Your retirement is in grave jeopardy.
If you’re counting on a company pension fund, it’s likely that a large portion of your money has already been washed away in the greatest financial scandal of our times.
If you’re counting on other company retirement benefits, like health coverage, your chances of actually collecting them are even worse, with no government agency responsible for picking up the tab when your company reneges on its promises.
And even if you’re managing your own 401(k) or IRA, unless you do so with great caution and foresight, a good portion of your money could be ravaged by the world events now reeling out of control.
New Pension Law
Too Little, Too Late
Congress has just passed legislation intended to try to fix the pension mess, and President Bush signed it into law on Thursday. But even if we could somehow achieve a Goldilocks economy — low inflation, no housing bust and no recession — it’s too little, too late.
For decades, U.S. companies have been skimping on the amount of new money they put into the kitty. Many counted on ridiculously optimistic projections of outsized returns they’d be getting from their investments. Some simply cooked the books.
But nothing was done to correct the problem. Between the passage of time and the damage of neglect, it just got worse and worse.
Last year, so many large U.S. companies had so grossly mismanaged their pension funds that their total deficit reached a record $353.7 billion. And at smaller U.S. companies, the pension fund deficits were nearly $100 billion, based on government estimates.
Total deficit as of the last official count: About $450 billion.
This is much worse than the S&L crisis of the 1970s. Back then, the government agency responsible for guaranteeing your deposits, the FSLIC, usually had a surplus. Even if it didn’t, Congress promptly provided the cash.
In contrast, today, the government agency that’s supposed to guarantee your pension money, PBGC, is in the hole to the tune of some $28 billion, and Congress is not nearly as committed to picking up the tab.
PBGC stands for Pension Benefit “Guaranty” Corporation. But the only thing that seems to be guaranteed right now is the fact that its finances are deteriorating very quickly.
Just six years ago, the PBGC had a respectable surplus of $9.7 billion.
Now, it’s in the hole to the tune of nearly three times that much.
Just in 2005 alone, its deficit surged by a whopping 27%.
And it’s is likely to continue surging, according to the CBO, the Congressional Budget Office.
Either taxpayers will have to foot the bill, says the CBO, or plan participants will simply lose out on their payments.
Funding for Other Post-Employment
Benefits in Even Worse Shape
If you think that’s bad, consider the big hole America’s corporations have dug for themselves — and their employees — with other post-employment benefits, mostly covering health care.
Heck. When a pension fund goes bust, the government is at least supposed to cover some of the shortfall. But if your employer defaults on your other retirement benefits, you’re out in the cold. In almost all cases, there’s no government coverage whatsoever.
How big are the deficits in funding for other post-employment benefits? Over double the size of the pension fund deficits!
Just among S&P 500 companies, for example, the funding deficit for other post-employment benefits is now nearly 2.3 times the size of the funding deficits for their pension funds. Assuming the same holds for non-S&P 500 companies as well, I figure the overall deficit for other post-employment benefits is over $1 trillion.
Deficits for Pension Benefits
PLUS for Other Benefits:
A Whopping $1.5 Trillion
Add it all up, and here’s what you get:
Over $1 trillion in funding deficits for post-employment benefits … plus $450 billion in pension fund deficits … equals almost $1.5 trillion in deficits overall.
That’s bigger than anything I’ve ever seen in my lifetime. To get an idea of the sheer size of this gaping hole, just compare it to the other giant deficits of our time:
It’s over DOUBLE the size of last year’s trade deficit, (which was $717 billion) …
It’s over QUADRUPLE the size of last year’s budget deficit ($318 billion), and …
It’s TEN times larger than the total cost of the 1980s savings and loan crisis (estimated at $150 billion).
It is looming as the greatest financial crisis in American history. And it just so happens to be striking at the very core of American’s largest single age group: Baby boomers now approaching — or already in — retirement.
So if you’ve worked for one of the thousands of underfunded companies, the chances are high that you could lose a substantial chunk of your retirement benefits. That goes without saying.
But even if you’re not among those directly impacted by this crisis, don’t forget the impacts on investors …
Investor Impact #1.
A Big, New Hole in U.S.
Corporate Balance Sheets
Why hasn’t all this shown up in corporate balance sheets? Because American accounting standards have allowed the companies all kinds of gimmicks for covering it up.
But starting early next year, new rules by the Financial Accounting and Standards Board (FASB) will help expose most of the true deficits: Companies will have to include net pension and retiree-healthcare costs in their balance sheet.
Result: For the first time, the magnitude of this crisis at each company will be clearly visible to shareholders. And soon after — or even before — the figures are revealed, expect a round of sharp credit downgrades by the major rating agencies. That could mean equally sharp declines in the market value of the corresponding corporate bonds.
Your action: If you own these bonds, consider taking advantage of the recent bond market rally to get out, regardless of their current rating.
Investor Impact #2.
Larger Hits to
Company Profits
According to the new law the President signed on Thursday, most companies will have to get their pensions fully funded by 2015.
Sounds good in theory. But in practice, where are they going to get the money?
Standard and Poor’s says that it’s going to have to come out of profits, reducing the value of your shares in these companies by 8 or 9 percent.
Plus, on top of that, the new law requires the companies to pay bigger insurance premiums to the PBGC — another drain on their profits.
Result: The combination of (a) broken pension funds and (b) the new law designed to fix them could be a major drag on the blue chips for years to come.
Your action: Steer clear of U.S. stocks with unfunded pension liabilities. Some of the worst among them:
Avaya (AV)
Goodyear Tire and Rubber (GT)
Hercules (HPC)
Lucent Technologies (LU)
Maytag (MYG) … despite a big rally last week
MeadWestvaco (MWV)
Navistar International (NAV)
Prudential Financial (PRU) … even after this month’s plunge
TRW Automotive (TRW)
Unisys (UIS)
W.R. Grace (GRA)
Investor Impact #3.
Still More Shocking
Corporate Failures?
S&P and other analysts seem to assume that, aside from the pension problems, the business of America’s largest companies will be expanding normally.
But suppose their business is slowing or shrinking. Then what?
It’s one thing to absorb the cost of stepped-up pension contributions if the company’s got plenty of extra cash. It’s another matter entirely if cash is tight. In this scenario, instead of an 8 or 9 percent drag on their share values, like S&P is currently estimating, you could see the damage grow to two or three times that much.
And suppose a company is losing money from its operations?
Then the pension deficits could be the last nail in the company’s coffin, driving it into bankruptcy and leaving still more current and former employees on the lurch.
Lawmakers weren’t totally unaware of this possibility when they passed the new legislation. That’s why they gave certain industries, like the airlines, more time to get their act together. But other troubled industries are expected to pony up like everyone else.
Result: Don’t be surprised if some major companies in steel … housing and construction … the auto and machinery industries … and even tech sectors like personal computers — are unable to survive.
Your action: Steer clear of these industries.
Is Your 401(k) Safe?
Is It in Grave Danger?
I’m pleased to see that with the new law, many more Americans are going to be enrolled in a 401(k) plan with their employers.
That’s a good thing. It means they won’t be the victim of irresponsible or incompetent pension funds. And they’ll have more freedom to deterime their own investment destiny.
But this also brings up a new set of questions:
Will they save money? If not, it’s a moot point.
Will they have the needed knowledge and tools to invest it prudently? If not, they’ll be jumping from the frying pan of poorly managed pension funds into the fire of poorly chosen mutual funds.
But I’m saving my most urgent question for you: In your own 401(k), IRA or taxable account, are you sidestepping the potential damage from the spreading world conflicts we’ve been warning you about?
If not, I fear your retirement could be in grave danger. Just this weekend, both sides have violated the cease-fire in Lebanon … Middle East experts have recommended splitting Iraq into three … Iran’s Foreign Ministry has warned it will retaliate against UN sactions … and Iran’s military has launched large-scale exercises throughout the country.
My recommendation: Connect the dots!
These raging and looming conflicts are a real threat to a comfortable retirement. They are driving up energy, inflation and interest rates.
They threaten to help topple the U.S. housing market and drag down the U.S. economy.
They could sink many of your stocks, slap many of your bonds and, for any dollars left in your account, slash their purchasing power.
Don’t just watch the news passively from the comfort of your easy chair. Be ready for the consequences of broader wars. To protect your retirement funds …
First, seriously consider exiting the most vulnerable sectors as soon as possible. That includes:
- industries vulnerable to the pension crisis — airlines, steel, autos, machinery, and other heavy manufacturing … plus
- those vulnerable to inflation and higher interest rates — housing and construction, non-prime mortgage lenders, and other financial institutions.
Second, place the proceeds in the safest investments possible, such as a money market fund that’s dedicated to short-term Treasuries and equivalent. My favorites:
- Am. Century Capital Preservation Fund (CPFXX, 800-345-2021)
- Dreyfus 100% U.S. Treasury Fund (DUSXX, 800-645-6561)
- Fidelity Spartan U.S. Treasury Fund (FDLXX, 800-544-8888)
- USGI U.S. Treasury Securities Cash Fund (USTXX, 800-873-8637)
- Vanguard Treasury MMF (VMPXX, 800-662-7447)
- Plus, also consider the Weiss Treasury Only Money Fund (WEOXX; 800-430-9617), managed by one of our affiliates.
Third, if you’re stuck in these sectors, hedge against the likely declines in your assets or your income. For example, you can now buy exchange-traded funds that are designed to go up when the broad stock averages go down.
Fourth, one of the smartest things you can do at a time like this is to keep your money out of the sectors mostly likely to be hurt; and in the sectors most likely to benefit. I’ve just published a report on the only strategy I’ve seen that has used this kind of sector rotation to achieve returns averaging over 21% per year for the last 15 years.
Good luck and God bless!
Martin
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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