The Detroit News and The Wall Street Journal are reporting that Motown automakers’ pensions funds are no longer fully-funded. “The outgoing director of the U.S. Pension Benefit Guaranty Corp. warned Friday that Detroit’s Big Three automakers face a $41 billion pension shortfall. “We’re not trying to tell people that the pension house is on fire,” quoth E.F. Millard in the DetN. “The point is that in many ways this has a similar look to other situations, such as a Bethlehem Steel.” Not surprisingly, the WSJ has an even more alarming sound bite. “An awful lot of people seem to think these plans are well funded or overfunded. Each of these plans is significantly underfunded [and] in three years I don’t want people coming back and saying, ‘How come the PBGC never told us that?'” Let’s drill down, then.
The three automakers reported $130.5 billion in pension assets, which represents only 76 percent of their combined liabilities. GM’s pension is 20 percent underfunded, Chrysler’s is 34 percent underfunded, and Ford is short by 27 percent.”
“When GM last gave a year-end update on its pension funds, the funds covered more than 400,000 retirees and were overfunded by $18.8 billion. But in November, GM said its plan for hourly workers was underfunded by $500 million because of restructuring expenses.”
So where did the money go? Heavy losses in investment portfolios, declining interest rates on assets and (as stated above) Detroit’s reliance on pension funds to pay for early retirement.
“It is certainly possible that none of these companies ever files for bankruptcy,” Millard said. “It is certainly possible that they all do.” He said the risk to the PCBG’s reserves is “significantly greater than it was six or seven months ago.’
And then…?
“If all three automakers were to collapse and turn their plans over to the pension corporation, the agency estimates it would pay out $13 billion of the $41 billion, because of limits set by Congress on how much the pension corporation can cover. The agency generally has a yearly cap of $54,000 in benefits for people who are 65.”
Is that the hourly, salaried, or both? Depending on which carmaker you’re talking about, hourly is usually overfunded, but salaried is usually underfunded.
Most workers would be much worse off than the yearly cap of $54k since there are plenty who probably retired early.
“For plans with a 2009 termination date, the maximum guarantee is $54,000.00 yearly ($4,500.00 monthly) for a single life annuity beginning at age 65. The maximum is adjusted downward for retirees younger than age 65. For example, the maximum guarantee for a participant who retires at age 62 is $42,660.00 yearly ($3,555.00 monthly) for a single-life annuity. At age 55, the maximum guarantee is $24,300.00 yearly ($2,025.00 monthly).” http://www.pbgc.gov/media/key-resources-for-the-press/content/page13542.html
I think the word “raided” is wrong here.
If the underlying investment of a funded pension dropped to 70% of its previous year’s value, then it would certainly make it appear that it is now 30% more underfunded. I know my 401k balance is a LOT lower today than it was 12 months ago, 30% or perhaps greater.
My point is, that I suspect that this new increase in the pension gap is a result of investment losses, not the siphoning of money out of the fund.
In addition, I don’t think that any of the 3 companies could actually withdrawal money out even if they wanted to.
@RF
Let’s be fair here. GM didn’t “raid” its pension fund. I know you really hate GM, but I’m willing to bet that your investment portfolio is down by similar levels. They did take out some money for the separations, but that’s totally acceptable because those people no longer qualify for an annuity.
Imagine the pension fund at, say, GM as a collection of maybe 500,000 annuities at NPV. Some are still being built (for current workers) and some are being paid out (retired workers), but we can assign NPVs to all of them. GM’s role is to try and keep each of those funds at an NPV that is considered “funded.” If someone is separated from GM, the annuity they have built up so far (could be around to $700-800k at NPV) is no longer needed. GM doesn’t have the liability unless they’re paying a reduced amount after separation. So, they use that cash to pay the separation. Any deficit comes from corporate cash. Any surplus funds the pension.
To say that GM robbed the pension to fund for restructuring is disingenuous. Likely all of the decline in % liabilities funded is due to the decline in the overall markets. What this article doesn’t point out is that their combined liabilities should have shrunk over the last two years, which is another reason why the fund would be smaller YOY.
Say you have a million retirees in the Big 3.
You pay each one $30,000 per year which is a total of $30 billion per year. Just how long will 130 billion last?
And that doesn’t even take into account the huge cost of health care and all the dependants which need to be covered.
It seems strange to me that the Federal Government (and thus we the taxpayer) is on the hook for a pension program that is an agreement between a company and its employees. As far as I know, my 401K isn’t backed by the full faith and credit of the United States.
I agree that the headline and text of this blog as originally written were inflammatory. After further research, I have changed both.
Make no mistake: this is a very serious situation. However, that’s no excuse for descending into hyperbole. I apologize for same.
Lichtronamo:
It seems strange to me that the Federal Government (and thus we the taxpayer) is on the hook for a pension program that is an agreement between a company and its employees. As far as I know, my 401K isn’t backed by the full faith and credit of the United States.
All firm’s pension plans pay a premium to to PBGC in case a firm tanks. A firms premiums, combined with the value of what’s left in the fund after a firm’s death, are what the fund pays out. And a pension has huge legal and regulatory costs that 401K’s don’t.
Of course, the PBGC pays far less than what many firms promised – especially degenerate unionized firms (like airlines, the steel industry). Management promised ginormous benefits for retirees in their 50’s in exchange for labor peace. After bankruptcy, young retirees taking a 50 percent haircut was common.
There is a lot of very sketchy accounting that goes on in the arena of pensions.
GM’s pension has been admittedly underfunded by 20B+ several times in the last 5 years.
To address the theory that “it’s just the market”, according to GM’s filings and statements, most of that money isn’t in the stock market. It’s in bonds.
PBGC has tried over the last several years to rewrite some of the rules, but has been met with heavy counter pressure from, you guessed it, big business. PBGC is also admittedly underfunded.
FWIW, according to the people who’d like to rewrite the accounting rules, the D3 pensions are all grossly underfunded. Have been for more than 5 years.
“The agency generally has a yearly cap of $54,000 in benefits for people who are 65.”
Well, that might mean a sizable disappointment for some D3 retirees, but the vast majority of Americans in that age bracket would be jubilant to get that much.
One thing to reflect upon: this is the first time in human history that people have come to expect to quit working while still healthy and able, and enjoy a comfortable income (for many years!) to boot.
Look, the law of unintneded consequences or kicking the can down the road prevails here. Every; time you early retire thousands of employees with lucrative buyouts, you are saving some money today for future costs later. None of these plans envisioned people leaving at the age of say 50. And worse, none of these pension plans called for a company of say 1/3 it;s former size having to wrestle with more retiress than workers.The only reason Social Security is not broke right now is that uncle sam still has more people paying in on the payroll then they did before.(I understand that the proportion of workers to retirees is less, but the real numbers of workers is still rising)