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November 26, 2008

Here's Another Bailout

As I've mentioned before, there's a huge looming problem with the under-funded State employee pensions, and given their strong support for the incoming administration you know they will be a main concern. But there's also a big problem in the private sector

Americans with 401(k) plans in stocks have been feeling queasy for months as they've watched their savings vanish at alarming rates.

But workers covered by traditional pension plans -- the ones 100% funded and managed by companies for employees -- have so far avoided that sinking feeling.

Unlike the 401(k) crowd, they don't get monthly statements bearing the grim news of the lousy performance of the investments in their pension plans.

But with stocks and bonds crushed, many of these old-school defined-benefit plans now look downright wobbly. If the economic weakness continues long enough, many could end up in the hands of the independent government agency responsible for taking over failing plans.

This would mean that, down the road, the agency would likely ask for a $50 billion to $100 billion boost from tax dollars, experts say.

That's right: This would affect you even if you didn't have a traditional pension plan. It's the looming bailout no one is talking about.

And these losses can not be completely blamed on the poop that is the Dow, because many of these companies have been under-funding their plans for years.

About 340 of the S&P 500 companies now have plans with shortfalls. And 227 of them -- almost half -- have plans that are less than 80% funded. That's a 266% increase from the 62 companies in 2007 with plans that were less than 80% funded.

...Not surprisingly, General Motors and Ford top the list. Much of the talk in favor of allowing the big automakers to go into bankruptcy centers on how it would let them shed pension obligations. Guess who gets the bill if they do.

Unisys, which offers information technology to governments and the private sector, also places high.

These three now have pension fund shortfalls equal to anywhere from about 80% to 180% of their market capitalizations, by Zion's calculations.

We've seen this before in the airline industry in the 80s. The government allows them to under-fund their pension obligations, then they go into Chapter 11, and the employees get screwed.

But hey, what's another couple hundred billion in taxpayer mullah?

And of course no "executives" will be fired, because that might destabilize things...

Posted by Mr. Bingley at November 26, 2008 07:57 AM

Comments

Happiness was always the ability to have fun with the actuarial assumptions underlying the defined benefit plans. 8% versus 6% solves a great many problems. This usually worked in strongly trending markets but as soon as you reached a prolonged sideways period or, yikes, a bear market you were back in the soup with some regulator knocking on your door asking questions.

The pension plan area is probably the biggest issue preventing the auto industry from going chapter 11. You might see a pre-packaged filing with the taxpayer taking the pension plans off the table,or not.

Posted by: yojimbo at November 26, 2008 10:09 AM