We know that bloated and unsustainable pensions have already helped bankrupt industries like airlines and more recently cities in California. But just wait… Our low interest environment is making it difficult if not impossible for pension funds at many public companies to make the returns they need to fund themselves. To resolve the problem, Congress has changed the way pension obligations are calculated and as a result, they can use a 25-year average instead of today’s rates.
CenturyLink recently reported it is able to save a billion dollars due to this federal legislation. The resulting problem is of course twofold.
If the pension return situation gets better and let’s say interest rates spike – that means that investors are losing confidence in the US dollar and/or the ability of the US to pay back its obligations. In this case we may need to see even more printing of money and this could trigger inflation. Even if inflating isn’t an issue, a higher interest rate is like a silent tax on the economy which isn’t great for business and other investments a pension fund may make.
If rates stay low on the other hand, it could be a sign that the economy is still weak and that CenturyLink and other companies will have to pony up more cash into their pension funds to keep them solvent.
Either way there is more risk being assumed and it seems every time this happens, the US taxpayer and their descendants end up footing the bill. Expect this time to be no different and the challenge is certainly not something CenturyLink has to deal with alone – all companies with pensions have similar problems.
Hat tip: Footnoted
Currently the Pension Benefit Guaranty Corp protects these pensions through insurance premiums from employers. The challenge is of course what happens if an unforeseen number of pensions have problems at once and break the proverbial bank?