Pensions That Kill

Safeway Stores owes more in unfunded pension liabilities than the entire company is worth. The city of Providence, Rhode Island will most likely follow Central Falls, Rhode Island into bankruptcy to greatly reduce its pension liabilities. American Airlines is fighting with the Pension Benefit Guaranty Corporation (PBGC) over who will pay for $8 billion in unfunded pensions. Notice a trend?

Whether in business or the public sector, most organizations that have been around a while will have pension obligations. Most likely, they also have health care obligations to their retirees.

The system that brought these liabilities into existence – great benefits, early retirement and a shortage of labor – belongs to another era, namely the late ’40s and ’50s. The system that must pay for these liabilities is the one we have today and cut-throat competition, falling wages and no financial wiggle room are the order of the day.

So what is the answer to this “pensions problem”? To punt, of course. Or, in this case, file for bankruptcy protection from your debts.


In some instances, cities, states or companies reduce their pension obligations, like Central Falls in Rhode Island did. But such practice is not the norm. Instead, cities like Vallejo in Californrnia, that had a huge pension issue, simply declared bankruptcy. They went to court and eventually emerged with a settlement that saw vendor payments, not pensions, were reduced. This means the taxpayers in Vallejo still owe the pensions.

On the private company side, American Airlines might be able to foist its pensions onto the PBGC, but what does that mean? Given that the PBGC is a public entity, it means U.S. taxpayers are on the hook for any shortfall. The PBGC already has billions in deficit, so what’s $8 billion more?

The point is that pension liabilities are killing the country one city and one company at a time. When revenues and expenses aren’t allowed to fluctuate together, any system will eventually break down. If a company wants to offer pension, it should look no further than buying the right amount of U.S. Treasury bonds that mature in the correct years to pay the liabilities when they come due. Anything short of this puts future cash flow at risk…which is where we are today.

The current estimate is that cities and states are roughly $1 trillion underfunded in their pension and healthcare liabilities. Corporate America is underfunded by roughly $400 billion.

Think of the millions of current and future retirees that are counting on this income. Now think of how much it will cost you and me as the American taxpayer to make good on all these promises.

The only thing I know for sure is that taxes can only go up from here. And no one flourishes under a heavy tax burden. In the next few years, we will have to work a lot harder, making good investment decisions and squirreling away as much money as you can.


P.S. Harry and I have pulled together a comprehensive course that will help you plan wisely for what lies ahead. You can get immediate access to this powerful financial tool. Simply click here.

Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.