The mother of all mismanaged retirement plans

The US Department of Labor has filed a complaint in federal bankruptcy court to try to recover more than $18,600 owed to the retirement plan of a now-defunct Portland, Ore., company called Redi-Fab Inc. The former owner allegedly failed to deposit all of workers' contributions into the plan, commingling some of the funds with the company's general funds.

A federal bankruptcy judge recently approved United Airlines' plan to terminate its employees' pension plans. The company has $9.8 billion in underfunded pension liabilities. While not necessarily illegal, it's grossly irresponsible. The company set aside too-little money to fund workers' promised retirement benefits. Now the employees will never see much of that money.

And it's not just companies. In 1997, the California Supreme Court ruled that the state's government illegally diverted pension funds to help balance its budget. Labor unions are notorious for diverting retirement-plan money as well. Keep reading to appreciate the irony of the following: according to a Labor Department memo, AFL-CIO officials want to spend retirement plan assets on their public relations battle against Social Security reform.

While the vast majority of retirement plans are run responsibly, unethically using workers' retirement contributions to fund current expenses, instead of saving them for workers' retirement, is still an all-too common occurrence.

By far, the biggest perpetrator of such shenanigans is the US government.

Unlike responsible plan administrators, which save all retirement contributions rather than spend them, the government immediately spends most of our Social Security contributions on current retirees. Were other retirement plans to do that, it would constitute an illegal Ponzi scheme, in which money from new investors is used to pay off old investors.

The Social Security contributions that do not get spent on current retirees are commingled with general funds, going toward government salaries, departmental budgets, pork-barrel projects, foreign aid, and the many other things that the government spends money on. Not a penny of it is ever saved for workers' retirement. In the private sector, that would be grounds for certain conviction.

To top it off, government officials have the effrontery to claim that there's a Social Security "trust fund." But this merely refers to how much the US Treasury - i.e. the US taxpayer - owes the Social Security Administration. If United Airlines executives told their employees that the $9.8 billion in underfunded pension liabilities is a "trust fund," they'd be sued for fraud.

The government has so mismanaged our retirement contributions that barring major reform, one or more of the following scenarios is inevitable:

1.) Future retirees will be denied at least some of their promised retirement benefits.

2.) Higher Social Security-related taxes and/or deficit-induced interest rates will cause a painful recession, slower long-term economic growth, or both.

3.) Spending on traditional government programs (e.g. environment, transportation, defense, national parks) will continue to get crowded out by ever-growing spending on Social Security and other entitlements.

Right now, the government can get away with its fiscal carelessness - albeit still at the expense of burdensome payroll taxes - because it is taking in more Social Security contributions than it is paying out. In about 13 years, however, it is projected that contributions won't be enough to cover expenditures, due to increased payout of Social Security benefits to retiring baby boomers. Covering the shortfall means higher taxes, denied benefits, reduced spending on other government programs, and/or going deeper into debt.

Barring reform, the government initially will probably take the politically easiest way out by going deeper into debt. If deficits get big enough, there could be upward pressure on interest rates, which could in turn cause a recession or slower economic growth. The weaker economy would result in less tax revenue, prompting politicians to raise tax rates, slowing the economy and lowering our standard of living even more.

To be sure, the federal government, unlike businesses and local/state governments, has the ability to deal with the problem by "printing money" (i.e., expanding the money supply). But this likely would cause inflation to rise, in turn causing interest rates to rise - a situation sure to give any government pause.

To stave off these eventualities, Social Security needs deep restructuring now. Just as companies, unions, nonprofits, and state and local governments are not allowed to spend retirement contributions on general operations, the federal government should not be allowed to do so either. That money should be invested, via personal retirement accounts, in a broad range of securities like stocks, bonds, and money market funds.

If one compares how Social Security is run to how most companies run their retirement plans, the reckless mismanagement of Social Security becomes obvious.