The Unfolding Pension Disaster, Federal Edition

If you are a politician, what is the perfect way to pay off your supporters to the tune of hundreds of billions of dollars while totally hiding from the public what is going on until long after you're gone?  The answer is pensions.

I've previously covered multiple times the ongoing disaster of state and local government employee defined benefit pension plans, for example here.  Today's topic will be the related issue of the federal government guaranteeing all private defined benefit pensions through something called the Pension Benefit Guaranty Corporation, or PBGC.  In one of PBGC's programs called the "multiemployer" pension plan program, there is taking place an ongoing transfer of some hundreds of billions of dollars from the taxpayers to union supporters of the President and of the Democratic Party.  Literally nobody knows about it.

On November 14 the PBGC came out with its latest annual report covering the year ended September 30, 2014.  Do you recall reading about that in any news source?  My own Google search cannot find any reference to it outside of specialty stuff for lawyers.  I came across it because I happen to get at work something called Bloomberg BNA Pension and Benefits Reporter, which is of course pay wall protected.  Who in their right mind would read something like that if they didn't have to?  Just another reason why pensions are the perfect place to hide a few hundreds of billions of dollars of payoffs to your supporters.

Anyway, here's the lead sentence of the BNA article:

The deficit of the Pension Benefit Guaranty Corporation's multiemployer plan program rocketed to an all-time high in fiscal year 2014 of $42.4 billion -- more than five times its previous high in 2013 -- the agency said in its annual report.

Yes, that's an increase of a factor of five -- 500% -- in just one year, from around $8 billion to over $42 billion -- and it was a year in which the stock market had a huge increase.  What could possibly be going on?  Here is the PBGC annual report.  The answer is that they re-classified a bunch of these "multiemployer" plans as "probable" to fail, which caused them to register the liability as to those plans on their balance sheet.  From page 20 of the Report:

The $34,176 million increase in the multiemployer program’s deficit is primarily due to losses from financial assistance stemming from the addition of two large new probables with a net claim of $26,335 million and 14 additional new probables with a net claim of $8,987 million.

But you ask, don't they have some assets, let alone premium income, to cover these losses? HAH!  The assets they hold against the $42 billion of multiemployer plan losses come to $1.769 billion (page 25); the annual premium income is a big $130 million (page 25).  Yes it's that bad.

Actually, much worse.  They only register the full liability when a particular plan becomes "probable" to fail.  In case you don't know, these so-called "multiemployer" plans are the things sponsored by unions in their unionized industries.  Essentially all of them are gradually going out of business.  There are hundreds and hundreds of these plans.  What is the dollar amount that the PBGC/taxpayers are on the hook for assuming that most to all of them fail over the next ten to thirty years?  You will not find that number in the PBGC report.  It's easily in the hundreds of billions of dollars.

Now you might think from this that the PBGC must have learned its lesson about the danger of dangling out an open-ended federally-backed guaranty to anyone who comes along.  You would be wrong.  You just have no idea how much fun this infinite credit card thing can be when you can use it to pass out lots of goodies to those who will support you politically.  And thus it seems that today, November 26, the PBGC has published a "final rule" by which it says it will now guarantee all private defined benefit pension obligations that have been created out of 401(k) plan rollovers.

Wait a minute!  Isn't that another tens or hundreds of billions of dollars of new implicitly-federally-guaranteed obligations, let alone from an organization that is already broke?  Doesn't that at least take an act of Congress?  You, my friend, are so old-fashioned, so pre-Obamacare and pre-Immigration Executive Action.  Here from back in April is PBGC's proposal for the new Rule and its statement of the statutory basis.  Some of the key text:

Rev. Rul. 2012–4 treats the amounts rolled over as mandatory employee contributions for purposes of section 411(c) of the Code.9 The ruling states that the plan satisfies section 411(c)(2) of the Code with respect to the rollover because—

1. The benefit resulting from the direct rollover is provided as an immediate annuity determined as the actuarial equivalent of the amount rolled over, where actuarial equivalence is determined using the applicable interest rate and mortality table under section 417(e)(3) of the Code; and

2. The plan further provides that, in the event payment is delayed after the rollover, interest on the rollover contribution is accumulated in accordance with the requirements of Code section 411(c)(2)(C)(iii) and the benefit derived from the rollover is not forfeitable upon death prior to the annuity starting date.

Sorry to subject you to all that bureaucratic doublespeakBut if you make the effort to read it, you'll see that it's basically the same argument as the one for subsidies on the federally-created exchanges under Obamacare:  we'll just take a pre-existing hopelessly complicated statute that obviously deals with something else and re-interpret it to allow us to spend a few hundred billion of taxpayer money on whatever we feel like without Congressional authorization.  We will treat a voluntary contribution to a defined contribution plan as a mandatory contribution to a defined benefit plan!  Why?  Because we can!  Try to stop us!

Don't worry, Obama will be long gone when the PBGC finally blows up.  Meanwhile, it will have put the taxpayers on the hook for hundreds of billions of dollars that will go to bail out union-backed pension plans and keep the contributions flowing to the Democratic Party for decades to come.  Can't somebody but me pay at least a little attention to this?

UPDATE, December 1:  The Wall Street Journal catches on, with an op-ed on page A15 by Alex Pollack of AEI.  Good job guys!  The headline really is the key point:  "A Federal Guarantee Is Sure To Go Broke".  Hmmm.  Fannie, Freddie, flood insurance, FSLIC, PBGC.  Might as well add Social Security, Medicare, Medicaid.  FDIC definitely went broke in the last financial crisis, and only got covered over by TARP.   Can anybody come up with an example of a federal guarantee program that has not gone broke?