Today in a conference room off the first floor of the Senate building, a small discussion about large things will take place……very large things. The GAO will present their findings surrounding their investigation of the PBGC fund. What will be said about this small fund, should stab a stiletto into the heart of any future discussion about privatizing Social Security. Sure, if one is young, with no assets, and just beginning to invest, privatized Social Security initially sounds like a “grand” idea. Everyone assumes: “Wow, will I be rich when I retire!.”


But theory and practicality often diverge. When investing they rarely tred the same path. The prime reason is of course human. Humans in charge of lots, and I mean we are talking about tremendous sums of money here, tend to make dumb decisions. At least they look dumb to us as we see the liabilities of our plans rise far above our assets. But to those benefiting from commissions assessed to these large sums, they of course still look as brilliant as the day they were conceived..


Although the hearing (at this writing) has not yet occurred, one can expect to see what happens then a federally guaranteed pension fund becomes mismanaged (by good, well intentioned people of course). No one has a crystal ball. But to give one an idea of the types of choices that need to be made often on a daily basis: is it better to invest in stable income at 3% or play the foreign markets where risks are high, and occasionally, so are the payouts?

With assets at 55 billion, a quick calculation reveals that when volume of this type is turned over to private companies, commissions of 1% to 2% range amount to between 550 million to 1.1 Billion dollars. After grasping this fact, one slowly begins to understand why the financial sector is pushing hard to privatize Social Security, which as all of us know, is a “slightly” bigger fund.. Face it. If any of us were grossing half a billion a year, would we truly care too much if, with no penalty to ourselves, several million $300 checks were returned for insufficient funds?


So what happened with the PBGC?


First some background: (courtesy of Wikapedia)


The Pension Benefit Guaranty Corporation (or PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage both the continuation and maintenance of voluntary private defined benefit pension plans, as well as to provide timely and uninterrupted payments of pension benefits, and at the same time, keep pension insurance premiums at the lowest level necessary to carry out its operations.


One reason Congress enacted ERISA was “to prevent the ‘great personal tragedy’ suffered by employees whose vested benefits are not paid when pension plans are terminated.” When a defined benefit plan is properly funded by its sponsor, its assets should be approximately equal to its liability, and any shortfall (including benefit improvements) should be amortized in a relatively short period of time.


The key words throughout this diary are that in a properly funded pension plan, the assets should be approximately equal to its liabilities. Apparently this is not so, As anyone who has closely studied this administration might guess……the liabilities are indeed, greater than its assets. Just how much? That is the bombshell to be dropped in the Senate committee room today.


The PBGC is responsible for the pensions of 1.3 million Americans, but we don’t currently have the resources to keep all of our future commitments,” the newly appointed PBGC Director Charles E.F. Millard announced on February 18, 2008. (The PBGC had an accumulated deficit of $14 billion as of year-end FY 2007. )


Several large airlines have filed for bankruptcy reorganization in an attempt to renegotiate terms of their pension liabilities. These debtors have asked the bankruptcy court to approve the termination of their old defined benefit plans insured by the PBGC.

On September 14, Delta Airlines and Northwest Airlines filed for bankruptcy the day before they would have had to contribute about $200 million, in total, to their pension plans. Both airlines’ pension plans are severely underfunded, Delta’s by about $10.6 billion and Northwest’s by about $5.6 billion. If these plans are taken over by the federal Pension Benefit Guaranty Corporation (PBGC), the agency’s deficit would rise over a third from its current $23.3 billion.

As far back as 1984, in National Labor Relations Bd. v. Bildisco, 465 U.S. 513 (1984), the U.S. Supreme Court ruled that Bankruptcy Code section 365(a) “includes within it collective-bargaining agreements subject to the National Labor Relations Act, and that the Bankruptcy Court may approve rejection of such contracts by the debtor-in-possession upon an appropriate showing.” The ruling came in spite of arguments that the employer should not use bankruptcy to breach contractual promises to make pension payments resulting from collective bargaining.


If a creditor is unsecured and there is not enough money,….. they usually are not paid. So as a matter of practical economics, if the downturn in a company’s fortunes which resulted in bankruptcy makes the performance of an executory contract less valuable than its breach, a rational company would breach!


As we look forward to the now flagrant warning signs of possible economic collapse, a total breakdown of our underfunded private pension system may make a difference in the number of homeless retirees wandering our streets after such a cataclysmic market event happens. After tomorrows’ hearing it will be obvious to most, that based on the performance of the Pension Benefits Guaranty Corporation’s own assets over the past seven years of Republican administration, that at least when Social Security is handled by a government of the people,… and not by a corporation dedicated to it’s own profit,…. we have a slightly better chance of having actual citizens receive actual benefits.


For the bottom line is this. When handled privately…………….bankruptcy, reorganization, and non payment, is always cheaper than fulfilling one’s obligations.