Released: June 05, 2006

The gathering pensions storm

Source: By David Wyss, BusinessWeek

The baby boom generation has been described as a pig going through a python. The problem is that the pig is getting close to the end of the python. Many baby boomers are facing retirement without adequate savings of their own. Together with Medicare trust funds that will be exhausted and inadequately funded corporate and government pensions, you have the makings of a potential crisis.

The problem for financial markets is twofold: First, the underfunding in corporate and other pension funds will cause individual firms great hardship, making those with high legacy costs uncompetitive. Second, the underfunding at the state and federal government levels will cause tax hikes, which will alter regional and international competitiveness. We currently estimate that U.S. corporate pensions are underfunded by about $140 billion. Add the cost of other postemployment benefits and the deficit doubles. State pensions are underfunded by $284 billion.

Disturbing as those numbers are, the federal underfunding situation dwarfs the state and private ones. Social Security has a $4.6 trillion shortfall (based on present discounted value of the next 75 years), and the federal civilian and military employee programs are underfunded by $4.5 trillion.

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