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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."