Back in August I wrote about Teresa Ghilarducci from the Schwartz Center for Economic Policy Analysis who wants to solve all of our problems by creating "Universal Retirement" benefits. This post has obviously received a lot of attention given that it has remained the most read post both since this blog was created as well as the most read on a daily basis.
I had pointed out back then that there are currently about $2.9 Trillion in 401k's and IRA's. This is a sizable sum our bankrupt government would like to get its hands. I explained that they would confiscate the money in exchange for IOU's that would essentially become the basis of a second social security program. Of course, much like social security you would not be able to name a beneficiary and there would be no guarantee that the money wouldn't be spent on whatever the government wanted. It would merely be a one time confiscation with a new entitlement on the US balance sheet.
What I failed to understand in the first post was that this likely went much deeper to include pensions. Why would pensioners, many of whom are owned by unions allow their pensions to be confiscated in exchange for an empty government promise? Because their pensions are as bankrupt as the US government and need a bailout. Though $2.9 Trillion in IRA's and 401k's sounds like a lot of money it pales when compared to the $16 Trillion in pensions as of 2011. (Editors note: this link replaces the old link. As of 2013, private pensions are estimated to be about $17.5 Trillion.) As much money as that is, its a shortfall that runs into the Trillions. California alone, has promised $500 Billion (Yes that's a 1/2 Trillion!) more in pension payments than it has the ability to pay according to Stanford Institute for Economic Policy Research.
But wait, it gets worse!
Most pensions are regulated by the Federal government under ERISA laws which require the investment managers to invest in bonds, including US treasuries. Now recall that we are several years now into the Fed's ZIRP (zero interest rate policy). Us Treasuries are paying between .13 and 2.8%. But their own calculations require an expected return of 7% or more! Pensions are facing the same problems that retired people who invest for themselves are facing...a lack of yield. Though individuals can take greater risk with their own money to try to get higher yields, the pensions cannot under ERISA regulations. So what happens to massively underfunded pensions when they can only earn a small return (or in the case of CALPERS a -.5 five year loss) ? They need a Federal bailout. Teresa's scheme may also include pensions in order to socialize the expense of states with underfunded pensions by making them a national liability because the US government can print more money while states like California cannot. This would penalize states with fully funded pensions for the benefit of states with under funded pensions.
Of course, none of this effects the US' aggregate assets and liabilities, it merely transfers them from the state governments to the Federal government.
Finally, I leave you with this interview of Teresa Ghilarducci by talk show host and constitutional expert Mark Levin.