by Victor Misek
THE PENSION FUND CRISIS in the United States extends into the public and private sectors of the economy to an extent unprecedented in the history of mankind. It’s instructive to compare two of the most notorious individuals involved in the mass destruction and destabilization of pension funds invested in debt instruments. The two individuals in my cross-hairs are Michael Milken and Benjamin Bernanke, a pair of Wall Street types specializing in contrasting methods of financial mass destruction.
Michael Milken’s career began in the 1970s when he noticed that many corporations had over-funded their employee pension plans with high quality securities. He reasoned (correctly) that such corporations would jump at the chance to refinance these plans with cheaper high yield junk bonds. The high quality securities could be sold off and replaced with cheaper junk. The corporation could then pocket the difference, in effect looting the pension fund and using the proceeds for corporate expansion, executive bonuses, etc. Major corporations swallowed the bait and things went swimmingly until an economic downturn caused major defaults in the junk bond universe. The resulting pension fund failures caused thousands of employees and retirees to lose their pensions, often their entire life savings. Michael ended up with a ten year prison sentence and banishment from the finance industry, a trivial punishment considering the heartbreak and misery he caused.
Ben Bernanke as head of the Federal Reserve Board used his position to slash interest rates through massive bond-buying schemes called “quantitative easing” (QE). For years this has caused the yield on most debt paper to remain at historic lows, in effect strangling the income stream of pension funds. The capital requirements of pension funds are calculated on an income assumption based on available interest rates. Funds based on an income assumption of 9% suddenly found themselves looking at available rates of 3% or less. To maintain the stability of such a fund it would either have to triple its capitalization or cut its benefits by 66.7% ! Many funds did not reduce their payout to adjust to the reduced income, causing them to expend capital to maintain monthly benefit rates. Worse yet, the injection of thousands of billions into the economy has had an inflationary effect, eroding the purchasing power of the shrinking remainder.
The pensions destroyed by Milken were restricted to a limited number in the private (corporate) sector. He specialized in destroying capitalization through high risk junk bond default. At the height of his popularity he was known as the “Junk Bond King.” Once convicted and imprisoned he was called other less friendly names.
The pensions destroyed by Bernanke dwarf in number and extent the damage caused by Milken. Bernanke will be remembered as the greatest pension fund killer of all time. The current ultra-low interest rates are causing the failure of public, private, corporate, municipal, state, and federal pensions. At the height of his popularity he was known as “Helicopter Ben” because he at one time proclaimed that he would dump money from helicopters like confetti, if necessary, to “juice up” the economy. Now that he is destroying the retirement plans of millions of Americans, new, less complimentary, names are being heard.
Unsustainable pension plans have already caused the bankruptcy of various cities in California, the bankruptcy of General Motors, and the insolvency of the US Postal Service. Money market, short term treasury, savings account, checking account. and bank CD yields are near zero — while food and fuel prices spiral upward, indicating a shredding of the US dollar.
Government policies are also stimulating the influx of excess labor into our country, causing collapsing wages, high unemployment, welfare overload, home foreclosures, and personal and business bankruptcies — and all of these effects massively reduce the contributions to pension funds from wages. As in the case of Michael Milken, serious prison time is needed for the drunken-spending politicians and Fed personalities responsible for this disaster.