In today's tough economy, many people are doing whatever they can to make it through one more mortgage payment or survive other financial hardships that have reached their doorstep. For some retirees, that means selling their pensions for a lump-sum payment.
"They don't have a lot of other avenues to go to," says Leslie Scism of the Wall Street Journal, who has reported on this trend. "For many people, it's a way to get some quick cash."
Pensions are supposed to be protection for down the road. That's how Joe Serina thought of the pension he earned from serving 22 years in the Navy. But in 2008, his wife left him and he had to pay child support.
"I didn't want to lose my house; I had already lost my daughter. I was only going to get her every other weekend and that's all I can think of," Serina told weekends on All Things Considered guest host Laura Sullivan.
Serina found a company that promised retirees cash right away, but they had to hand over their pension checks for years. They asked that he reroute his pension check directly to their bank, every month, he says.
The company gave Serina $57,000 up front in exchange for his $1,400 pension check every month for eight years. That comes out to $125,000 for the company that paid him the money; the equivalent of a 23 percent interest loan.
"The more it sunk in, it really financially didn't do anything better for me," he says.
Dr. Louis Kroot and his wife, Kathie, share Serina's regret.
After retiring from two decades in the military, Kroot says a miscommunication or misunderstanding caused him to not pay the full taxes on withdrawing his retirement fund. He ended up owing the Internal Revenue Service $70,000; money the Kroots didn't have.
"I panicked," he says. "I saw what I had to pay the IRS and I got desperate. I leaped before I looked."
In 2005, the Kroots made a deal with Structured Investments, the same company Serina used for his pension buyout. Again, they offered a lump-sum payment to Louis Kroot in exchange for eight years of pension checks.
The Kroots managed to pay off their tax bill, but they still have two more years of handing over their pension checks to Structured Investments; they even took out a life insurance policy made out to the company just in case. The $92,000 they received will, in the end, cost them $243,000.
Structured Investments didn't respond to requests for comment on this story, but last August its founder, Steven Covey, told the Center for Public Integrity that the company's practices don't violate any laws. He says it isn't loaning money; it's paying for a commodity.
In 2005, Serina and several other retirees joined together in a class-action lawsuit in California, arguing that the deals aren't legal. The state court ruled in their favor but the company is expected to appeal.
In the meantime, Serina has stopped making his payments. The Kroots, however, are still making theirs.
Pensions For Investors
The Journal's Scism tells NPR's Sullivan that investment companies so far seem to like the idea of investing in the sale of people's pensions.
"There are so many financial whiz kids out there who are always willing to try to find some way to turn some consumer product into something that an investor can make money on," Scism says. "There's just constant financial engineering on all kinds of income streams."
In her reporting, Scism found that pensions from both state governments and the private sector have been bought by investors, but most are interested in military pensions because they come from the federal government.
Scism says the way the pension deals are structured circumvents the legality question of signing over the actual pension checks.
"The people putting together these deals feel they are not assigning your pension to someone else," she says. "They feel that this is money you've received from a pension, and once you receive it ... you're allowed to do what you want with that money."
Some courts have upheld this thinking, Scism says, saying that once the money is in the retiree's hands it is under their control.
The pension-buying business is relatively small, Scism says, and hasn't hit the big investment firms on Wall Street just yet. But, she says there is interest and efforts to grow it as an investment option.
"There are so many investors that are frustrated with the low-yields on a lot of their investments, so it seems like there's a lot of demand for off-beat investments," she says.
With millions of pension holders in the U.S., the supply is ripe for the picking.
Comparisons To The Mortgage Market
If something about this seem familiar — taking what has traditionally been a safety net for consumers and turning it into a possible investment for Wall Street — you'd be right, according to Lawrence J. White, a professor at NYU's Stern School of Business.
He says there are some similarities to mortgage securities.
"A pension represents a stream of payments that are going to stretch out into the future just the way a mortgage represents a stream of payments by the borrower back to the lender," White says.
Somewhat reassuring, White says, is that even though there are millions of pension-holders, this type of pension securitization is unlikely to grow as large as the mortgage-backed securities market; billions of dollars in pensions versus the trillions in mortgages.
Though it might be too early to talk about regulation of the pension market, White says at a minimum there should be a "cooling-off" period for those considering selling their pensions.
"[Time] where you have a chance to think twice, think three times, consult friends [or] consult with a trusted adviser," he says.
Beyond that, White says, once financial institutions start investing in pensions, federal regulators should be there making sure they have enough capital to support the potential loss from investing in a risky security.
Few federal agencies seem to have pension sales on their radars. But in an email, Sen. Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee, called them a "worrisome new practice that deserves careful scrutiny."
LAURA SULLIVAN, HOST:
This is WEEKENDS on ALL THINGS CONSIDERED from NPR News. I'm Laura Sullivan, in for Guy Raz.
Has financial trouble reached your doorstep? Behind in your mortgage payments? Or has another tragedy hit your family? Here's a new solution.
(SOUNDBITE OF COMMERCIAL AD)
UNIDENTIFIED MAN: It's never been easier to get a lump-sum pension buyout or cash advance for your pension payments.
SULLIVAN: That was an advertisement for selling your pension.
LESLIE SCISM: People are desperate for money. They don't have a lot of other avenues to go to. So they call up one of these proliferating number of websites with names like buyyourpension.com, pensionstream.com, pensionforcash.com. And for many people, it's a way to get quick cash.
SULLIVAN: That's Leslie Scism. She's a reporter at The Wall Street Journal who's looked into a growing trend: Retirees selling their pension to get through tough times. That's our cover story today: how a pension goes from golden nest egg to quick cash in hand.
(SOUNDBITE OF MUSIC)
SULLIVAN: Pensions are supposed to be a protection for down the road, part of a safety net, just like life insurance for a house. That's how Joe Serina thought of his pension. He came from serving 22 years in the Navy. But in 2008, his wife left him and he had to pay child support.
JOE SERINA: I didn't want to lose my house. I had already lost my daughter. I mean, I was only going to get her every other weekend, and that's all I can think of.
SULLIVAN: Poking around on the Internet, he found a company that promised retirees a bunch of cash right away. But the retirees have to hand over their pension checks for years.
SERINA: They wanted me to go right into my pay and they wanted me to reroute my pension directly to their bank every month. And the more it sunk in, it really financially didn't do anything better for me.
SULLIVAN: So here's the deal he got. The company gave Joe Serina $57,000, but Serina was supposed to give the company his $1,300 pension check every month for eight years. Did you catch that math? Joe Serina gets $57,000, but over eight years, the company gets $125,000. That's like taking out a loan with a 23 percent interest rate.
Dr. Louis Kroot and his wife, Kathie, share Joe Serina's regret. After two decades of working in the military, Dr. Kroot got in trouble with the IRS.
DR. LOUIS KROOT: Through either miscommunication, misunderstanding, I did not pay the full taxes on withdrawing my retirement fund and ended up with big tax bill.
SULLIVAN: Really big. The Kroots needed about 70 grand.
KROOT: I panicked. I saw what I had to pay the IRS, and got desperate. And I leaped before I looked.
SULLIVAN: Kathie Kroot explains what happened.
KATHIE KROOT: In 2005, we hooked up with Structured Investments. They offered a lump-sum payment for eight years of Louis' retirement. And it seemed like a way that we could pay the IRS because there was no way we had that money laying around to pay them.
SULLIVAN: We tried to talk to Structured Investments, the company both the Kroots and Joe Serina used. The company didn't respond to multiple emails or phone calls. But last August, its founder, Steven Covey, also an Army vet, told the Center for Public Integrity that the company's practices don't violate any laws. He says they aren't loaning money, they're paying for a commodity.
But the Kroots sure felt like their payment came with a lot of loan-sounding terms.
KROOT: The contract said that we had to pay certain bills off first before the IRS, and there wasn't enough money then to pay off the IRS.
SULLIVAN: And they also had to take out a life insurance policy made out to Structured Investments.
KROOT: They're here to make money. And if for reason I drop-dead, my pension stops, I had to take out a life insurance policy.
SULLIVAN: The good news is the Kroots finally finished paying off their tax bill last month. The bad news: They have two more years of handing over their pension checks. Assuming they don't miss a payment, the $92,000 they got will wind up costing them about $243,000.
KROOT: Using the retrospectroscope, it really was not a bright thing to do.
KROOT: You call it the stupid tax.
SULLIVAN: In 2005, Joe Serina and several other retirees joined together in a class-action lawsuit in California, arguing that the deals aren't legal. The state court ruled in their favor, but the company is expected to appeal. In the meantime, Joe Serina has stopped making his payments, but the Kroots are still making theirs.
Leslie Scism, the reporter from The Wall Street Journal, says investment companies so far seem to like this idea of investing in the sale of people's pensions.
SCISM: There are so many financial whiz kids out there who are always willing to try to find some way to turn some consumer product into something that an investor can make money on. So there's just constant financial engineering on all kinds of income streams in particular to try to find ways to turn those into investments.
SULLIVAN: Is any pension up for sale? I mean, and are some worth more than others?
SCISM: The spreadsheets we saw did include lots of pensions from state governments, New Jersey state pensions, California civil servant pensions, teacher pensions from various places. And we even saw some private sector ones: Ford Motor, Delta Airlines. We talked to financial advisers and we were told that most of their clients, if they're willing to go for this offbeat investments, they want to do it in what they perceive as the safest possible way.
So they view buying a military pension as the safest route because they feel that's from Uncle Sam, they don't have to worry about a default of that pension. The pension's going to arrive to the retiree every month.
SULLIVAN: These folks are signing over checks that come into the mail every month for them that they're supposed to live on. Is this legal?
SCISM: In general, federal law does not allow the assignment of a pension. The people who put together these deals feel they're not assigning your pension to someone else. They feel that this is money that you have received from a pension. And once you receive it in your checking account, you're allowed to do what you want with that money.
SCISM: The courts have ruled differently. A few courts have, in fact, concluded that these successfully thread the needle, the thinking being that the money is in the retiree's hands and he can control it and he can even break that contract.
SULLIVAN: The pension checks that end up in somebody's mail every month, how do these investors ensure that these people are actually going to send that check onto the investors every single month for seven, eight, 15 years?
SCISM: They have no assurance that the retiree's going to keep his end of the bargain. He may be so desperate to start with that he is, in fact, a good candidate to default or to go into bankruptcy court.
SULLIVAN: In your article, you describe pension sales as a burgeoning business. How big are pension sales right now?
SCISM: I think it's safe to say it's relatively small right now. This is not something that any of the Wall Street firms are involved with, and we called around to some big firms.
SULLIVAN: Is this something that's growing?
SCISM: There are definitely efforts to grow it. There are so many investors who are frustrated with the low yields on a lot of their investments. So it seems like there's a lot of demand for offbeat investments. And then the supply is generally considered big. There really are just millions of these pension holders out there.
SULLIVAN: How does this end up working out for taxpayers?
SCISM: Taxpayers are likely to react unfavorably if they hear that a lot of middleman and an investor are making money on pensions that they fund for the benefit of that particular retiree, that veteran, that police officer, that firefighter. But that's not stopping people from trying to figure out how to make a buck being a middleman here.
SULLIVAN: If something about this sounds familiar, about taking what has traditionally been a safety net for consumers and turning it into a possible investment for Wall Street, you'd be right, according to Lawrence J. White, a professor at NYU's Stern School of Business. He says there are some similarities to mortgage securities.
LAWRENCE J. WHITE: A pension represents a stream of payments that are going to stretch out into the future just the way a mortgage represents a stream of payments by the borrower back to the lender. However, the one reassuring thing should be this kind of pension securitization is never going to get anywhere near as large as the trillions of dollars of mortgage securities. Even if...
SULLIVAN: Why not?
WHITE: Why? There just aren't that many pensions and pension streams. Maybe a couple of billion, you know, mere couple of billion dollars at most as compared with mortgage securities that are in the six, seven, $8 trillion range.
SULLIVAN: So do you think that market for pensions needs to be regulated?
WHITE: At a minimum for especially a new financial instrument like this, maybe there needs to be some kind of cooling-off period where you have a chance to think twice, think three times, consult friends, consult a trusted adviser. And then beyond that, if financial institutions are investing in these things, the financial regulators ought to be there making sure they have enough capital to support the potential losses that could come from investing in a risky security.
SULLIVAN: Few, if any, federal agencies seem to have pension sales on their radars. But in an email, Senator Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee, called them a worrisome new practice that deserves careful scrutiny. Transcript provided by NPR, Copyright NPR.