Ground Zero for U.S. Economy: Private Pension Insolvencies

With all the Trump promises of jobs returning to the Rust Belt [they won’t], there is a much darker storm brewing in the U.S. And it will affect the entire world.

In previous columns, I’ve talked about some of the top economic land mines set to blow the legs off of the U.S. economy. On top of the sheer enormity of the sub-prime auto loan market, the student loans that will likely default, and the rapid advancement of technology and robotics that will inevitably replace Rust Belt, and hundreds of thousands of other jobs, the big kahuna is one virtually no one is talking about.

The private pension crisis at hand makes all the debt bubbles and the Fourth Industrial Revolution look like potholes in the economic highway compared to the sinkhole that is the mind boggling magnitude of the insolvency of the pension plans by some the most profitable companies and job-intensive industries in the world; not to mention the effect that their collapses will inflict on our consumer-driven economy here and across the globe when our economic house of cards come tumbling down.

Back in the spring of this year, the Washington Post reported that the multi-employer funded Central States Pension Fund, which handles, among many others, the retirement benefits for current and former Teamster truck drivers across various states including, but not limited to, Texas, Michigan, Wisconsin, Missouri, New York, and Minnesota, (one of the largest pension funds in the nation)….and it has filed an application to cut participant benefits, which became effective July 1 2016, as its “projections” show that it will become officially insolvent in eight years [by 2025]In 2015, the fund returned -0.81% “growth”, under-performing the paltry 0.37% return of its benchmark.

Over a quarter of a million people depend on their pensions being handled by the CSPF; most of whom rely on it as their only source of fixed income in retirement.

Private pension funds applying to lower promised benefits is a relatively new development. For many years there were federal protections which shielded private pensions from being cut, but that all changed in December 2014, when Republicans proposed that multi-employer pension plans be able to cut pension benefits so long as they are projected to run out of money within 10 to 20 years. Further, they folded it clandestinely into a $1.1 trillion government spending bill in one of the many blackmail threats of defaulting on federal obligations.

In addition to rising benefit payouts as more aging participants become eligible (coinciding with fewer workers to combine with employer funding), the increasing use of technology to replace manual labor jobs, and the 2007 Bush real estate financing debacle, with its unemployment fallout, it was inevitable that these steps were going to be taken to allow pension plans to cut benefits to recipients.

The Central States Pension Fund (one of the largest private pension funds in the country) is currently paying out $3.46 in pension benefits for every $1.00 it receives from employers, which has resulted in the fund paying out $2 billion more in benefits than it receives in employer contributions each year.

As a result, Thomas Nyhan, executive director of the Central States Pension Fund declared that the fund would become insolvent by 2025 if nothing is done—meaning in just eight years almost a half million  people could see their promised, employer/employee-funded pensions cut to virtually nothing.

According to Nyhan, if the plan becomes insolvent it would overwhelm the Pension Benefit Guaranty Corporation which at the end of fiscal 2015 only had $1.9 billion in total assets,—less than half of the yearly deficit detailed above occurring each year from just the CSPF.(The PBGC was set up by the government to absorb insolvent plans and continue paying benefits in the same way the FDIC is supposed to protect depositors in federal banks should they become insolvent).

Just this past August, Tobias Levkovich at Citigroup published a report stating that, “just the companies in the S&P 500 pensions alone (some of the most profitable companies in the world) were over $375billion under-funded at the end of 2015 with the top 25 companies having underfunded plans accounting for over $225billion (60%)of the total S&P 500 under-funded pension plans.” 

Democratic candidate Bernie Sanders has proposed a bill that would repeal the measure that allows cuts, and instead calls for the government to provide assistance to troubled pension funds, but with all branches of government now under the control of Republicans, the probability of that happening are virtually nil. It’s beyond me why the companies themselves shouldn’t be required to pick up their own slack.

Just to recap, the largest pension fund, the government pension plan backstop, (the PBGC ), and according to CNN, more than 10% of the roughly 1,400 additional multi-employer plans, covering more than 1 million more workers, now fit the same criteria that result in being classified as insolvent and qualify to apply for benefit cuts to employee-participants. To be clear, employer contribution to these funds are taxable to employees once they start receiving them, further reducing the amount they receive.

“This is going to be a national crisis for hundreds of thousands, and eventually millions, of retirees and their families. It’s going to open the floodgates for other cuts.” said Karen Friedman, executive president of the Pension Rights Center.

It’s just another ticking time bomb facing the US economy, which faces dramatic cuts in public services, and if Paul Ryan has his way, Medicare and Social Security will suffer the same fate as billions more in profits flow to the shareholders, CEOs, and the wealthiest 1% of Americans with another round of tax cuts coming their way under Trump and the GOP.

And yet the unsuspecting pensioners are the same people who voted Trump and the GOP into virtual total control of our government while claiming to be looking out for the working class. And these are the same ones who will find some way to blame the poor and/or government “giveaways” to them—which account for an infinitesimal amount of subsidies and tax breaks compared to what the wealthiest corporations and individuals receive.

Danielle DiMartino Booth, the tough talking former Federal Reserve adviser and President of Money Strong, has an insider’s perspective on finance. As she picks apart the danger signs with the US on the precipice of a deep recession being ignored by mainstream money analysts from CNN to CNBC, it’s the severity of this impending pensions crisis that’s really keeping her awake at night despite:

Says Ms DiMartino Booth, “A fleet of bulldozers couldn’t fill the private pensions’ gaps. And the idea that we can escape what’s to come, given demographically what we’re staring at, is naive at best… And it’s reckless at worst. And when you throw private equity and the dry powder that they have, given egregiously bad valuations, yeah, it’s hard for me to sleep at night.”

To her point, huge withdrawals from the pensions are already rapidly increasing, amid concerns over the future viability of the pension funds. A surge of people trying to retire early and take the money is occurring, at least in part, because the more aware retirees between 65 and 70 become, the more they can see the writing on the wall…it’s not going to be there if they wait. And if that dynamic and belief spreads–forget all the debt problems; the under-funded pension plans and their guarantor fund is Ground Zero for an economic nuclear blast.

The endgame appears destined to resemble The Winter of Discontent in London in 1979. There, as here, it was the very process of deregulation (lack of oversight) and lack of accountability that caused it.This current instance will be caused by the willful under funding of pension plans that wealthy corporations promised their employees to fund in lieu of lower wages.

It’s no surprise that we are an angry country. Hell, we’re an angry world. Shit isn’t going the way we’ve been told they’d go. Promises are broken frequently and blatantly by our larges corporations. And the Democrats seem devoid of the backbone, much less a cohesive national strategy to hold Republicans and their propaganda machines accountable, despite contributors repeatedly throwing tons of money at them to make their case.

Consider recent setbacks:

  1. The return of the KKK and overt racism while the GOP leadership remained silent allowing Trump to empower these groups once again.
  2. Women deprived of the right to have the same control over their body as do men.
  3. The death of the wealth effect. The inequality divide is unlike anything we’ve seen since the years that immediately preceded the Great Depression.
  4. Lack of strategic planning to provide concrete ways to fund a recovery for middle class jobs [Trump’s mythical tariffs would only cause rampant inflation and the rapid rise of monopolies and less competition just as the same practices did in leading up to the Great Depression].
  5. And now, in my opinion, we’re hurdling headlong into identical circumstances that led to the Great Depression with a megalomaniac so-called businessman (like Hoover in 1929) surrounded with a brain trust that consists of thugs, billionaires, racists, and people who won’t be effected by the anguish and terrible consequences of their actions.

Then, as now, conservatives scramble so as to avoid the question, “Where’s the money going to come from?”

And the answer is, as always, they will cut services that help the poor, the sick, efficiency, cuts in Social Security and Medicare. The GOP is salivating over the Postal Pension Fund that the 2006 Congress required the non-profit Post Office to fund 75 years into the future by the end of this year, causing billions in operating losses, which I warned and wrote about over three years ago. I even disseminated simple fixes that would benefit the poor and help fund the Post Office without costing taxpayers a penny.

And they simply cannot wait to put 30 million people back into the quagmire of having no health insurance.

But what really makes me angry is that our supposed leaders in the Democratic Party take our contributions and somehow manage to get fewer and fewer wins with each passing election. I’ve personally written to the DNC,, Senators, Representatives, Senator Sanders, Senator Warren, Senator Franken, and any number of progressive organizations spelling out simple strategies and simple solutions that might just break through the propaganda wall the conservatives have spent decades erecting with simple, effective, solutions that wouldn’t cost the average taxpayer a single penny to finance. I’ve received not one response. After all, they are all too busy deciding the next leader of the DNC.

But like so many times before, history might repeat because we ignore the signs. Wall St., will skate away unharmed, while the poor and middle class who decided to believe that “Only I [Trump] can fix it” will be the ones to suffer….and somehow, some way, the GOP will convince voters that too many regulations was the cause.

It’s impossible to predict exactly when the dominoes will start to fall. I was a good two years off on the Bush housing crash. Ours is a resilient economy. Sometimes remarkably so.

Maybe we’ll find a way to avoid the massive pain and suffering of a deep, lengthy recession/depression. Maybe Americans will wake up and realize that a 50% turnout for elections is a pathetic example of American un-exceptionalism and laziness. Maybe we’ll realize that healthcare for profit is barbaric and the root of our healthcare crisis, not health insurance. And maybe Santa Clause will knock on our doors Christmas Eve and deliver peace on earth and good will towards our fellow men [and women].

Hell, the Cubs won the World Series. Maybe miracles can happen. It’s going to take one to avoid the mess that’s coming. Bah humbug.

Harvey Gold