Yes, “guaranty” is a legit spelling but it still looks wrong and like something other than an actual guarantee.  And since the PBGC is the Pension Benefit Guaranty Corporation, this seems to be a cleverly designed loophole for an occasion such as this one.

PBGC is a federal agency charged with insuring pension funds for the 44 million Americans who still receive pensions (that many? I do not know a single person under the age of 50 who doesn’t work for the government that gets a pension).  If a company goes bankrupt, it is no longer obligated to continue paying pensions to its retirees, and this is where the PBGC kicks in.  Like any insurer, it relies on investment income to aid in its payouts, and until recently it relied heavily on bond investments for this. Naturally, since I’m writing about it, something then went horribly wrong. That’s right, it began moving much of its $64b in funds from bonds to stocks beginning sometime last summer – 45% of its holdings was invested in equities, 45% in bonds and the like, and 10% in private equity and real estate. So, you know, a pretty drastic change from the 85% in bonds and 15% in equities.

The agency hasn’t said just how much has been lost to date, but numbers from its last FY, which ended in September of 2008, aren’t promising:

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent – and all of its stock-related investments were down 23 percent – as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.

So how many people does this actually affect?  On top of the 44 million whose pensions are currently insured but being paid by their employers,  another 1.3 million people are currently receiving pensions from the PBGC fund or are scheduled to in the future. If all this sounds familiar to you, you’re probably from California, because something similar happened to CalPERS and threatened to derail that state’s entire economy until Schwarzenegger cashed his latest Kindergarten Cop residual check and saved the day at the last minute, as he is wont to do.

In normal times, this might not be such a big deal, as fewer than 25% of its participants are receiving benefits. But with the possibility of one or two automakers filing bankruptcy looming large, this is about to get uglier than Hank Paulson on a six-day meth bender. And it’s not just me saying this, either:

Last year, as director of the Congressional Budget Office, [OMB chief Peter] Orszag expressed alarm that the agency was “investing a greater share of its assets in risky securities,” which he said would make it “more likely to experience a decline in the value of its portfolio during an economic downturn the point at which it is most likely to have to assume responsibility for a larger number of underfunded pension plans.”

Whose bright idea was this new investment strategy? The last director of the PBGC, Charles Millard, who actually said, “The new investment policy is not riskier than the old one.” It is worth noting that Millard is also a former managing director at Lehman Brothers, which is something that I could never have made up in a thousand years. A big tip of the hat and a hearty thanks to Millard for using a federal pension insurance agency as his own pretend hedge fund!

(h/t to A.G.)