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Pension Ponzi Bailout: Democrats Sponsor US Treasury Bailout Scheme

Authored by Mike Shedlock via www.themaven.net/mishtalk,

Most defined benefit pension plans are nothing but Ponzi schemes. Plans are now unraveling because of demographics. An increasing number of retirees, needing untenable returns, are supported by fewer and fewer people putting money in the system. Democrats sponsored a bailout scheme. Will it pass?

Sen. Sherrod Brown, D-Ohio, plans to introduce legislation that would allow struggling multiemployer pension funds to borrow from the U.S. Treasury to remain solvent.

 

The bill, co-sponsored by Rep. Tim Ryan, D-Ohio, could be introduced later this week or shortly after. It would create a new office within the Treasury Department called the Pension Rehabilitation Administration. The funds would come from the sale of Treasury-issued bonds to financial institutions. The pension funds could borrow for 30 years at low interest rates. One restriction for borrowers is they could not make risky investments.

 

The bill would also fund a program at the Pension Benefit Guaranty Corp. to finance any remaining needs of pension plans borrowing from the new program. "Any money needed for the PBGC would be a tiny fraction of what it would otherwise be on the hook for if Congress fails to act," said an analysis by Mr. Brown's office.

Mr. Brown told a group of retired Teamsters in Ohio on Monday that the bill will be out shortly.

It Begins: Pension Bailout Bill

A reader asked me to comment on the story after reading ZeroHedge's take: It Begins: Pension Bailout Bill To Be Introduced This Week.

"It's bad enough that Wall Street squandered workers' money — and it's worse that the government that's supposed to look out for these folks is trying to break the promise made to these workers. Not on our watch. We won't allow that to happen," said Brown.

 

No, instead what will happen "under his watch" is that funds collected from taxpaying Americans will be spent to satisfy the ridiculous retirement promises and obligations made over the past few decades, and while the immediate recipients of the funds, i.e. those looking at near-term retirement will be made whole, everyone else, i.e., taxpayers will lose.

 

And now that the machinery for pension bailouts is finally in motion, we look forward to the next, and possibly final, tear in the American social fabric, that between workers who can't wait to retire to the generous pension promises (see "Why Illinois Is In Trouble - 63,000 Public Employees With $100,000+ Salaries Cost Taxpayers $10 Billion " and "Mapping The $100,000+ California Public Employee Pensions At CalPERS Costing Taxpayers $3.0B"), and all those other unlucky taxpayers, who will have to fund these promises.

Private Union Bailout

It's important to note that the bill addresses private pensions covered by the Pension Benefit Guarantee Corporation, not public pensions. I wrote about private pension haircuts several times.

Retirees vs Full-Time Equivalents

There are over 200,000 retirees backed by 60,000 or so employees contributing to the plan. Moreover, the plan assumes 6% returns at a time when 10-year treasuries 2.4%.

This is a Ponzi scheme about to go bust.

Leverage

The only way demographically-challenged plans can achieve the necessary returns is via leverage. That is precisely what Democrats Brown and Ryan propose, perhaps without realizing it, perhaps not caring.

Regardless, borrowing money to invest in stocks is the equivalent of using margin.

If the stock market heads lower, losses will be massive, requiring more and more funding. Margin funding can backfire unless there is an infinite pool of money available to borrow.

Can It Pass?

Just because two financial illiterates or Ponzi scheme backers propose a bill, does not mean the bill will ever see the light of day.

I doubt Republicans would back such a scheme and I doubt it will ever make it out of committee. I also think the Fed would weigh in negatively on such a scheme.

Let's assume I am wrong on both counts.

If they do pass such a scheme, bear in mind that it is for a limited situation, at least for now.

Then it is nearly guaranteed to blow up in proportion to the amount of leverage used. If so, it's highly unlikely the program would be expanded to cover public pensions.

Some Other Scheme

I do not think this is the final scheme, for reasons stated, but it is the opening salvo. Expect to see even more "creative" ideas when public union pensions such as CALPers blows sky high.

What ultimately happens may depend on which party is in office when the Ponzi scheme is widely recognized for what it is.