Monday, February 16, 2009

PBGC likely to have to pay off many more terminated pension plans; annuities or bonds?

This blog has covered how the Pension Benefit Guaranty Corporation works before, but today (Presidents’ Day, Monday Feb. 16) the AP has a story by Deb Reichmann, to the effect that the PBGC has to “brace for recession.” The link is here and it appeared as on item on Yahoo! Finance on a day that the markets are closed.

The PBGC operates in a building hear the White House. It has $63 billion in assets and $74 billion to pay out now. But it’s inevitable that the PBGC will have to take over more plans, especially if a lot of companies fall specifically because of the auto industry crisis, which, to all appearances, shows no sign of improvement yet. We still don’t know what happens to them March 31. However, in the near term (as during Obama’s first term), there does not seem to be a likelihood of a bailout for the PBGC. This is one rusty can that is still getting kicked down the road. Pension funds are among the most conspicuous entities damaged by the economic collapse, and it seems that major labor interests are cutting their own throats on this one, sometimes.

Today, Yahoo! also reprints a Bankrate article by Dr. Don Taylor, “Annuities or Bonds”, discussing the “classic question” for many people nearing retirement, link here. Taylor says it is an apples v. oranges question, partly because state insurance regulation protects annuity holders in ways that it does not for bond holders, and also because annuities are complicated products with a variety of payout options. Bond funds could be hurt badly by the rapid increase in corporate bankruptcy, and particularly by bank nationalization proposals that could not only wipe our shareholders but seriously affect obligation repayment to "investors" many of whom, of course, are retirees.

I haven’t heard any news in the past couple of weeks about the supposed panel that Obama is supposed to convene to look at earned entitlements. It would sound likely that he could take this up in his Feb. 24 address (is that “state of the union”?)

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