Death of pensions looms large

The largest generation in American history is starting to retire, wreaking havoc with our economy from two different directions, predicts Harry S. Dent, Jr., founder and president of the HS Dent Foundation. In his "Death of Pensions" report, he warns that the level of payments promised to future retirees cannot possibly be paid, affecting not only private sector workers, but civil servants. According to Dent, the effects of this situation will cause private and public pensions to lower benefits, as well as drive state and local governments to raise taxes in an effort to pay what they have promised. At the same time, Dent estimates that slower spending by aging Baby Boomers will cause an economic slump after 2010, compounding an already difficult situation.

"It is a fact that U.S. companies absolutely cannot pay all of the pension and health care benefits that they have promised to their workers," Dent states. "The statistics barely skim the surface. While the number of underfunded plans is startling, the degree to which some are unfunded is staggering."

To understand the scope of the problem, Dent examines General Motors as a case in point. Today, GM has almost $100,000,000,000 in its pension fund, but the company is underfunded by more than $7,000,000,000--and that does not include retiree health benefits, which totally are unfunded, adding another $60,000,000,000 to the deficit. With a market capitalization of roughly $17,000,000,000, GM could give itself away to its current and future retirees and the company still would owe them over $50,000,000,000.

"A similar scenario, although not as dramatic, applies to the pension funds of many companies and government entities throughout the U.S. The economic implications of pension and health care benefit shortfalls are serious," Dent stresses.

Many people believe that the Federal government will rescue pensioners and provide needed health care benefits. This is unlikely, Dent predicts, as consumer spending will cool after 2010 and tax revenue from corporations will fall. Wage growth will slow as well, which reduces tax revenues from individuals. "In the resulting stock market decline, there will be little revenue from capital gains or dividend taxes. Revenues will fall, but regular discretionary spending and entitlement spending for Social Security and Medicare will soar," Dent points out. "Bottom line: Congress won't have the funds to bail out the state and corporate pension plans"

COPYRIGHT 2007 Society for the Advancement of Education
COPYRIGHT 2008 Gale, Cengage Learning