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Bankruptcies Batter Pension Coffers
-- January 31, 2003

In a recent issue of Safe Money Report, we alerted you to the fact that many companies have inflated their earnings based on "assumed returns" on pension plan investments. The end result: Their stock prices are pushed up based on false earnings while their pension plans are insufficiently funded. Now, the agency that steps in when a company can't pay their retirees is operating in the red.

The Pension Benefit Guaranty Corporation, the agency that insures the nation's defined-benefit pension plans, went from having a surplus of $7.7 billion to a deficit of $3.6 billion in one year. The agency had to step in when a number of bankrupt companies couldn't make the payments on their pension funds, including three steel companies: Bethlehem Steel, LTV Corp., and National Steel.

And that could be just the beginning: US Airways has already applied to have the government take over payments for its pilots' pension plan. United Airlines, Kmart, and other companies with defined benefit plans could eventually follow suit, costing the PBGC billions and potentially wiping out its funds.

The PBGC estimates that companies owe another $300 billion to their pension funds. That's in addition to what they've already put in this year. For example, GM has put in $3 billion, but estimates that it still has a $19.3 billion deficit. IBM has added $4 billion; 3M, $789 million; Honeywell, $900 million; and Johnson & Johnson, $750 million.

All of these companies -- and many more -- still have miles to go before their pension funds are fully funded. And for investors in these companies, it means serious hits to future earnings.

related article: Pension Insurer Cites $3.6 Billion Deficit and Suspects Worse