Thursday, May 27, 2010

The $165Bn+++ Pension-Fund Rescue, Explained

Hennessey provides a very readable mid-length post on pension funding.

Key graf:

This is a textbook case of moral hazard. The presence of government insurance with artificially low premiums encourages firm managers and labor union bosses to cooperate and shift some of the costs of future employee pensions onto the PBGC and maybe onto taxpayers. Management and labor agree to pay employees higher wages and benefits now, to increase the promised future retirement benefit promises from that plan, but to underfund those promises. They are, in effect, gambling workers’ pensions on the firm’s ability to avoid bankruptcy.

Once again, a FAR-too-involved FedGov now finds itself in the tar with Bre'r Rabbit.

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