The recent $1.9 trillion Covid-19 Relief Bill, signed by President Biden in March 2021, will direct $86 billion to failing multi employee pension funds. Most people are oblivious to this fact or even that the Bill is sending payments to all sorts of programs that are not directly related to the stimulus checks which have received the majority of the attention.
The majority of the media coverage on the $1.9 trillion Bill has been focused on the $1,400 stimulus checks that certain people below an income threshold will receive. Mainstream media likely focuses their attention on the stimulus checks as it brings the largest amount of viewers to their platforms. This is of course is the same reason that the politicians focus their marketing of the bill on the stimulus checks; those receiving the stimulus checks represent the largest group of voters who benefit from the bill. And while the majority of the population assumes that the $1.9 trillion is being used solely for the stimulus checks, according to a USA Today article published on March 2, 2021 only 22% of the 1.9 trillion bill is directed towards those checks. That 22% represents $422 billion.
Failing pension programs that receive a portion of the $86 billion signify an obvious moral hazard that could represent the beginning of the end of the entire financial system. Moral hazards, as it relates to a government bill or program, are the unintended consequences that result from the government action. The bailing out of pension programs designed to provide a steady income for retirees will result in institutional investors continuing their slide to more risk taking as an implicit bailout by the government in the future will be assumed should pensions fail down the road.
While failing pension plans present a catastrophe for many retirees or soon to be retirees, it is incredible important for society for those pains to be constrained within the group of people who are tied directly to the pension. At the very least, if government is to intervene because it is determined to be a societal benefit, the government intervention should be done at the most local level possible. For example, if a Chicago school teacher’s pension program were to fail, why should people living in Texas be forced to bail out the poor decision making of Chicago city politicians. Any bailing out of that pension should contained within the city of Chicago, which would hopefully wake citizens in Chicago up to the problem and potential ways to make sure the problem never occurred again. This would likely result in citizens taking a closer look at the politicians they elect to make such important decisions regarding the amount of future budgets that will go to city employee retirees and which companies are chosen to manage that retirement nest egg.
Companies and government cohorts that decided to enact pension programs for their employees decades ago made the choice to collect – or more accurately hold back from paying – a portion of the employees salaries and invest it on their behalf. When the time came for an individual to retire, instead of them receiving a lump sum of all the payments they had directed, the pension would instead pay them out a certain amount each month for the remainder of the employee’s life. The check being sent to the retired employee would in theory be derived from the interest and trading profits of the entire pool of invested assets.
In order for the pension to fail, a monumental failure would have had to take place in the company entrusted with managing the investments, especially in an economic environment that has seen a 11 year stock bull market. Such failures should even lead the participants in the pension to wonder if foul play was and is at hand.
The fundamental theory of the pension is to take in monthly amounts from employee paychecks, and invest it wisely growing the total amount over time through the power of compounded interest. For the pension to fail horribly stupid mistakes would have had to be made over the years. Mistakes that might include investing a large amount of money in a friend’s unworthy business, or a business that was in desperate need of raising cash so they offered a kickback to the money manager in the form of stock options if a certain amount of corporate bonds were purchased. There a countless ways for a money manager to profit by risking the retirement funds of the hard working people that are trusting the money manager to do the right thing.
Failure through poor decision making doesn’t have to happen in one poor investment decision that can be seen taking place over one month or one year. The pension is designed to collect and grow currency payments over decades. With currency payments adding to the pot each and every month, the investment firm resposible for managing the pension has ample opportunities to play catch up for previous risky decisions that have gone belly up. The can can be kicked down the road for many years until one day their is nothing the firm can do but admit their failure and pay the consequences.
That is of course unless someone at the investment firm or within the group who has enacted the pension has a buddy in congress who can get them to squeeze $86 billion of taxpayer wealth to a bill designed to combat those who have been hurt by a pandemic. The politicians who support the inclusion of the $86 billion to pensions will argue that it is the pandemic that has caused these pensions to fail, but in reality they have been failing for decades due to high risk decisions that possibly reward the investment firm in the short run at the detriment of those paying into the program in the long run.
Bailout out these pension programs is signaling to the investment firms that there is nothing wrong with high risk poor decision making. In fact, it is telling them that they should continue to operate in this fashion as it is the world we live in today. Just keep taking risks in order to maximize the growth, and if you happen to fail there is no need to fret, the government will simply take wealth from all those who are not engaged in high risk behavior and give it to you to try again. This is the moral hazard that will result in the $86 billion bailout of pension funds.