How low interest rates are gutting pension funds

[Scuba]

http://www.nationalmemo.com/content/hidden-dangers-low-interest-rates



The hidden dangers of low interest rates

At the same time, low interest rates, on top of weak stock prices, have ravaged pension funds. Overall, state and local public employee plans lost 22.7 percent of their value in 2009, the Census Bureau reported in October. Their assets fell to $2.5 trillion from more than $3.2 trillion, while annual payments to retirees and survivors rose 6.7 percent to $187 billion.

Eventually, inadequate endowments will require taxpayers to pay more so state and local governments can keep their pension promises.

The Pension Benefit Guaranty Corporation, which insures corporate plans, owed $106.7 billion to retirees as of Sept. 30, but had only $80.7 billion of assets, a $26 billion shortfall. Just four years earlier it reported a surplus of nearly $10 billion, or 87 percent.

Low interest rates are good for mismanaged banks and for obscuring the cost of servicing the federal debt. But why do we elevate those issues above the interests of society’s prudent people whose personal and pension fund endowments are being consumed prematurely due to government policy?

Damned if you do, damned if you don't

[madrchsod]

1. that was a main topic during my wife`s union`s meet the candidates

of course they all said they believed in keeping the pension funds but no one really knew how to fix the under funded plans.

someone suggested that maybe stop giving tax breaks to sears and that scum bag who runs the board of trade. maybe investing in the local communities and changing the trade policies.


who knows maybe enough people will wake up and see what`s going down.

[earthside]

2. We are so stuck.

If interest rates rise, the economy will plunge even deeper into recession.

Government and personal debt is so big that there just isn't any room for paying higher interest rates.

On the other hand it is low interest rates that is allowing the mega-transnational corporations and banks to make "profit" -- and allowing governments to keep bailing themselves and the corporations and banks out of the mess they are in.

And now this administration is going along with the warmongers in ratcheting-up the saber-rattling against Iran ... watch gasoline prices "soar" (one of the CNBC crowds favorite words) soon. With no income from interest for regular folks, the increase in prices of gas and other necessaries is keeping us stuck in this recession. The truth is that for most middle and working class Americans, we're still sliding backwards.

Just watch ... all the "optimism" pumped-up over the holidays by the one percent to encourage us to part with a bit more credit card money is going to disappear in short order. In fact, it is already happening.

[Yupster]

4. Rates are too low

You should be able to get a decent bond paying 5 % interest and they just aren't to be had today.

Where does it hurt?

Older people invest in cd's. They have their interest direct deposited into their money market accounts and that money shows up in restaurants and malls. The check the people have always gotten, say $ 421.75 a month has now fallen to $ 8.23 a month. You bet the stores are noticing that their older people haven't been by like they used to.

Pension funds are based mostly on corporate bonds. They have generally paid 5-6 %. Now the managers are left with bad choices. If they lock in 10 year bonds at 3.7 % they are going to miss their already optimistic targets to fund the pension. Their other choice is to increase risk. They can buy more junk bonds instead of investment grade bonds increasing risk dangerously. Or they can buy more stocks and hope we don't have another stock market crash.

It's a bad situation for a fiduciary.

[Johnson20]

3. Some here would

have us believe that only the rich own stocks or bonds, so why should we be concerned about this.

[Scuba]

5. Everyone with a pension, 401K and a scad of other type investments is effected. n/t