As the stock market hit all time highs this week, there is little talk of pensions and the deck of cards on which they are built. When the market crashes to reflect the fiscal irresponsibility of both Congress and the Fed, what will happen to these companies that have promised, and for many, provided a lucrative retirement? How will these comfortable retirees react when their $200 dollar per share stock, drops to $30. Many will live off other income in the hopes the stock will again bounce as it did after the 2009 crash. Others will double down and buy more shares knowing the company builds a sound product and its valuation will return to pre-crash levels, just as it did after 2009. Stock owners will be assured the crash is a blip and not to worry.
They should worry.
If pensions are funded from future revenues and accounting projections, what happens when the dollar is devalued, interest rates increase, and demand for products shrinks – a lot? Just as after the 2009 crash, many companies will discover it is cheaper to go bankrupt than it is to pay. Others will stand by and wait to buy out these companies to reform them without those nagging long term debt obligations, including pension liability. The losers will be the shareholders and the employees, past and present.
The pension issue is compounded, or exacerbated, by bankruptcy laws. These too are promulgated in favor of the large creditor and lastly the shareholder. The employee, past and present, are an unfortunate casualty. It rarely invokes any penalty for senior management. They will simply find different investors and show how a re-formed company, bought at a discount, can be profitable again. Senior management will be retained as experts who were faultless due to unforeseen economic malaise.
It is insulting.
For those aware, the Government, in its infinite wisdom, created a pension default fund. The size and scope of this fund is equivalent to using a child’s piggy bank as mortgage collateral, for the whole neighborhood. It won’t help. This is yet another policy that is ignored and rarely mentioned, until it matters. When it matters is often times too late.
Books have been written, articles published and warnings issued about the potential fallout of multiple businesses failing simultaneously and creating a domino effect for failed pensions. As these compositions sit and gather dust and this country’s fiscal responsibility resembles that of the proverbial drunken sailor, add these to the list of policies that require review.
Forewarned is forearmed, but only if you pay attention to the warnings.