“You’ve all just made the biggest mistake of your lives.”
“You’re gonna die on this plane. It’s gonna crash.”
“The company is bankrupt and this plane is going down with all of you on it.”
Then a first class passenger tackled her to the floor just to shut her up.
Ok… we don’t know exactly what this crazed flight attendant said over the PA system on the American Airlines flight to Chicago on March 9. But we’d imagine there were additional, juicy expletives peppered in there. Especially if she’d recently read the American Airlines bankruptcy filing that revealed the company’s pension plan is $18 billion underfunded.
She’s not alone in her concerns, although she’s alone in voicing her hysteria publicly.
Recently General Electric (GE) calculated what it must put aside to fund its pension this year. They were surprised to discover their required payment for this year is $7 billion more than they thought it would be.
That’s not chump-change. That’s not even a minor miscalculation. That’s downright shocking.
So what changed? How did they get it so wrong?
Quite simply, they had to factor in the effect of the Fed’s efforts to keep interest rates at historic lows.
Low Interest Rates Have Knocked the
Comfort Out of Pensions
Every year, companies crunch the numbers to see how much they must set aside for that year to meet their long-term pension obligations. Part of this calculation involves using interest rates to estimate how money will compound over time.
The interest rates and the required payments have an inverse relationship. If interest rates are high, the company assumes the pension will have high earnings thanks to investments in interest-bearing securities. This means the company needs to contribute less money to the pension plan.
If interest rates are low, then the opposite is true and the company must contribute more funds to the pension.
Currently, with short term interest rates at 0.25%, they are at rock bottom. So companies like GE, Boeing and American Airlines must suddenly make insanely high pension contributions.
Where does the money come from? Earnings, of course. And that’s the rub.
Companies have decided that using money to fund pensions is a real drag on earnings. So they’ve petitioned the Senate for a reprieve. After all, they’re thinking “Who needs to fund pesky pensions anyway? Won’t interest rates go up soon enough? Aren’t those liabilities a long way off?”
Senators are actually considering this exemption because less pension contributions would mean more taxable income and therefore more tax. In their minds it’s a win-win deal.
Except it isn’t.
It’s a win-win-lose situation. The company may win by contributing less. Congress may win by getting more tax income. But the worker, the pensioner, loses because his pension won’t be fully funded when his retirement rolls around. He faces a pauper’s retirement thanks to corporate and Senate short-sightedness.
The Redundancy Plan is Dead in the Water
It gets worse.
The Pension Benefit Guarantee Corporation (PBGC), the government entity that’s meant to take over pensions from failed companies, is tens of billions underfunded. It’s in no position to ensure the pensioner gets his dues. And that’s not the worst part. The PBGC does not really pay out what a pensioner is owed from his company. Instead it pays out a very modest, barebones amount based on its own calculations of length of service and pay.
Pensions across America are in a nose dive. Are you willing to bet your financial future on the goodwill of a company and Congress?
That’s why, if you have a pension, look through your company’s quarterly filings to determine how well funded it is. There is a good chance you will be staring at a bad surprise.
If you are going to maintain your standard of living in retirement, you need to take several steps to prepare yourself now. Add income streams to your portfolio. Increase your savings. And be prepared to grab opportunities to short the market when the time comes.
P.S. You could say we have one overarching goal here at Survive & Prosper: to give you information that helps you see around the bend and stay ahead of the curve. This is how you will survive and prosper through bear markets and bull markets… how you can take advantage of booms and busts before anyone sees them coming. Harry explains more in this note.
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World-renowned economist Harry Dent now says, “We’ll see an historic drop to 6,000… and when the dust settles – it’ll plummet to 3,300. Along the way, we’ll see another real estate collapse, gold will sink to $750 an ounce and unemployment will skyrocket… It’s going to get ugly.”
Considering his near-perfect track record of predicting economic events long before they occur, you need to take action to protect yourself now. Get the full details…