Oh, that company-underfunded pension the government insured’?

Think again, says Jim Jubak. He calls THIS the “scariest investing story of 2008:

The Pension Benefit Guaranty Corp., the government agency that protects the pensions of 44 million workers in case their employers can't (or won't) pay promised benefits, has announced that to avoid going bust it will double the percentage of its portfolio — to 45 percent — that it puts into stocks. An additional 10 percent will go into alternative investments, including hedge funds.

In other words, facing a $14 billion deficit and even larger projected shortfalls, the Pension Benefit Guaranty Corp., or PBGC, decided not to save (by raising premiums) or to live within its means (by cutting benefits) but to gamble in the financial markets by taking on more risk. The PBGC was so proud of its new strategy that it announced it on Presidents Day, when the U.S. financial markets were closed and almost no one was paying attention.

Jubak explains why the PBGC is in trouble:

This agency, set up by Congress in 1974, is supposed to fund the pensions of workers when their employers go bust or get bought by someone who shuts down the plan. …

When Congress set up the PBGC, it didn't provide any taxpayer money to pay out these benefits. Instead, payouts are funded by premiums paid by companies that sponsor pension plans -—plus investment returns on the money the PBGC holds, pending future payouts, and any money it recovers from plans that go bust. In 2008, the premium is $9 per worker covered by a multicompany plan; for single-employer plans, it's $33 per worker plus $9 for each $1,000 of unfunded vested benefits.

Unfortunately, the premiums don't cover what the fund has to pay out in most years, and the odds are that the deficit will grow. The agency estimated that for fiscal 2006, the pension plans it covered were a total of $500 billion short.

Even if just a small portion came due at one time, $500Bil is a lot of semollians.

Jubak says the PBGC had four options:

• Raising premiums, which would have required a politically unpopular vote by Congress.

• Lowering payouts, which would have required a politically unpopular vote by Congress.

• Tightening rules, so companies would stop underfunding their pensions, which would have required a politically unpopular vote by Congress.

• Purchasing a lottery ticket and announcing the problem was fixed.

Well, we know which one it picked.