Sunday, November 3, 2013

Keeping my family safe from pension-related fraud

After learning about the pension problems America faces, I made a plan with a relative to ensure my grandparents are in good shape. Below is that plan stripped of personal details. Any suggestions are welcome! Feel free to use it if it could help your own family.


I'm excited to work with you and Grandma to make sure she's in good financial shape. Here's the plan:

Background info on the pension problems

Why do we care? Here's some background:

Matt Taibbi's article on pension fund looting:

And a real-life look at what happens when unsustainable things break, in this case in Poland:  The Polish federal government decided it could not borrow more without owning more assets against which to borrow, so it decided to partially raid several private pension funds so that it could borrow more. Could this happen in California, South Carolina, or some other US State, decimating the value of the fund? It's easy to respond "That would be unconstitutional," but if bankruptcy is the alternative, the law may change or be reinterpreted very quickly. Thus, we must not just know the state of the pension fund, but also the state of the managing government authority, such as the state or city government budget.

Also, the US government has been raiding the social security trust fund for decades, so this pension-fund-raiding behavior is already common practice in the US!

So what do we do?

1) Learn what institution manages Grandma's pension

'nuf said.

2) Contact the institution directly

Ask the pension management for:
This may be available online as well.

These are the main questions we want to answer with this information:
  • Is the net-present-value negative? If so, the fund is already underwater and her pension is definitely at risk
  • Is the expected asset growth rate reasonable? 1-2% expected growth may be reasonable, at least for awhile. 7-8% is not.  Many funds pretend to be healthy by expecting wayyyy too much growth in the future to make up for current shortfalls. If the expected growth is too high, she's definitely at risk.

3) Learn about the health of the managing institution and parent institutions

In parallel with (2), seek news articles about the health of the institution which manages the pension and its parent institutions, if any. For example, since Grandma worked for the county, the county gov't and state gov't would be parent institutions. We know already that the California gov't is in bad shape fiscally, and their pensions have been hard hit. I don't know what legal avenues the state could take to extract value from county or municipal funds, but it's something to consider.


4) Reduce Grandma's dependence on the pension if it's in bad shape

I have a phrase I say a lot: "You gotta stop depending on things that are going away!" Better to do it purposefully on your own terms than suddenly on somebody else's. So...

  • Make sure Grandma is saving every month rather than dipping into savings.
  • Reduce / get rid of any large debts such as mortgages she may have. Consider it 'large' if she can't pay it off at a moment's notice based on her current savings. Consider this: if her pension went away and she lost all her money, she could move in with one of her kids and be just fine... it may be crowded, but it'd be just fine. If she has debt, she is way more dependent on that income stream because she has less scope for adjusting her expenses to match her income.
  • Do the math to see how she'd fare without the pension, or with reduced outlays. Would it threaten her stay at her retirement community? Would it impact her health care? Or anything else important?
  • Learn about the particular bonds she's invested in and make sure she isn't "doubly exposed" to her pension fund. For example, let's say her county manages her pension. If her county goes bankrupt, her pension may also go under. If the bonds she owns are from her county, she loses twice: lost income from the pension and lost income/savings from defaulted bonds. Make sure the bonds are from somewhere else, like a steady corporation or the US.
  • Ensure her cash is spread out. The big banks in this country (Bank of America, Wells Fargo, JP Morgan and others) are hyper-risky (due to being hyper-fraudulent, see my earlier post for an example), and during the next collapse, I expect depositors in at least some of these institutions to lose out - including FDIC-ensured depositors. This article explains the risks. My response has been to a) avoid too-big-to-fail banks, and b) park my cash savings in multiple banks. For example, I use USAA and two local community banks.

So who does what?
- You please take care of (1). If Grandma doesn't have the info, call her financial advisor directly.
- I'll research (2) after you relay what you find. Then we'll figure out next steps together.

I'm excited to be working with you on this. I expect the future to be turbulent, and Grandma will be grateful that we did this for her.