Private Pensions the Next Big Bailout?

Damien Hoffman Wall St. Cheat Sheet May 28, 2010

Posted on May 28 2010.

As if authentic capitalism hasn’t been mauled enough, Congress is now considering a bailout of private pensions. Excuse me for asking such a simple question, but since when did a pension come with an explicit guarantee?

For those unaware: every investment — even US Treasuries — possesses risk. Hell, there is no guarantee the Earth will exist tomorrow. So when exactly did people become disillusioned that their pensions would pay out 100% on the dollar? Social security — the largest Ponzi Scheme in history — may not even pay out in full.

We have a problem of the masses misunderstanding risk. This was also evident in 2008 when money market funds “broke the buck” and the masses believed money markets were risk-free. Well spread the word: there is no such thing as risk-free. Risk-free is a fairy tale character living in the same Platonic realm as unicorns, Santa Claus, and zero calorie chocolate cake.

As lawmakers lay the groundwork to bailout private pensions in an effort to win favor among ~10 million Americans, let’s pause and meditate on three horrible consequences:

1) Taxpayers will now be on the hook for “make-whole” payments on private sector investments and companies. And we’re not talking about payments that are needed to save us from the Great Depression. We’re talking about bailing out people who don’t want to accept they do not have a Constitutional right to investments (i.e., pensions) working out as planned. Beyond diversified portfolios underperforming, everyone must also understand there is no Constitutional guarantee that a company exits forever. If your pension contains 10% of your former employers stock, and that company goes out of business during the natural evolution of capitalist society, then the stock goes to zero. That’s the cold hard reality.

2) Pension fund managers will increase risky betting with the knowledge the taxpayer will step in if things go badly. Wall Street already has a problem with managers taking huge risks in order to shoot the moon for extraordinary bonuses. We need to fix this, not make it worse.

3) As usual, the small and medium size business owner will get shafted and have less reason to be entrepreneurial. Small business owners get screwed compared to larger businesses which lobby for tons of legal favoritism. These hard working and job creating Americans don’t have implicit guarantees for their retirement savings. So why should their competitors?

A 2009 Moody’s Investors Service (NYSE: MCO) study estimated the country’s largest multi-employer plans have long-term deficits of ~$165 billion. That is the natural result of living in a universe full of unknowns. Why should taxpayers pay that bill to assuage the delusions of those who don’t believe they too live in a world full of risk?

If we truly want to save capitalism, this is not the path to prosperity …

Readers who liked this also enjoyed these posts:Like JPMorgan, Trading Pushed Citigroup to ProfitableOutrageous But Legal: Social Security Ponzi Scheme Needs a BailoutIs it All Just a Ponzi Scheme?

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Damien Hoffman - who has written 712 posts on Wall St. Cheat Sheet.

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Tags: Bailout, capitalist society, chocolate cake, constitutional guarantee, constitutional right, diversified portfolios, fairy tale character, free risk, great depression, groundwork, horrible consequences, money market funds, money markets, natural evolution, NYSE: MCO, pension fund managers, Ponzi Scheme, private pensions, private sector investments, Treasuries, unicorns

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