Submitted by unsettling economics

Do you remember when we could save Social Security by funding retirement in the stock market. Here is what the Wall Street Journal reports about the U.S. Pension Benefit Guaranty Corp.’s decision to invest in the stock market.

Silva, Lauren and Martin Hutchinson. 2008. “Pension Guarantor’s Bad Bet.” Wall Street Journal (21 February): p. C 14. http://online.wsj.com/article/SB120356297487082117.html?mod=todays_us_money_and_investing

“The U.S. Pension Benefit Guaranty Corp.’s decision to boost its investment in equities and alternative assets looks like poor risk management. The liabilities of this government guarantor of corporate pensions increase sharply in economic downturns, when companies file for bankruptcy and offload their under-funded pension plans onto it. So equities, which tend to fall in downturns, and alternative investments, which can become illiquid, may represent a doubling of risk for the pension agency, rather than a hedge. Pension Benefit Guaranty, established in 1974, has been funded primarily by corporate premiums. It had built up a surplus of $9.7 billion by 2000, but two factors caused it to run a deficit since 2002. First, several large bankruptcies, particularly in the airline sector, burdened it with large, unfunded pension liabilities. Second, bond yields dropped. That lowered the discount rate used to calculate the present value of its future pension obligations, meaning that from an accounting perspective, they increased rapidly.”
“The agency’s new investment plan — to increase its allocation to equities to about 45% from about 25%, and allocating 10% to alternative investments — also looks poorly timed. Making such a move after a lengthy bull market and a period of low interest rates and high speculative activity can lead to low returns, even over 20 or 30 years.”

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