If Ed Yourdon and many other folks are correct, our society will at least suffer a long period of financial depression. What will happen to the pensioner of today who is paid in inflated dollars? In times of depression, even a meager Social Security check will be a kings ransom in depression dollars.

Does anyone know if there are laws on the books that would allow cuts in government pensions predicated on the health of the economy? My pension has a cost of living adjustment "COLA" clause, but has a rock bottom amount based on my contributions to the retirement system. If the upcoming depression is anything like the last one, I will be living like a king just based on my contributions. I cannot accept that I will be allowed to live like "KING BILL" while the rest of the country is checking out the trash cans and selling apples on the corner.

Anyone with any expertise in this area? Any thoughts?

Bill in South Carolina

-- Bill Solorzano (notaclue@webtv.net), September 12, 1999

Answers

Bill, all pensions and retirement plans have invested in the Stock Market. When the Market crashes like the Dow 2000, all retirement plans vanish, regardless of what you paid into it! Better prepare for the worst! If the postal service goes down, no checks in the mail!

-- Count Dutch (CountDutch@aol.com), September 12, 1999.

Count,

I don't think Bill was ever counting on an answer like that.....

-- Vernon Hale (create@premiernet.net), September 12, 1999.

Bill, you have nothing to worry about as long as no significant percentage of the population take their money out of stocks, or out of banks, and as long as the gov't agency paying you is compliant, and whatever companies or agencies they use to handle the pension payments, and as long as all the banks are compliant in this country, and as long as the large international banks don't fail, and as long as the lights stay on, and as long as the postal service is okay, and as long as the phones work, and as long as planes, trains and trucks can deliver mail.

No problem. Nothing to worry about.

-- Linda (lwmb@psln.com), September 12, 1999.

The pensioners will be royally enscrewed...

-- Andy (2000EOD@prodigy.net), September 12, 1999.

A slightly more realistic answer -- in case of a downturn, if there was mild inflation or deflation, and your company does not go out of business, you are OK. If for whatever reason, the company holding your pension does fail, there's a federal agency called something like the Pension Benefit Guaranty Corporation (http://www.pbgc.gov) that is supposed to pay. Needless to say, they are underfunded to handle the case where many companies go belly up at the same time.

As for Social Security, even mild deflation would make their balance sheet horrible. So I expect the government to try and reflate, since it would be political suicide to try and cut social security during a downturn. This deliberate inflation would of course affect the purchasing power of your pension as well.

In other words, hope you have some real assets in addition to your pension.

-- You Know... (notme@nothere.com), September 12, 1999.

Possible 'stagflation' resulting from persistent inflation combined with stagnant consumer demand and relatively high unemployment.

-- no talking please (breadlines@soupkitchen.gov), September 12, 1999.

You Know is correct. But here are a few more comments. I currently get a small pension, through the PBGC, from one of the companies I worked for which went bankrupt. In the best of times, with all paperwork in order, it takes the PBGC 4 months to process the pension allocation. They are underfunded, as stated, and will not have enough assets to cover even a small percentage increase in pension failures. Even if they could, expect it to take a least a year to get any checks from them.

As to corporate pension funds, they are usually self directed, meaning they have the funds invested in stocks plus rely on current cash flows as well, to cover the payments. Expect a lot of failed plans as business goes first into recession, then bankruptcy. I've watched this happen a number of times. The ERISA Federal rules are routinely given a waiver during an impending bankruptcy. Sorry, Bill, but all pension bets are off. If yours keeps coming, good for you!

As to Social Security, I too believe the government will have to engage is massive inflation practices to keep the check coming. There just won't be the current revenues. Remember, SSA checks are from a pay-as-you-go system. There is no money just sitting there invested with your name on it.

-- Gordon (gpconnolly@aol.com), September 12, 1999.

What happens to pensions in times of financial depression?

They disappear. Look at what happened in the economic downturns of the 70's and 80's. Folks that had worked all their lives saving for retirement were shocked when they realized their pensions were tied to the health of their company. Now their pensions are tied to the health of the stock and bond market. Y2K and the coming collapse will make the pension defaults of that period look like a walk in the park.

-- a (a@a.a), September 12, 1999.

Another scenario would be massive deflation. As Gary said, "Like nothing seen in man's history."

The Bureau of Engraving and Printing is running 24/7 just to keep up with currency in circulation. How are they going to inflate?

See Gary North's 09/10/1999 article on Currency, the Multiplier, the Divisor, Velocity, and Deflation: Minor Problems for Bankers.

http://www.garynorth.com/y2k/detail_.cfm/6090

-- Drew (kolosky@prodigy.net), September 12, 1999.

Bill,

There are 2 basic types of retirement programs: money-purchase (MP) and defined benefit (DB). MP plans pay out whatever the plan assets are worth. DB plans pay a guaranteed benefit based on prior compensation levels, and are often COLA-adjusted.

From your post I infer you are a gov't employee, and these are typically DB plans. The last deflation we had in this country was in the thirties. The widespread use of retirement plans didn't begin until the 1960's when tax rates went up to 90% for passive income like interest and dividends, and plans were created as an antidote to this prohibitive tax sysyem. So we have no precedent for negative COLA adjustments during deflationary times. I would guess-and that's all it is- that gov't benefits would be lowered to meet the new deflationary world. I do not think the gov't would suspend the benefits for lack of money. The more feasible political option would be to print money to pay the benefits and re-inflate the economy.

If my inferences about the type of pension you have is incorrect, e- mail me with more facts and I will be pleased to respond more specifically.

mike

-- mike (maples@voy.net), September 12, 1999.

Gordon, I liked your answer about pension funds failing with their parent companies. I also considered the risk of outright theft - it takes a while for the Feds to realize that a company has dipped into its pension fund, and a fat retirement fund is quite a temptation for a company that needs a liquidity injection. Even if there are fines and other consequences under ERISA, the theft has to be proven first and even then a fine may be just a slap on the wrist compared to the impact of a bankruptcy filing.

California dipped illegally into the state pension fund when it had to pay for recession spending and several natural disasters at the same time. I recall the diversion was over a billion dollars. It took years before the high court forced the state to pay back the pension fund. I don't recall whether it was a lump sum repayment or under an installment plan. Meanwhile, though, the state had use of that money interest free.

Another case was Pacific Lumber, shortly after it got bought out in a hostile takeover and the new owner had to pay off junk bonds. One of the casualties was the loggers' pension fund. I heard of a lawsuit over that, but I don't know how it fared.

Conclusion: I'm not relying on my pension fund for the near future. I hope something in it is still available when I reach retirement age, but at this point I'm just keeping my fingers crossed.

-- Margaret J (janssm@aol.com), September 12, 1999.

Margaret J: Do you like to mudwrestle?

-- King of Spain (madrid@aol.com), September 12, 1999.

Bill, you may find it useful to read "When Money Dies" by Adam Fergusson, or "Manias, Panics, and Crashes" by Charles Kindleberger. The short answer IMHO is that pensioners will get screwed, just as they are being so now in Russia, except it will follow a somewhat different path with lots of BS pronouncements that change nothing.

www.y2ksafeminnesota.com

-- MinnesotaSmith (y2ksafeminnesota@hotmail.com), September 12, 1999.

Well, Bill, there is no historical precedent for the future of pensions in a calamaity/depression, whether inflationary or defationary. See, the life expectancy during the LAST(meaning there will be another)Great depression was about 55. It was 46-48 at the turn of this century. So, most people didn't live long enough to retire, anyway, get it? Also, most of the Social Security programs were set up by FDR during the 1930's--they didn't exist befiore then. For a good read of what a DEFLATIONARY depression would bring, read "At The Crest of the Tidal Wave" by ROBERT PRECHTER. To summarize a 400 page book, he says that the deflationary forces will be UNSTOPPABLE, and that means by any gov't/institution(read FED). But that will not stop gov't from ATTEMPTING reflating the collapsing baloon, so all that will happen is that we would see DEFLATION FIRST, followed by a massive hyperinflationary blowoff/collapse, caused by the zillions of dollars printed in a vain attempt to halt the deflation, that will finish things off. As usual, it will be another example of the gov't doing too little/too late. Now if you believe that we will see an INFLATIONARY depression, then read the new book by Dr. Ravi Batra. You can find it on AMAZON. There is certainly historical precedent for this. Germany during the 1920's is the best example. In either case, don't expect ANY paper PROMISES(AND THAT INCLUDES s.s. CHEQUES) to be honored. I was listening to www.walstreetuncut.com several weeks ago, and the REALPLAYER file interview with Ian Mcavity (DELIBERATIONS), where he mentioned that YEARS AGO, he mentioned on WALL STREET WEEK that the US gov't would NEVER honor its Treasury debt, and would default on it. In response to that, he has been black-listed from the show! All fiat currencies will go the way of the debased Roman coinage--history proves it. NEVER in history has a country with a massive hemmoraging of wealth through a gigantic trade deficit, as we see the US today, EVER failed to follow through with a collapsed currency. Take a look at the US dollar in the past month. It is foretelling the MASSIVE $300+ billion/year TRADE DEFICIT will come back to kill the dollar.

-- profit-of_doom (doom@helltopay.com), September 12, 1999.