Pension Tsunami is About to Hit

22 Statistics About America’s Coming Pension Crisis That Will Make You Lose Sleep At Night

The Economic Collapse
August 2, 2010

As the first of the 80 million Baby Boomers have begun to retire, it has become increasingly apparent that the United States is facing a pension crisis of unprecedented magnitude.

• State and local government pension plans are woefully underfunded,


• Dozens of large corporate pension plans either have collapsed or are on the verge of collapsing,


• Social Security is a complete and total financial disaster, and


• About half of all Americans essentially have nothing saved up for retirement.

So yes, to say that we are facing a retirement crisis would be a tremendous understatement. There is simply no way that we can keep all of the financial promises that we have made to the Baby Boomer generation. Unfortunately, the crumbling U.S. economy simply cannot support the comfortable retirement of tens of millions of elderly Americans any longer. The truth is that we are all going to have to start fundamentally changing the way that we think about our golden years.

Once upon a time, you could count on getting a big, fat pension if you put 30 years into a job. But now pension plans everywhere are failing. State and local governments are cutting back and are raising retirement ages. A majority of Americans have even lost faith in the Social Security system, which was supposed to be the most secure of them all.

The reality is that we are moving into a time when there is not going to be such a thing as "financial security" as we have known it in the past. Things have fundamentally changed, and we are all going to have to struggle to stay above water in the economic nightmare that is coming.

Part of the reason we have such a gigantic economic mess on the way is because we have promised vastly more than we can deliver to future retirees. When you closely examine the numbers, it quickly becomes clear that a financial tsunami is about to hit us that is going to be so devastating that it will change everything that we know about retirement.

The following are 22 statistics about America's coming pension crisis that will make you lose sleep at night...

Private Pension Plans And Retirement Funds

1 - One recent study found that America's 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008.

2 - Approximately half of all workers in the United States have less than $2000 saved up for retirement.

3 - According to one recent survey, 36 percent of Americans say that they don't contribute anything at all to retirement savings.

4 - The Pension Benefit Guaranty Corporation says that the number of pensions at risk inside failing companies more than tripled during the recession.

5 - According to another recent survey, 24% of U.S. workers admit that they have postponed their planned retirement age at least once during the past year.

State And Local Government Pensions

6- Pension consultant Girard Miller recently told California's Little Hoover Commission that state and local government bodies in the state of California have $325 billion in combined unfunded pension liabilities. When you break that down, it comes to $22,000 for every single working adult in California.

7 - According to a recent report from Stanford University, California's three biggest pension funds are as much as $500 billion short of meeting future retiree benefit obligations.

8 - In New Jersey, the governor has proposed not making the state's entire $3 billion contribution to its pension funds because of the state's $11 billion budget deficit.

9 - It has been reported that the $33.7 billion Illinois Teachers Retirement System is 61% underfunded and is on the verge of total collapse.

10 - The state of Illinois recently raised its retirement age to 67 and capped the salary on which public pensions are figured.

11 - The state of Virginia is requiring employees to pay into the state pension fund for the first time ever.

12 - In New York City, annual pension contributions have increased sixfold in the past decade alone and are now so large that they would be able to finance entire new police and fire departments.

13- Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern's Kellogg School of Management recently calculated the combined pension liability for all 50 U.S. states. What they found was that the 50 states are collectively facing $5.17 trillion in pension obligations, but they only have $1.94 trillion set aside in state pension funds. That is a difference of 3.2 trillion dollars.

Social Security

14 - According to one recently conducted poll, 6 out of every 10 non-retirees in the United States believe that the Social Security system will not be able to pay them benefits when they stop working.

15 - A very large percentage of the federal budget is made up of entitlement programs such as Social Security and Medicare that cannot be reduced without a change in the law. Approximately 57 percent of Barack Obama's 3.8 trillion dollar budget for 2011 consists of direct payments to individual Americans or is money that is spent on their behalf.

16 - 35% of Americans over the age of 65 rely almost entirely on Social Security payments alone.

17 - According to the Congressional Budget Office, the Social Security system will pay out more in benefits than it receives in payroll taxes in 2010. That was not supposed to happen until at least 2016. The Social Security deficits are projected to get increasingly worse in the years ahead.

18 - 56 percent of current retirees believe that the U.S. government will eventually cut their Social Security benefits.

19 - In 1950, each retiree's Social Security benefit was paid for by 16 U.S. workers. In 2010, each retiree's Social Security benefit is paid for by approximately 3.3 U.S. workers. By 2025, it is projected that there will be approximately two U.S. workers for each retiree.

20 - The shortfall in entitlement programs in the years ahead is mind blowing. The present value of projected scheduled benefits surpasses earmarked revenues for entitlement programs such as Social Security and Medicare by about 46 trillion dollars over the next 75 years.

21 - According to a recent U.S. government report, soaring interest costs on the U.S. national debt plus rapidly escalating spending on entitlement programs such as Social Security and Medicare will absorb approximately 92 cents of every single dollar of federal revenue by the year 2019. That is before a single dollar is spent on anything else.

22 - Right now, interest on the U.S. national debt and spending on entitlement programs like Social Security and Medicare is somewhere in the neighborhood of 15 percent of GDP. By 2080, those combined expenditures are projected to eat up approximately 50 percent of GDP.

FDIC Playing With Fire by Soliciting State Pension Money to Buy Toxic Assets

The FDIC's New Policy of Soliciting State Pension Plans to Pour Hard Cash into Purchases of Failed Bank Assets Takes Shape

CentristNet
March 27, 2010

The Federal Deposit Insurance Company (“FDIC”) has recently initiated a risky new policy: soliciting and facilitating public pension fund purchases of failed bank assets that are presently on the FDIC’s balance sheet after seizure.

Apparently, the FDIC’s fund is deep into the red (over $20 billion), and a decision has been made to tap the two trillion dollars in public pension funds around America to take “toxic assets” off the FDIC books and replenish the FDIC’s fund, thereby relieving the pressure on the FDIC . Bloomberg reports:

March 8 (Bloomberg) — The Federal Deposit Insurance Corp. is trying to encourage public retirement funds that control more than $2 trillion to buy all or part of failed lenders, taking a more direct role in propping up the banking system, said people briefed on the matter.

Direct investments may allow funds such as those in Oregon, New Jersey and California to cut fees for private-equity managers, and the agency to get better prices for distressed assets, the people said. They declined to be identified because talks with regulators are confidential.

Pension funds, of course, are designed to provide funds for workers as they retire and such funds are capitalized by withholding from worker paychecks, and in the case of public pension funds, from government worker paychecks.

The first state pension fund to actually pour money into FDIC-held failed bank assets pursuant to the FDIC’s solicitations could be the State of Oregon, ponying up $100 million in perhaps the first deal of many to come. Jay Fewel, a senior investment officer at the Oregon State Treasury, confirmed that bank regulators are looking for “the support of state pension funds to solve the crisis surrounding ongoing bank failures”. The Oregonian explains the familiar “get rich quick” sales pitch being served up by the FDIC and investment bankers looking to leverage state pension fund money:

In a deal being pitched as a home-run investment opportunity for the state pension fund, Oregon’s public pensioners may be about to buy stakes in several of the 700 troubled banks around the country that are wallowing in bad loans.

The citizen’s council that oversees the Oregon Public Employees Retirement Fund gave its approval last week — subject to final fee negotiations — to invest $100 million in a bank holding company being organized by Sageview Capital, whose partners bring deep experience in the world of leveraged buyouts.

According to a presentation to the Oregon Investment Council by Harrison and Sageview partner Scott Stuart, the FDIC is so anxious to recapitalize troubled banks that it is willing to cover 80 to 95 percent of buyers’ loan losses as well as the costs incurred in restructuring loans.

That’s a potentially lucrative deal for discount bidders who can clean up problem loans and get the bank into growth mode before selling it. Stuart suggested that it wasn’t unrealistic to think Oregon could double its money over several years.

“The government is handing out free money,” enthused council member Dick Solomon, a Portland accountant. “Maybe we should get in line.”

So a “desperate” FDIC is facilitating a private equity firm’s solicitation of Oregon state pension fund money to purchase failed bank assets off of the FDIC’s books. Oregon may be the first in a long line of state pension funds who jump at chance to get in on the FDIC action as the “government is handing out free money.” Such sentiments are almost certainly unrealistic, and fantasy claims that a state pension fund “could double its money over several years” could be relied upon by state pension funds, like Oregon’s, New Jersey’s and California’s, to justify pouring massive portions of the hard cash under their control into FDIC-solicited failed bank asset purchases.

Apparently the FDIC likes the idea of selling failed bank assets off to state pension funds because such government pension funds have a “longer [time] horizon” and won’t be concerned about losses in the next decade or so:

Private-equity managed funds typically promise they’ll return funds to their investors in about 10 years. Pension funds are aiming to fund retirements that are decades away and thus can hold on to investments longer, which would help ease the FDIC’s concern, said one of the people.

FDIC guarantees may soften the risk of investing public pension money in distressed banks, Whalen said. When the FDIC sells a failed bank, it typically shares a portion of the loan losses.

“Financially sophisticated people do not assume that banks have recognized all of their real estate losses,” Kramer said, adding that it can still be a bad deal if a buyer overpays for a deposit franchise or if loans perform worse than expected. “We are in the early innings for commercial real estate.”

It appears that the FDIC is trying to avoid selling to private-only funds, who are looking at a 10-year investment window, and instead sell to public pensions, which “are aiming to fund retirements that are decades away and thus can hold on to investments longer, which would help ease the FDIC’s concern.”

Reading between the lines, it appears that the FDIC knows it cannot sell certain failed bank assets to private equity funds because such private firms won’t buy at the higher prices the FDIC wants, as the 10-year return on investment is unattractive to private investors.

State pension funds, however, are great because they don’t care about a 10-year return; instead, they’re only worried about “decades away” valuation and accordingly can be solicited to buy some of the FDIC’s failed bank assets at higher prices than private-only funds.

This conduct by the FDIC is quite risky to the solvency of public pension funds as even the failed bank assets already marked down on the FDIC books now could fall further if the commercial real estate market deteriorates further, which some see as likely in 2010 and beyond. Indeed, the entire new policy of the FDIC to solicit government pension fund money into the risky proposition of buying up failed bank assets could be seen as attempting to tap into the “equity” of the United States ($2 trillion in public pension funds) to cover bad debt that no one else will buy.

Zero Hedge is also concerned about this possible new trend in FDIC solicitation of public pension money:

My thoughts on public pension funds investing in failed banks? I think any way they do it, it’s a recipe for disaster. I can just see the private equity sharks raising funds to bid on failed banks. And even if pension funds take direct control of these failed banks, do they really know what’s lurking on their books and how to operate a bank? I shudder to think at what will happen to these investments if we enter a protracted period of weakness in commercial real estate.

Another independent expert, Chris Whalen, managing director of Institutional Risk Analytics of Torrance, California, sees unnecessary risk for state pension funds in any FDIC purchase deal. Regarding failed bank assets, Whalen notes that:

“If they are really interested in playing this area, they should put their money into a larger bank that’s already playing here,” Whalen said. “If you look at the risk-reward and the distraction involved, it’s not worth it” to back a new bank, he said.

Another financial expert, Richard Suttmeier, points out that a reasonable solution to the FDIC fund shortfall is to use repaid TARP funds from the big banks to replenish the fund. The problem of finding hard cash to purchase “toxic assets” that remain after a bank’s failure continues to lurk in the background as the elephant in the room.

Sadly, voices of reason like Whalen’s and Suttmeier’s will probably be drowned out by exuberant claims of “free money” and “double its money” from the private hedge fund managers looking for state pension fund clients, and from the FDIC in its desperation to find new sources of hard cash to take those infamous “toxic assets” off of the FDIC’s hands.

One can only hope that FDIC’s momentous decision to tap the $2 trillion in state pension fund money to buy up toxic assets will garner some public attention and debate as the implications for millions of state and local workers could reverberate for years to come.

Government Plans to Take Your 401-k

By Steve Pearce
May 12, 2010

All taxpayers should know the federal government is broke. When governments are broke they look to your assets. They are now looking to take your 401-k and your private retirement accounts. During my time in Congress, I heard rumblings like that, but always from the most extreme members on the left. Now, it is being proposed for real.

Republicans Sound Alarm on Administration Plan to Seize 401(k)s
By Connie Hair
May 4, 2010

In February, the White House released its “Annual Report on the Middle Class” containing new regulations favored by Big Labor including a bailout of critically underfunded union pension plans through “retirement security” options.

The radical solution most favored by Big Labor is the seizure of private 401(k) plans for government disbursement -- which lets them off the hook for their collapsing retirement scheme. And, of course, the Obama administration is eager to accommodate their buddies.

Vice President Joe Biden floated the idea, called “Guaranteed Retirement Accounts” (GRAs), in the February “Middle Class” report.

In conjunction with the report’s release, the Obama administration jointly issued through the Departments of Labor and Treasury a “Request for Information” regarding the “annuitization” of 401(k) plans through “Lifetime Income Options” in the form of a notice to the public of proposed issuance of rules and regulations.

House Republican Leader John Boehner (Ohio) and a group of House Republicans are mounting an effort to fight back.

The American people have become painfully aware over the past year that elections sometimes have calamitous consequences. Republicans lack the votes (for now) to reign in the Obama administration’s myriad nationalization plans for everything from health care to the automobile industry.

Now the backdoor bulls-eye is on your 401(k) plan and the trillions of dollars the government would control through seizure, regulation and federal disbursement of mandatory retirement accounts.

Boehner and the group are sounding the alarm, warning bureaucrats to keep their hands off of America’s private retirement plans.

Just when you thought it was safe to come up for air after the government takeover of health care.

* * * * * * *

The entirety of the House GOP Savings Recovery Group letter outing the issue that was sent last night to the Labor and Treasury secretaries:

The Honorable Hilda L. Solis, Secretary
U.S. Department of Labor
200 Constitution Avenue, NW
Washington, DC 20210

The Honorable Timothy Geithner, Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20210

Dear Secretaries Solis and Geithner:

As members of the Republican Savings Solutions Group, we write today to express our strong opposition to any proposal to eliminate or federalize private-sector defined contribution pension plans, such as 401(k)s, or impose burdensome new requirements upon the businesses, large and small, who choose to offer these plans to their employees.

In the Annual Report of the White House Task Force on the Middle Class, Vice President Biden discussed at length the creation of so-called “Guaranteed Retirement Accounts, (GRAs)” which would provide for protection from “inflation and market risk” and potentially “guarantee a specified real return above the rate of inflation” -- presumably at taxpayer expense. In the Report, the Vice President recommended “further study of these issues.”

The Vice President’s comments are troubling, insofar as they come on the heels of testimony before Congress from supporters of GRAs proposing to eliminate the favorable tax treatment currently afforded to 401(k) plans, and instead use those dollars to fund government-invested GRAs into which all employees would be required to contribute a portion of their salary -- again, with a government subsidy. These advocates would, essentially, dismantle the present private-sector 401(k) system, replacing it instead with a government-run investment plan, the size and scope of which remain to be seen. This despite data showing that 90 percent of households have a favorable opinion of the existing 401(k)/IRA system.

In light of these facts, we write today to express our opposition in the strongest terms to any effort to “nationalize” the private 401(k) system, or any proposal that would dismantle or disfavor the private 401(k) system in favor of a government-run retirement security regime.

Similarly, and more recently, the Departments of Labor and Treasury have jointly issued a “Request for Information” regarding the “annuitization” of 401(k) plans through “Lifetime Income Options.” While we appreciate the Departments’ seeking guidance and information from all parties and stakeholders in advance of regulatory activity, we strongly urge that the Departments not proceed with any regulation in this area before they have carefully and thoroughly considered all of the information received.

More specifically, we urge that the Departments take no action to mandate that plan sponsors -- often, small businesses -- include a “lifetime income” or “annuitization” option if they choose to offer a 401(k) plan to their employees, or that beneficiaries take some or all of their retirement savings in such an option. Data shows that 70 percent of Americans oppose the concept of a mandated annuity or government payout of their 401(k) plan. On a more fundamental level, Congress should not be in the business of choosing “winners” and “losers” among retirement security stakeholders. Instead, we urge the Departments to make it easier for employers to include retirement income solutions in their savings plans and to help workers learn more about the value of their retirement savings as a source of retirement income.

Finally, to the extent new mandates and bureaucratic red tape from Washington push small employers out of the business of offering these plans to their employees, we would submit such an effort weakens, rather than strengthens retirement security.

We appreciate your consideration of our views in these important matters and stand ready to work with you and the Administration to promote secure and adequate retirement savings for all Americans.

Sincerely,
House Republican Leader John Boehner (R-OH)
Rep. John Kline (R-MN)
Rep. Dave Camp (R-MI)
Rep. Sam Johnson (R-TX)
Rep. Dean Heller (R-NV)
Rep. Brett Guthrie (R-KY)
Rep. Michele Bachmann (R-MN)
Rep. Pat Tiberi (R-OH)
Rep. Bob Latta (R-OH)
Rep. Erik Paulsen (R-MN)
Rep. Lynn Jenkins (R-KS)
Rep. Ed Royce (R-CA)
Rep. Buck McKeon (R-CA)
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Connie Hair is a freelance writer, a former speechwriter for Rep. Trent Franks (R-AZ) and a former media and coalitions advisor to the Senate Republican Conference.