The next big crisis: Retirement Funds! UPDATE #1 &2

I had several friends tell me I scared them on this story 2 posts below. I didn't mean to do that but realized I had not provided any answers to the question, So what do I do about it? The answer to me is to consider investing in more hard assets than paper products such as money, stocks or other derivatives. Consider buying things like Gold and Silver physically, not the paper stocks which trade it. Also consider buying rental income properties, which can generate cash flow positive returns, especially with the prices down so much and mortgage interest rates at the lowest level in years. If you can get these properties, they are hard assets. People can live in them and you can own something which will rise in value, as inflation rises. Inevitably it will, because of the massive amounts of dollars and Euro's in the world being printed out of thin air.

Most have their current retirement funds in accounts they have little or no control over. They are suppose to be protected not just by "promises" like IOU's, but physically there for when you retire and start to draw the funds out. Most of my retirement funds are in my own accounts, as I am self employed and set up a Defined Benefit Plan in which I am able to manage my own investments. (The average person does not have this luxury. And I am at an age where in a few years I can start to draw it out.)

The government stands behind the Pension Benefit Guaranty Corp. so I am not worried they can't print the paper and do what's necessary to help it should it need it. The overarching problem, in my view, is that it makes money appear to be worthless, as the government can print all they want to solve almost any problem. Here from the Pension Benefit Guaranty Corp.'s 2008 Strategic Plan is what they say can be a key issue:

Key Factors Affecting Achievement of PBGC Goals
Plan Underfunding
-Financial and operational risks facing the pension insurance system continue to fluctuate significantly because of the sensitivity of underfunded pension plans to changes in economic conditions. The necessary monitoring of these plans and their sponsors strains PBGC resources.

Plan Terminations
-Continued growth in the number and magnitude of pension plan terminations and the number of participants in trusteed plans increases the PBGC’s workload and the need for supporting infrastructure. This larger workload and increasing customer expectations challenge the agency’s ability to deliver quality customer service.

Complexity of Assets in Terminated Plans
-When an underfunded pension plan terminates, the plan’s existing investment portfolio is absorbed by the PBGC, which commingles the assets with its own assets under management. Assets from recent large plan terminations have included complex investment mixes that the agency manages until the assets can be liquidated. The handling of complex assets in the PBGC’s portfolio, and particularly assets that it would otherwise not hold, increases the PBGC’s investment management costs.

It is this last statement, which is the most troubling, as sure as you can count to ten, you know these are probably troubled assets or "toxic assets" on their books too.


Money will always be here, as long as it can be printed. You need to know when to hold it and when to invest it, when to invest it in soft versus hard assets. Right now inflation is all but non existent, but that will change over the next few years.

UPDATE #2 May 6th 7:30am PST

Surprising employees, today Wells fargo announced they will no longer be contributing to its traditional Employee Pension plan, cutting the total compensation of its workers only 2 weeks after announcing record first-quarter profits!

The next big crisis: Retirement Funds

So do you think that if we can just get this banking crisis behind us all will be well again? Think again! Oh I know you are thinking about the rising Unemployment rate and the number of foreclosures which are tied into the banking problems also as important, and I agree. But what has not been discussed much of late is what has happened to the Pension Funds for retirees and the Agency which Insures them, the Pension Benefit Guaranty Corp.. Here straight from their website is a description of who they are.

"PBGC is a federal corporation created by the Employee Retirement Income Security Act of 1974. It currently protects the pensions of nearly 44 million American workers and retirees in more than 29,000 private single-employer and multi-employer defined benefit pension plans. PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusteed by PBGC, and recoveries from the companies formerly responsible for the plans."

What I have seen in the news these past few months should raise the alarm bells. Here's a sampling:

April 9, 2009 The Exxon Mobil pension fund has filed a lawsuit against its custodian Northern Trust for breaching its fiduciary responsibilities. The corporate fund is claiming that the funds garnered from the lending out of shares has been invested in risky assets by Northern Trust. These assets are alleged to have included highly-leveraged assets, mortgage-backed securities and collateralized debt obligations. It is alleged that these investments effectively generated losses for the Exxon Mobil pension fund.

April 16, 2009 A special pension fund for railroad workers that was given permission during the Bush administration to invest its assets in the stock market lost more than a third of its value during a recent 18-month period, a loss that could influence an ongoing debate about how to keep government-affiliated retirement programs solvent.

March 1, 2009 Questions arise from GM's use of pension for buyouts, VEBA trust. Details are emerging about how General Motors Corp.'s U.S. pension funds went from a $20-billion surplus at the end of 2007 to a $12.4-billion deficit 12 months later. Newly released numbers show that the funds, which help support more than 650,000 Americans, were tapped for billions of dollars over the past year for employee buyout programs, benefit increases and as part of the UAW's retiree health care trust deal.

February 2009 The Next Catastrophe: Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode. Funds worth trillions of dollars start to plummet in value. Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protected wake up to a sinking feeling of uncertainty and gloom. Sound like the great mortgage-fueled financial crisis of 2008? Sure. But it also describes a calamity likely to hit as soon as 2009. State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.

There are serious faults cracking the very foundation and well being of our elder population, as it approaches retirement. The near term focus has been on the immediate Financial system recovery, which is where it should be focused, but behind that curtain is a very large problem with cataclysmic repercussions for all our soon to be retired Baby Boomers. The current Financial crisis has many related and interconnected parts and this one will play a prominent role as a new President thinks of dealing with Social Security policy changes, or should I say Social Insecurity changes as a part of reform.

Under President Bush he attempted to get Americans to take a part of their Social Security retirement Funds and to consider investing them in the stock market. If that had been done by many Americans the current situation would have been worse than it is. The problem is that the Social Security Funds were not in the Lock Box as Gore had promised should he have been elected, but were used by the Government to pay for other things, and now in the Lock Box is a big IOU with no real hope of doing anything to solve it except print more paper money. Eventually citizens are going to wake up that paper isn't really worth anything and they want real assets in exchange for goods and services. God help everyone when that happens! It is called bartering. Get used to it.