Saturday, October 15, 2011

But Wait it Gets Worse...The Federal Government's Pension Plan is Underfunded by a Staggering $5.7 TRILLION

Earlier today I posted about how the Pension Benefit Guarantee Corporation, which insures private pension plans in case of corporate insolvency, is itself deep in the red, putting anyone with a private pension at risk of losing it. Not to be outdone, Congress decided to set things up so federal employees are hosed EVEN WORSE. Here is with the details:
Far less attention has been paid to the Federal Employee Retirement System. Despite providing benefits to a fraction of the number of people that Social Security covers, one analysis estimates that FERS faces a staggering $5.7 trillion in unfunded liability.

The reason for the huge shortfall is a classic case of "do as I say, not as I do." Private employers that provide pensions for their employees are required to put money into retirement funds. But unlike the payroll tax that helps fund Social Security benefits and the pension funds out of which payments to state retirees are made, the federal government sets nothing aside, paying its retirement costs from tax revenue and borrowing.

The root of the problem dates back to 1986, when FERS was created to take the place of the old Civil Service Retirement System. Federal employees hired prior to 1984 remained in the old system, while those who started in 1984 or later are in the new one.

Congress decided to have employees pay the same 7 percent of salary toward retirement under both systems. But there was a catch. You see, those covered by CSRS don't participate in Social Security, while those under FERS do. Newer federal employees pay the standard 6.2 percent of salary into Social Security, leaving only 0.8 percent of their salaries to fund their own pensions. Most private-sector employees pay the 6.2 percent Social Security tax and contribute an average of 5.3 percent of their salaries toward retirement.
So if it's any consolation, whether your pension is public or private you are just as fucked. What a country.


  1. The thing that kills me with the whole underfunding thing is that it was entirely predictable and avoidable. In virtually every case, the organization made completely ridiculous assumptions about their likely returns (7% 8% 12% higher). Even in the boom years, these are optimistic assumptions that had no chance of actually happening over any kind of long term horizon.

    "But, wait!", I hear you say, "Aren't pensions a fundamentally long-term proposition?" Well, duh! Apparently, not. Well, surely, I hear you say, when the returns did not materialize the organizations must have modified their assumptions and increased their required contributions to allow for more realistic returns. Well, of course.... NOT!

    Nope, they doubled down at the casino. If the current bets are losing, bet bigger and on games with longer odds. Hell, losing doesn't matter, you're already fucked. Only winning big matters. That's right, bet the house on black. Go all-in on sub-prime-based MBS's and credit default swaps. No risk there. Only upside.

    WTF? Why is anyone ever surprised that these things are going bust. It's frankly amazing they lasted as long as they have. Public or private, the people running these things were (and are) degenerate gamblers that couldn't get a credit line in Vegas. Hell, if you really think about the scale and impact, you'ld have to conclude that I'm probably being unfair to degenerate gamblers everywhere.

    What was the line from The Matrix? "Do you hear that sound Mr. Anderson? That is the sound of inevitability."

  2. @bmerson - "Do you hear that sound Mr. Anderson? That is the sound of inevitability."