The Peeps Ponzi

The PEEPS case is a tangle of litigation between the company (“Just Born Quality Confections”), its union and the multi-employer fund that currently manages pensions for the 250 or so union workers.

The core issue is that the company wants to phase out the defined-benefit pension plan by placing new employees in a 401(k) or defined-contribution type of plan, while current workers will keep their defined-benefit plan.

If you look through the smoke, it is clear that the issue is not the new employees. Union workers seldom give a damn about new employees, yet in this case they had gone out on strike in their support. Seemed unlikely, so I took a closer look. The key is the pension fund. The new employees, who are presumably young and not likely to claim pension for a long time, are needed to provide contributions, which will fund the pensions of the older workers. In other words, the pension fund has become a Ponzi (just like Social Security) where new money is required to fund withdrawals because investment income is insufficient. Of course, the young workers are unlikely to ever see a dime of the money they put in or the company puts in on their behalf.

So, if the company gets its way, this will set a precedent which others will likely follow, bringing down this and other multi-employers funds.

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