The Next Corporate Crisis: Massive Pension Deficits

We have noted on more than one occasion that pension plans would be trouble in the future.  It has been well known that city, county, and state pension plans are facing severe losses and are underfunded.  Ditto for the Big 3 in the auto sector, and go ahead and throw in all the parts supplier shops as well.  But today we saw a new report showing just how bad the pension plan deficits are in Corporate America.

HR consultant Mercer estimates pension plans hit a record deficit of $409 billion for the S&P 1,500 companies. Needless to say, it is forecasting a significant drain on corporate earnings.

What is unbelievable is how rapid the declines came.  The ratio of assets to liabilities fell from 104% at the end of 2007 to a startling 75% at the end of 2008.  This translates to a loss of an estimated $469 billion over 2008 alone, with more than three-quarters of this coming in Q4.  It also noted that the cost would rise to $70 billion for these companies in 2009 after a $10 billion expense in 2008.  You can see the full details of the report.

It is no wonder that so many employees worry about the future of their pension plans  Companies have been cutting these benefits long before this latest crisis.  It won’t be a shock if that only increases after the economy rebounds.  The problem with that is that if you remove this perk there is less incentive for employees to keep showing up to work each day.

Jon C. Ogg
January 7, 2009