged retirees when the economy remains sluggish and they are at their most vulnerable.

2014 Spending Bill last-minute attachment saves pension plans, not pensioners

The Post reported:
The rule would alter 40 years of federal law and could affect millions of workers, many of them part of a shrinking corps of middle-income employees in businesses such as trucking, construction and supermarkets.
The amendment was attached – without prior publication or announcement, of course – to the $1.01 trillion spending bill just passed by the House and Senate.

The rule change will “apply to multi-employer pensions, where a group of businesses in the same industry join forces with unions to provide pension coverage for employees. The plans cover some 10 million U.S. workers,” said the Post.
Millions will lose benefits when they can least afford to

The paper reported that, overall, there are about 1,400 multi-employer pension plans in existence, and many still remain in good fiscal condition. Those would not be affected by the deal. But several dozen plans have failed while several more larger plans are facing insolvency.

Over the next 20 years, as many as 200 multi-employer plans that cover 1.5 million workers are in danger of running out of funds. And half are believed to be in such bad shape that they are likely to ask for permission to reduce pension payments to recipients in the very near future.

“We have to do something to allow these plans to make the corrections and adjustments they need to keep these plans viable,” said Rep. George Miller, D-Calif., who, with Rep. John Kline, R-Minn., led efforts to hammer out a deal. Naturally no congressional pension plans are in danger of running out of funds – not as long as taxpayers continue to fund them.

As you might have guessed, the provision has angered retirement security advocates. They say that giving pension plans permission to cut benefits and payments will only lead to additional cuts later.

“After a lifetime of hard work to earn their pensions, retirees don’t deserve to receive a bad deal, in which they have had no say, cut behind closed doors and excluding the very people who would be impacted the most,” Joyce Rogers, a senior vice president for AARP, the lobbying giant lobbying group for older Americans, said in a statement, as reported by the Post.

Worse, there are some unions and retirement fund managers – those who supposedly stand up “for working Americans” – supporting this deal (the Post said they are “reluctantly” supporting it, but it is support nonetheless). They have said they see the deal as necessary to prevent the plans from running out of money (which, as our editor Mike Adams, the Health Ranger, says will happen anyway – more on that in a moment).

“This bipartisan agreement gives pension trustees the tools they need to maintain plan solvency, preserves benefits for the long haul, and protects the 10.5 million multiemployer participants,” Randy G. DeFrehne, executive director of the National Coordinating Committee for Multiemployer Plans said in a statement, according to the Post. “With time running out on the retirement security of millions of Americans, moving this bipartisan proposal forward now is not only timely, but necessary.”
Predictable results

A year-and-a-half ago, in a piece for Natural News, Adams predicted the decline and fall of pensions – private, for sure, but also public pensions. With the declaration of bankruptcy by the city of Detroit in the headlines, Adams wrote:
Yes, Detroit owes former government employees – teachers, firefighters, cops and more – a whopping $3.5 billion in current and future payments. Except Detroit doesn’t have $3.5 billion to pay the pensions. The city is in a state of economic collapse. Remember, the U.S. government used billions in taxpayer money to help General Motors move its manufacturing offshore to countries like China. As a result of economically-insane actions and criminal mismanagement, a city that used to be the hub of industrial output in America has become a ghost town of abandoned buildings, crumbling infrastructure and financial destitution.

But even as all this was becoming apparent, the government workers there continued to collect fat paychecks and pensions, all based on the promise that endless population growth would outpace the rise in pension obligations. Many pensioners are owed over $100,000 a year from the government, and this is true across California, Illinois and many other states as well.

Chicago, for example, owes $19 billion in pension payments that it doesn’t have, and the city of Los Angeles is more than $30 billion in the hole. The story is much the same in every major U.S. city.
Read the Health Ranger’s full report here.
Last Friday, I wrote a lengthy comment on how Congress just nuked pensions, stating my thoughts on the pathetic display of bipartisan butchering of pensions:
I don't know why Joshua Gotbaum is so ecstatic. This bill deals a retirement death blow to millions of blue collar workers and will propel the United States of Pension Poverty to the top spot of countries with the worst retirement system among developed nations.

And never mind all the political posturing, both Democrats and Republicans voted in these changes with little or no regard to the plight of these workers. It's basically more of the same, bailouts for Wall Street and austerity for Main Street.

Having said this, there is no question that these multi-employer plans were poorly managed and were in desperate need of reforms. The problem is that instead of implementing more sensible reforms to try to bolster these plans or try saving them -- like maybe have the state public pension funds manage them or just bailing them out like it did for Wall Street back in 2008 -- Congress took out the guillotine and chopped them, effectively spreading the message that the pension promise is worthless.

Think about it, these people worked thirty or forty years and thought their pension benefits were safe and secure, allowing them to retire in dignity. Instead, they got the royal pension shaft as Congress just pulled the rug under their feet.
To my surprise, very little or no media attention has been given to the implications of Congress's decision to chop pensions for these multi-employers plans. Worse still, most financial blogs, including Zero Hedge, didn't even cover this topic. To her credit, Yves Smith of Naked Capitalism did post on how Cromnibus pensions provisions gutted forty years of policy, allowing existing pensions to be slashed.

Mark Miller of Reuters reports, What Retirees Need to Know about the New Federal Pension Rules:
Only a small percentage of retirees are directly affected by the new rule. But future legislation may lead to more pension cutbacks.

The last-minute deal to allow retiree pension benefit cuts as part of the federal spending bill for 2015 passed by Congress last week has set off shock waves in the U.S. retirement system.

Buried in the $1.1 trillion “Cromnibus” legislation signed this week by President Barack Obama was a provision that aims to head off a looming implosion of multiemployer pension plans—traditional defined benefit plans jointly funded by groups of employers. The pension reforms affect only retirees in struggling multiemployer pension plans, but any retiree living on a defined benefit pension could rightly wonder: Am I next?

“Even people who aren’t impacted directly by this would have to ask themselves: If they’re doing that, what’s to stop them from doing it to me?” says Jeff Snyder, vice president of Cammack Retirement Group, a consulting and investment advisory firm that works with retirement plans.

The answer: plenty. Private sector pensions are governed by the Employee Retirement Income Security Act (ERISA), which prevents cuts for retirees in most cases. The new legislation doesn’t affect private sector workers in single-employer plans. Workers and retirees in public sector pension plans also are not affected by the law.

Here are answers to some of the key questions workers and retirees should be asking in the legislation’s wake.

Q: Cutting benefits for people who already are retired seems unfair. Why was this done?

A: Proponents argue it was better to preserve some pension benefit for workers in the most troubled plans rather than letting plans collapse. The multiemployer plans are backstopped by the Pension Benefit Guaranty Corp (PBGC), the federally sponsored agency that insures private sector pensions. The multiemployer fund was on track to run out of money within 10 years—a date that could be hastened if healthy companies withdraw from their plans. If the multiemployer backup system had been allowed to collapse, pensioners would have been left with no benefit.

Opponents, including AARP and the Pension Rights Center, argued that cutting benefits for current retirees was draconian and established a bad precedent.

Q: Who will be affected by the new law? If I have a traditional pension, should I worry?

A: Only pensioners in multiemployer plans are at risk, and even there, the risk is limited to retirees in “red zone” plans—those that are severely underfunded. Of the 10 million participants in multiemployer plans, perhaps 1 million will see some cuts. The new law also prohibits any cuts for beneficiaries over age 80, or who receive a disability pension.

Q: What will be the size of the cuts?

A: That is up to plan trustees. However, the maximum cuts permitted under the law are dramatic. Many retirees in these troubled plans were well-paid union workers who receive substantial pension benefits. For a retiree with 25 years of service and a $25,000 annual benefit, the maximum annual cut permitted under the law is $13,200, according to a cutback calculator at the Pension Rights Center’s website.

The cuts must be approved by a majority of all the active and retired workers in a plan (not just a majority of those who vote).

Q: How do I determine if I’m at risk?

A: Plan sponsors are required to send out an annual funding notice indicating the funding status of your program. Plans in the red zone must send workers a “critical status alert.” If you’re in doubt, Snyder suggests, “just call your retirement plan administrator,” Snyder says. “Simply ask, if you have cause for concern. Is your plan underfunded?”

The U.S. Department of Labor’s website maintains a list of plans on the critical list.

Q: How quickly would the cuts be made?

A: If a plan’s trustees decide to make cuts, a notice would be sent to workers. Snyder says implementation would take at least six months, and might require “a year or more.”

Q: Am I safe if I am in a single employer pension plan?

A: When the PBGC takes over a private sector single employer plan, about 85% of beneficiaries receive the full amount of their promised benefit. The maximum benefit paid by PBGC this year is $59,320.

Q: Does this law make it more likely that we’ll see efforts to cut other retiree benefits?

A: That will depend on the political climate in Washington, and in statehouses across the country. In a previous column I argued that the midterm elections results boost the odds of attacks on public sector pensions, Social Security and Medicare.

Sadly, the Cromnibus deal should serve as a warning that full pension benefits aren’t a sure thing anymore. So having a Plan B makes sense. “If you have a defined benefit pension, great,” Snyder says. “But you should still be putting money away to make sure you have something to rely on in the future.”
Indeed, I warn all of you who foolishly believe your pensions are "sacred" and 'untouchable" to have a Plan B, C and D because if my worst fear comes true, and deflation comes to America, many of you are in for a very rude awakening.

And it's not just private pensions that will get slashed, public pensions are extremely vulnerable and most of them are not in a position to weather another financial crisis. Both Warren Buffett and Bridgewater have sounded the alarm but nobody seems to notice or care until their pensions get slashed.

The worst of the bunch, states like Kentucky and Illinois, are already reeling and on the edge of a public pension disaster. The Economist just published a comment on America's Greece, discussing Illinois' public pension woes and the standoff between unions and the state government.

Folks, it's going to get ugly and when deflation hits America, it's going to get even uglier. And instead of implementing much needed reforms to bolster defined-benefit plans, politicians are cutting them and replacing with crappy defined-contribution plans, leaving more workers to fend for themselves in crazy, volatile markets, effectively condemning them to pension poverty.

Finally, it's important to note the mass looting of American and global pensions started a long time ago, as big banks and their big hedge fund and private equity clients figured out ways to rip off public and private pensions directly or indirectly by charging them exorbitant fees for "sophisticated alternative investments" which are long on promises but short on results.

And make no mistake, the Federal Reserve is in on the game, fueling the alternatives bubble. Despite the linguistic acrobatics, the Fed is committed to keeping rates low for a protracted period, effectively forcing public and private pensions to keep taking more risks in stocks, corporate bonds and especially alternative investments to achieve their actuarial target rate-of-return, which is nothing but a fantasy in most cases. Quantitative easing (QE) and low rates are necessary to fight deflation but the biggest winners are big banks and big alternative investment managers, not pensioners.

Ironically, all this doesn't really matter because when deflation rears its ugly head, it's game over for global (not just U.S.) pensions, Wall Street, hedge funds and private equity funds. So enjoy the liquidity party while it lasts because the Titanic is still sinking and all that policymakers are doing is rearranging the deck chairs.

Below, CNBC's Rick Santelli and Bradley Belt, former Pension Benefit Guaranty Corp. CEO, discuss the federal pension insurance system and risk to taxpayers. I predict the PBGC and many state pensions will need taxpayer relief in the not too distant future, unless of course, Congress just keeps on nuking pensions, which is pretty much what I expect it to do.

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