Bloomberg writer Danielle DiMartino Booth says the Pension Crisis Too Big for Markets to Ignore.
But I have a question: If the problem is too big to be ignored, why is nearly everyone complacent?
Only a handful of sites including MishTalk, ZeroHedge, and Jack Dean at Pension Tsunami discuss the problem with any frequency.
On a recent Friday, Dean posted multiple stories on the California Public Employees’ Retirement System, the country’s largest pension program, as well as a budget cliff facing San Francisco, six Los Angeles public safety officers who collected over $1 million apiece last year in pensions, and eight cities that could face bankruptcy when the next recession hits. But the day’s headlines also included the latest on the fiasco unfolding in Dallas, an update on Houston’s less awful situation and features on states that have become the site’s other usual suspects — Connecticut, Illinois and New Jersey. And that was a slow news day.
The question is why haven’t the headlines presaged pension implosions? As was the case with the subprime crisis, the writing appears to be on the wall. And yet calamity has yet to strike. How so? Call it the triumvirate of conspirators – the actuaries, accountants and their accomplices in office. Throw in the law of big numbers, very big numbers, and you get to a disaster in a seemingly permanent state of making. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007.
Federal Reserve data show that in 1952, the average public pension had 96 percent of its portfolio invested in bonds and cash equivalents. Assets matched future liabilities. But a loosening of state laws in the 1980s opened the door to riskier investments. In 1992, fixed income and cash had fallen to an average of 47 percent of holdings. By 2016, these safe investments had declined to 27 percent.
It’s no coincidence that pensions’ flight from safety has coincided with the drop in interest rates. That said, unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate. In fiscal 2016, which ended June 30th, the average return for public pensions was somewhere in the neighborhood of 1.5 percent.
Corporations’ accounting rules dictate the use of more realistic bond yields to discount their pensions’ future liabilities. Put differently, companies have been forced to set aside something closer to what it will really cost to service their obligations as opposed to the fantasy figures allowed among public pensions.
So why not just flip the switch and require truth and honesty in public pension math? Too many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used. That would translate into much steeper funding requirements at a time when budgets are already severely constrained. Pockets of the country would face essential public service budgets being slashed to dangerous levels.
What’s a pension to do? Increasingly, the answer is swing for the fences. Forget the fact that just under half of pension assets are in the second-most overvalued stock market in history. Even as Fed officials publicly fret about commercial real estate valuations, pensions have socked away eight percent of their portfolios into this less than liquid asset class. Even further out on the risk and liquidity spectrum is the 10 percent that pensions have allocated to private equity and limited partnerships.
How Long Can This Go On?
How long everyone can remain complacent over a brewing pension crisis is a mystery.
It will not even take a market crash to cause panic. A major pension fund blowing up could do it. Chicago and Dallas are possibilities.
A recession could trigger a panic, especially if bond yields rise and equities sink simultaneously. A simple earnings scare could cause panic.
Meanwhile, market valuations are the most stretched in history by many measures.
GMO 7-Year Expected Returns
Source: GMO
*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forwardlooking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.
Forecast Analysis
GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, even nominal returns are expected to be negative for seven full years.
Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.
Dealing With Insolvency
Some states have bankruptcy provisions to deal with insolvencies other states don’t. For example, Illinois does not allow municipal bankruptcies even though a number of Illinois cities and retirement funds are insolvent.
Image from Municipal Bankruptcy State Laws.
Congressional Help Needed
To help address the eventual problems, Congress needs to get in on the act because states, especially Illinois, will not do what is necessary.
On March 14, I reported Illinois General Assembly Retirement System Only 13.52% Funded: Overall, Illinois Pension Debt Interest Hits $9.1 Billion Per Year.
Many other Illinois pension plans are among the walking dead.
Related Articles
- Chicago Pension Liabilities Jump 168%, Understated by $11.5 Billion
- Five Chicago Suburbs Headed for Bankruptcy (More Illinois Cities Will Follow
- Dallas on Verge of Bankruptcy Due to Pensions; Just a Matter of Time (For Dallas, Houston, LA, Oakland, Chicago, etc)
- Criminal Witch Hunt in Dallas Pension Fiasco
- Not Just Dallas: Fort Worth Employees’ Pension Plan in Deep Trouble
How about dealing with the problem before panic sets in rather than after?
Mike “Mish” Shedlock
Won’t the Fed just buy whatever ‘troubled assets’ they have to sell at whatever price gets the job done when the time comes?
Why ever stop kicking the can down the road while there’s road to kick it down?
LikeLike
The Fed could bail out every public pension fund at the massive expense of economic growth. And if it sets that precedent, all state and local governments will double and triple down. Why not offer min wage salaries with the promise of million dollar retirements? Eventually reality will set in and the longer we wait the worse it will be as the world builds more and more on top of a bad foundation.
LikeLiked by 1 person
+1
LikeLike
Fed bails out banks, not state governments.
LikeLike
“The Fed could bail out every public pension fund at the massive expense of economic growth.”
I’m not sure how. If the Fed printed $2T and simply put it in pension funds then how would economic growth fall? The real economy isn’t yet impacted, the real economy is the one that produces goods and services.
As retirees start collecting benefits from that $2T, they will be buying goods ands services. Is the economy resource constrained and unable to produce them, even when imports let you tap the entire world?
LikeLike
Fed ,national governments can buy all pension debt at any time and without borrowing of saving. It’s permitted by the Constitution. There is therefore no such thing as “unfunded liabilities.” Pensions being paid now have not been saved for and neither will that happen in the future. Pensions will continue to be paid ex-nihilo. As long as there is stuff to buy and stuff for sale the Fed can act. It cannot go broke in its own currency.
LikeLike
The same way it would fall if the Fed printed up $200 quadrillion and put it in everybody’s bank account: By redistributing limited resources from those who have made, and can make productive use of them, to those whose sole contribution is sitting on their ass squealing “Me-me-me! Steal from ‘those guys’ and give to me-me-me!”
LikeLike
If the Fed just up and printed $200 quintillion and put it in everyone’s bank account people would go out and try to buy everything they ever wanted. Since there is not an infinite amount of goods available, stores will raise their prices and at the end of the day mostly everything will end up the same as it was.
For this to apply to the Fed bailing out busting pension programs, you have to say that there are so many people who are retired state and local workers entitled to a pension and their pensions are so huge that it would be like printing trillions of dollars and just tossing them in everyone’s account. While some workers get million dollar pensions most do not.
LikeLike
You’re assuming that people will get money in their account in the exact same proportion to which they currently have money equivalents. So that relative purchasing powers are not altered by the printing.
As long as the set of real goods available remains the same, printing up money and handing it out according to any other formula, will increase the power to purchase the (unchanged, remember..) existing set of goods, for those who get the fresh print. Which, since the real goods stock is fixed, inevitably means those who do not receive it, or receive it to a proportionally lower degree, will end up with less real purchasing power.
This is why those in the financial rackets has made so much money since Nixon fully detached from gold, and let the rackets run free. A simple obfuscation by which noone directly have their money taxed, confiscated nor stolen. It’s just that the connected keep awarding themselves fresh print. Slowly (or not so slowly anymore) displacing everyone else’s means to lay claim to any of the economy’s real goods and services. Until the rest is destitute and the banksters own it all.
A fixed currency supply prevents this specific, and popular amongst banksters and their sycophants, means to steal from the rest. Which is why the entire brunt of the progressive propaganda and indoctrination machine, is so hellbent on suckering those designated as patsies, into falling for all manners of shams claiming fixed and universally known money supplies are somehow “evil.” “Bad for the economy” and all manners of other nonsense that even a five year old can easily verify is nothing but bunk.
LikeLike
Federal bailout option. If a state or municipality accepts it, the Fed will make good however:
1. Retirees get a haircut on benefits.
2. The state taxpayers must fork over an equal amount to the Federal gov’t.
3. All future pensions must use the ‘pension unit’ scheme.
Then:
Establish a simple ‘pension unit’. Say it is $5 per month starting at 65 yrs old for life. Any bank or financial institution can manufacture and sell pension units. For example, on the birth of your grandchild you may go down to your bank or online trading firm and pay $40 for a pension unit in his name. If you want to give your 30 year old gardener a pension unit as a holiday tip, though, it might cost you $125. In days past you might have instead used a US savings bond as a gift instead.
While any financial institution can make pension units, they have to be backed by assets funded to, say, 125% of estimated future benefits to be paid. In negotiations with unions, rather than a state promising to pay $1000 a month for life to workers after retirement, they will instead promise to purchase 200 pension units per worker (or more likely for each worker they may purchase 10 units per year producing 200 total units after the worker hits the 20 year mark…of course workers could use their own money to buy units themselves). A state may create pension units but it cannot use them for it’s own workers, instead it would only be able to sell them on the open market and they would have to follow the rules as any other bank or company would. In other words any pension promised would be fully funded as it is earned, no need to trust that a state pension fund manager will magically become a stock market wizard and score big just before the bulk of workers retire.
LikeLike
#2 meant to say state taxpayers must fork over an amount equal to the haircut the retirees get.
LikeLike
Just make sure the tax is directly on property, rather than income. Otherwise:
1) Everyone able to generate an income will just leave.
2) While nothing involving government is ever “fair,” the ones who obtained the services of currently reired police, firefighters and (mostly) teachers, are also retired. If anyone ought to pay for the providers’ pensions, it’s the ones who got the benefits. Young people will have enough on their plate paying for services, and setting aside pensions, for the guys that serve them. While no targeting is perfect, you bias who pays much more accurately in the direction of the generation(s) that “enjoyed” the “benefits” provided by current public retirees by going after property than incomes. Particularly real property, since it can’t be taken to Arizona, and that is where most of the ones you want to target, have most of their “savings” locked up.
LikeLike
If a state accepts the bailout then both taxpayers and retirees get a portion they must split. The state can figure out for themselves how to fund that. The Federal gov’t could probably simply take it out of sharing funds it has (i.e. highway construction and Medicaid match usually dollar for dollar what the state spends). How a state responds will be up to that state.
LikeLike
Huh??
Tax tax tax,, what a great plan that is
LikeLike
Yes, if after the bailout a state still wants to offer pensions and workers still want to demand them then they will have to be fully funded by taxpayers at the time the cost is incurred. If you want to offer workers $1000 a month when they turn 65 for life after 20 years of work then each year you must buy them ten ‘pension units’. Does that mean more taxes? Maybe, or it could mean lower take home pay. The point is whatever something costs it gets paid for.
In my proposal no state has to take a bailout. They can continue to run their own pension plans if they want and workers can continue to trust them if they want. If a state or any entity for that matter can consistently generate above market returns through savy market trading then they should opt for that route.
The other aspect I think is important is to provide an easy way to meet a huge demand regular people have for defined benefits in retirement. A product like a ‘pension unit’ makes it easy to save in small quantities but not have to rely upon any single government or corporation to invest the savings wisely.
As for a state’s taxpayers paying for a share, yea because otherwise it’s the taxpayers of ever other state paying and then you have an incentive for a state to promise even more wild pensions, never fund them and toss them onto the backs of the rest of the country when it becomes too much. That’s how life works for those of us who are grownups.
LikeLike
“for the guys that serve them.”
???
Do you live in the same universe I live in?
LikeLike
I do. I do realize that, in reality, no government, at least non larger than Jefferson’s, have ever benefited anyone but those in it, themselves.
I was just going along with what seems to be the prevailing nonsensical notion of the dumb-age: That people derive some sort of “benefit” from having a government lording over and robbing them. IOW, that the institution in and of itself, is somehow meaningfully different from any other gang of thugs and robbers. Of course I’m not dumb enough to believe that myself, but that seems to be the story that gets bandied about amongst the indoctrinati, and the media outlets targeting them.
That being so: IF anyone did get some benefit from whatever it was these public sector retirees did while “serving,” it sure wasn’t people who weren’t even born until after they retired. Even a progressive can’t be downright imbecile enough to believe that! Hence, the only legitimate way to make up for the pension shortfall via taxes, would be to levy taxes that maximally fall on those who did “benefit” from the government programs. And could have voted for smaller government when they had a chance. Not to levy it on those who weren’t even born when all the idiocy that led to the underfunding went down.
LikeLike
Pension unit, my azz. It won’t be worth the paper it’s printed on when the politicians have 30+ yrs to play with it.
Put a silver eagle away for the kid instead.
LikeLike
You left out https://pensionpulse.blogspot.com/ whohas been postinf on pensions for 10+ years
LikeLiked by 2 people
This is where our “representative” government is not. Just as in the absurdity of not being able to fire bad teachers because of campaign contribution bribery and bullying, the public unions will not allow publicity respecting this problem, and the liberal press is only too happy to squelch these stories. Thus the country considers to suffer from the result of a complicit and corrupt media which hides the truth, preventing appropriate solutions to this and other crisis. The citizens be damned.
LikeLike
Com placement because no one can comprehend $$ in the millions, let alone trillions!!!
Sent from my iPhone
>
LikeLike
This is not as big a problem as everyone thinks. Look at the early remedies. Go bankrupt and cut payouts by fifty or seventy percent or whatever it takes. Screw the little guy and continue on. Everyone is going under the illusion that retirees will continue getting their pensions. They will not. There is not financial crisis when you assume pensioners will not be compensated.
LikeLike
There’s no political will for that, unfortunately. Far easier to run a Ponzi, paying 100% when investments support a 60% payout, using new contributions and investment ‘seed’ to keep it up.
The political class has failed us on economics. They are well versed in the art of the non-provable bribe.
LikeLiked by 1 person
Duh!
All political classes fail their captive underlings. On all things. Getting more than theirs, at the expense of those they can get that from, is what being the ruling class is all about, after all.
LikeLike
Spot on !
LikeLike
People tend to forget that the judges who also collect fat pensions determine the legal fate of the pensions and who must pay to keep them afloat. The politicians all collect fat pensions too. Who do you think they will protect?
So far the courts just continue kicking the can down the road. No surprise to me.
The politicians back public safety because the unions are their primary contributors. It’s disgusting how they gloat over the cops and the firefighters and refuse to criticize them when criticism is truly warranted.
They rob taxes and fees that were never earmarked to supplement public pension funds as secret bailouts.
If push comes to shove you will see TARP-like bailouts for the pension funds in the future.
Until there is a populist movement in the streets that forces the public sector workers to play by the same rules as the private sector workers – NOTHING WILL CHANGE.
LikeLike
Can’t there be a ballot initiative for states that extort the taxpayer when they cannot meet pension obligations. Wasn’t Meredith Whitney on a 60. minutes interview who predicted this pension tsunami back in 2009? She was widely ridiculed.
LikeLike
There could be.
But the judges and the lawmakers would never allow it.
It would be interpreted as unconstitutional.
They can interpret the law any way they want to.
You must know that by now.
LikeLiked by 1 person
It very well might be. The Constitution protects contracts directly in its original language. If you contract with someone to, say, “keep this school clean for 20 years and we’ll pay you $30K per year and then pay you $1K a month after you turn 65 for life” you can’t just vote at year 19 and 6 months “naaa don’t feel like it”.
LikeLike
Private sector workers want to have what public sector workers have. They don’t want to drag public sector workers down with them. They used to have pensions themselves. Some still do. They remember Reagan’s promise of the 3 legged stool of corporate pension, SS and personal savings as necessities for a comfortable retirement.
LikeLike
There is none so blind as he who will not see. And that’s almost everybody. Meanwhile, there are not too many options for those who do see. What is there that will retain its value?
LikeLiked by 1 person
There has been NO ONE more prescient and accurate on the global economy than Armstrong, yet you ignore his findings because they disagree with your BELIEF that the solution is ending the Fed and a gold-backed currency, even though Armstrong has shown a gold standard has never lasted throughout history.
https://www.armstrongeconomics.com/world-news/sovereign-debt-crisis/the-sovereign-debt-pension-crisis-expanding/
In 1985, Armstrong forecasted 2017 as the pivotal year in the pension crisis, as the Ponzi scheme comes unraveled with the collapse in Socialism and the Sovereign Debt Crisis. The question is not will pensions collapse, but how far will govt be allowed to go to save itself? Will people be out ranged when private pensions are captured? What about when the Fed’s take over 401K’s, or when Social Security goes poof when the govt bond bubble pops?
LikeLike
We know govt will always wait for a crisis, and never proactively solve problems. What about the rest of us? The one thing everyone can do to have a positive impact on a root problem is vote out every incumbent, every election. The elimination of the career politician is one of five things I sent you many years ago that all conservative bloggers could focus on to create a movement. I saw no collaboration, even though the 5-Steps are still valid today.
I guess Armstrong is right again. There is no stopping the cycles that will produce the “crash and burn”. The only question that remains is what comes next – Mad Max and totalitarianism, or a new Democracy with maximum freedom?
LikeLike
Armstrong = Trash
LikeLike
You just discredited yourself. Stick to fake news sites.
LikeLike
whether there will be a crisis if the increasing number of pension?
LikeLike
The modern version of Swift’s Modest Proposal. The Fed obviously only cares about the rich. Behind all their models is their real MO, let them eat cake. Of course the other half of the problem is the con put over by Wall St, and welcomed by CEOs and politicians, regarding unreasonable returns.
LikeLike
Didn’t Meredith Whitney predict this pension tsunami back in a 2009 60 Minutes interview. She was widely criticized for this. Who knows when the SHTF will happen. The only thing for certain is that it will be ignored until it can’t. I am wondering if a ballot initiative can be used in states that will try to extort the taxpayer when they cannot meet pension obligations.
LikeLike
The LAST THING we need is Washinton DC politicians getting involved in this “crisis”. The responsibility for making sure their pensions are fully funded is on the workers who are going to depend on them. Remember, a pension is supposedly deferred compensation, that is current $ deferred in contract or employment negotiation that is set aside (and not currently taxed) and to be received in the future after the end of a working career.
If the deferred $ are placed into a separate account which is owned by and the investment decisions controlled by the employee, he or she knows from year to year exactly how much $ is in the account. This the “defined contribution” approach and is embodied today in the form of the 401-k plan. The $ in the employee’s separate individual account are not subject to any creditor, not subject to tampering by politicians, and the future benefits are not based on “promises” by an actuary. But the future benefit is subject to the investment performance of the $ in the separate account.
Many employees, especially government workers, apparently don’t like or trust the responsibility of managing their own retirement plan. They would rather trust some committee to invest their deferred compensation for them, and therefore they have someone to blame when things don’t go according to the “promises”. Also, they don’t have to “keep an eye” on the plan, since the outcome of years of investment results, economic crises, market fluctuations, interest rate manipulations by the Fed, etc, etc, has been transferred from themselves to the people who made the “promises”. This is the old-fashioned Defined Benefit plan.
What the government workers failed to account for is the fact that the politicians also have other constituents, the taxpayers, who would vote the politicians out of office if they raised taxes to fully fund the pension plan. So, the easiest way, for everyone involves, is to continue the charade of investment assumptions that cannot be met. As long as current retirees are receiving their montly checks without reduction, the charade will continue. Until one day it won’t and the unfortunate employees and retirees will discover the extent of the lies they have accepted as reality. Because they wanted to, just like a wife who knows her husband is cheating on her but refuses to acknowledge it.
LikeLike
The problem with your thesis is that pension funds can, and do, change the rules in the middle of the game. You could work for a company for ten years, and then they could change the funding. Corporations have done this lots to boost their earnings.
LikeLike
Unless there is a provision for bankruptcy taxpayers are on the hook
LikeLike
Congratulations Detroit pensioners!!
You have a rock solid, irrefutable legal claim on empty street after empty street of abandoned houses that haven’t had even minimal maintenance for the last 7-8 years (and many were being neglected long before the 2008 bubble burst).
If the city can afford the legal bills to repossess the houses (courts and lawyers charge money even after the previous owners have abandoned the dilapidated messes)… If the city can get funding to help new occupants fix up the houses to code… If they can find people willing to put in the work to do the fixes despite knowing the pensioners might seize the property later….
Even with a rock solid legal claim on cr-p assets, pensioners will be lucky if they get 25 cents on the dollar
LikeLike
Mish,
in a situation in which BK is illegal, what happens when cash contributions are less than cash payments ? what happens when a pension fund becomes cash flow negative ? The Ill fund which is 13% funded is luke’s very close to being cash flow negative.
If you can’t restructure your liabilities, what is solution when you have no more cash ?
LikeLike
When government bureaucrats don’t feel like keeping their promises, they just close the bullet proof window they hide behind and pretend like they can’t hear the taxpayers screaming at them.
Same thing will happen here in reverse.
The lawyers will take the 13 cents, and leave DPW workers with just the stuff they were supposed to clear out of the street drains.
What goes around, comes around bureaucrats!!!
LikeLike
So the FED printed what $16 Trillion and continues to give the BANKSTERS free money at 1/4% interest but god forbid we even consider doing something for working class people and their pensions!
LikeLike
Now Garry, you and Mike (see below) failed to coordinate your socialist propaganda. Soros will only promise to pay one of you for your social justice nonsense, the other one will have to hit up the clinton foundation or maybe a university budget (gotta screw over the students).
Everyone else: get out your violins and play a sad tune for the socialists like Garry and Mike
LikeLike
Medex Man – I agree with you on some points, but I also agree with Garry and Mike on some of their points. Speaking of socialism, when the bankers got bailed out in 2008, that was most definitely socialism for the rich. It was a travesty. They should have been left to twist in the wind and jailed. When this all goes down, they’re going to lose everything they stole.
The Fed and the banks are furiously trying to create inflation (they’re failing), debasing the currency, screwing the guy who saved some money in order to not be a burden on anyone else in his retirement years. And it’s all being done in order to bail the bankers out, enrich them some more. Again, socialism for the rich, done under the guise of trying to help the economy. They could give a sh*t about the little guy.
No one should ever have been involved in any pension scheme. People should have saved for their own retirements. Of course, had they done so, they wouldn’t have been the consumers they ended up being. The economy would have been a lot slower, but in the end we would not have had the inflation we’ve had.
Had people saved for their own retirements, there would have been hell to pay from retirees if the government started printing up money. They would have put a stop to that type of crap happening.
LikeLike
Net, it pays to be blind. Always does in totalitarian societies.
Those that act “responsibly”, will simply have their pensions confiscated to pay for those that blew theirs on hookers and blow, and are now “starving in the streets.” Under the slogan of “shared sacrifice.” As long as government CAN take from the responsible, it WILL take from them, as they are the only ones with anything left to take.
It’s the same mechanisms that guarantee an endless stream of bank bailouts, whether overtly or via debasement. Why be a responsible lender, when the Fed will just debase your assets to make up for the “mistakes” of those who knowingly take on unsustainable risks, then use part of the money they made from doing so to hire lobbyists babbling about “tanks in the street?”
The proper, and only sustainable, response from a public that is anything more than a captive bunch of, at best, half literate indoctrinated rah-rah sycophants, is to simply say “So what? People have died since the dawn of time. Another few millions won’t make a difference! And who cares about “tanks in the street”? No pension crisis in Mogadishu, and that’s a much freer place than this dump has been for the past century and a half anyway. Eff You and bring it on! I’m a better shot than you are anyway! And besides, there are tens of millions of us, and we’re not simply a bunch of incompetent leeches.”
And the funny thing is, if the public were that sensible, there wouldn’t end up being much shooting in the streets anyway. Paul Ryan certainly wouldn’t grab his gun and attempt to go door to door collecting taxes. Neither would anyone from Gldman Sachs. And the people they expect to do so on their behalf, are generally regular Americans. Hence would quickly realize whose side is the right side, and whose consists of expendable scum. Problem solved.
LikeLike
Mish, you know the answer as to why “they aren’t doing anything about this problem”. Acting in a timely and prudent manner will only anger everyone. Cuts to pension benefits, substantial tax increases, and reduced services would result and most politicians would be thrown out of office.
Better to wait for a “crisis”, so the crony-political axis can be activated and the federal government can TARP the problem away. That solution is also looking more likely for the student loan debacle as well. It is the preferred solution for politicians, so they can say they “saved” the country again, after having caused the problem themselves.
If the country is stampeded into another TARP-like rescue, the minimum price demanded by taxpayers should be the complete abolition of public sector unions
LikeLike
Yves at Naked Capitalism also often addresses pensions, esp. Calpers.
LikeLike
He travelled! How do they miss that? Took 3 steps if not 4
Robert J. Ducanis Winter Park, FL rjd1955@hotmail.com
________________________________
LikeLike
There is more rope…
State retirement funds will soon buy state bonds issued to find retiree payouts.
That is how you keep it going when your credit rating goes to shit.
You have a captive audience in some states like NJ.
CDO x CDO.
What could possibly go wrong?
LikeLike
Those of us not in a pension plan also run the risk of a collapsing investment portfolio. My sympathies, but how is this a tragedy for everybody else?
LikeLike
odds are your paycheck (which does not include any pension) is smaller than the public employees that are whining about pensions after 20yrs of sorta, kinda, but not really working.
You got a smaller paycheck, roads covered in pot-holes, failing schools, and you had to work 45 years instead of 20 like the public sector — now you want to take away the pensions they didn’t earn too?
LikeLike
As several other regular commenters have pointed out — this pension thing was pointed out by lots of people in the past (Merideth Whitney was one of many). CalPers has been pointing out that many municipalities are behind on payments — years behind. Both private sector “bankers” and public sector pension managers have been talking about this problem for years.
The Orange County CA “money market fund” explosion was an election issue for 8-9 months before that election, then they ignored the problem for months, then their cash management group exploded in their face — and then all the socialists in California acted surprised. Like it hadn’t been in every newspaper, TV debate and radio talk show for more than a year.
The moral of the story is that politicians never intended to pay these pensions — because they never funded them. Read my lips and give my intern a BJ… political promises aren’t worth a thing, and neither are public sector pensions.
They will not be paid, regardless of whatever legal mumbo jumbo. In some states, the lazy public workers may or may not have a legal claim on empty abandoned houses (like Detroit). A rock solid claim, but worthless since the public sector chased everyone away with taxes and corruption.
LikeLike
I notice from a lot of the other comments here that Mish’s blog has been discovered by obama’s free sh!t army. They want everything for nothing, and they won’t stop whining about how entitled they think they are. If only they put half as much effort into working?
Not a good sign for Mish’s blog.
LikeLike
If only the bank would stop confiscating pensions by printing. Bankers are taking from retirees, and future retirees, to enrich the financial sector.
LikeLike
Oh look, Mike is a member of obama’s free sh!t army, and he’s posting socialist propaganda!
Everyone get out your violins and play a sad tune for Mike
LikeLike
“…six Los Angeles public safety officers who collected over $1 million apiece last year in pensions…”
LikeLike
“Is Bankruptcy For Illinois The Answer?”
http://www.zerohedge.com/news/2017-03-26/bankruptcy-illinois-answer
LikeLike
“If the problem is too big to be ignored, why is nearly everyone complacent?”
Considering only a few dozen GOP Freedom Caucus members fully grasp the Obamacare numbers set to come crashing down in coming months, any awareness at all outside of the minority currently collecting pensions would be surprising. Though Marx was very numbers and data based, modern socialist ideologues are blind to numbers and operate on a blind misplaced faith that their atheist universe will provide miracles. Or perhaps they are simply counting on the power of the police state to do the looting for them. Adding inflated pensions every year to pension fund liabilities means that no pension fund can ever become solvent. Unless you count a contrived hyperinflation as a form of solvency.
If you are one of the “six Los Angeles public safety officers who collected over $1 million apiece last year in pensions,” you will be wealthy even if your annual payout crashes to zero. So, why worry if you are on the right side of the Ponzi curve? Millennials, last in on the Ponzi, will get the big shaft, and likely have more pressing survival issues at the moment.
LikeLike
“It’s no coincidence that pensions’ flight from safety has coincided with the drop in interest rates. That said, unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate.”
It’s no coincidence that these guys are reckless in their decision making. I suspect political motives (especially from CALPERS) are the real issues that make them “unlike their private peers”.
LikeLike
“In fiscal 2016, which ended June 30th, the average return for public pensions was somewhere in the neighborhood of 1.5 percent.”
As noted in the Dalbar study, these are Joe Sixpack type returns, not up to standards you’d expect from pension managers. Is this really all that difficult? In the 401(k) plan offered by my own employer, there are about a dozen or so choices, including Dodge & Cox Stock Fund (DOD).
As of the most recent statement date DOD was up over 38% YOY and even with a harsh pullback in the last couple of weeks it’s still up over 20%. I guess I could point out that California based Dodge & Cox is a plain vanilla stock fund using an active, not passive strategy. It is one of the biggest mutual funds in the world and very popular in 401(k) plans. It’s been around since 1965. You just don’t need all the exotic holdings these pensions are getting themselves into.
https://www.msn.com/en-us/money/funddetails/fi-FOUSA00C3O?symbol=DODGX&form=PRFISB
LikeLike
“. …somewhere in the neighborhood of 1.5 percent.”
Yep. That’s Joe Sixpack’s neighborhood.
LikeLike
2016 is just one year. Florida’s state pension plan has averaged over 9% annual returns for the last decade (brother’s a cop so I keep track). Yes Chicago, Cali and a few other states have problems. Most don’t. Like a lot of work here, facts are cherry-picked to meet an ideological agenda, not a sober, reality based discussion.
LikeLike
Nearly all states have problems
LikeLike
I believe that when cold reality sets in legislation will be passed that makes bankruptcy a legal option. Everything is on the table at that point even their bonds. That will set precedent for future bond sales and their pricing will reflect that risk. I am wondering what happens to the bond insurers when legislation is passed allowing state and municipal bankruptcy. Are they obligated to pay after the rules are changed.
LikeLike
@hnk,
In bankruptcy law, you establish an order of payment. Everything’s on the table, but based on the order of payment, your pain may be less or more. I would expect Wall Street to want to be deeply involved in any legislation. But most elected officials are in pension programs themselves so it would be an ugly fight. Expect roads and water systems to get sold off to Wall Street and taxpayers having new masters where they pay exorbitant road tolls and water rates.
@Mish,
Everybody always carries some level of risk. However, the vast majority of pensions have simple and easy resolutions to their problems:
1. Increase the vesting period for new hires.
2. Reduce the employee multiplier. Cops get 30 years x a multiplier of 3, 90% payout after retirement of their highest five years. Make it 2 for incoming cops.
3. Increase employee payments into the system (Florida did this in 2011 or 2012)..
4. Increase employer payments into the system.
5. Last resort: increase taxes.
Small contributions of 1 – 4 each over a few years shores up nearly every system in the country with a few exceptions of very bad players: Chicago, Cali, NJ, etc…
Florida makes small adjustments nearly every year, and currently sits at 88% funding. But over a decade, it moves between 85% and 105%, nearly every decade.
You’ve shared in the past what you pay for property taxes and if I was in that boat, I’d be pretty pissed too. But Chicago and Cook County have historically poor governance. Most places aren’t like that.
LikeLike
Florida’s pension system, back in 2010 was less than 60% funded with a funding gap of about $99 billion. Has Florida done anything to close that gap?
http://globaleconomicanalysis.blogspot.com/2010/04/interactive-map-of-public-pension-plans.html
LikeLike
“2016 is just one year.”
Yes, it is.
2016 featured the worst performing calendar year start in US stock market history. It was about the only meaningful correction seen during Obama’s presidency. I’m not convinced that’s the place to go to pick cherries if you’re trying to make a bullish case for equities.
Nevertheless, it was 2016 that Danielle DiMartino Boothe uses in the article when she cites the awful 1.5% figure.
In true Joe Sixpack fashion, my research went no further than the website of my 401(k) plan to reveal the huge gap in performance. That was my point to begin with : this stuff isn’t that difficult that we should see such a wide gulf in performance results.
These public pension fund managers should be viewed in the same way that Barney Frank was some sort of banking regulator. They hold the title of these positions, if not the competency thereof. Politics is at play way more than it should be, which is not at all.
LikeLike
Everybody is complacent as long as the current pensions are paid. Taking Greece as a painful example, pensions will eventually suffer haircuts or worse. One day they will declare: “There is no money in the till; wait until next month, or even next year! or forever.”
Then the taxpayer will be called upon to come up with the pensions obligations, making the whole system a welfare system and bringing the government finances to its knees by multiplying the national debt with its natural consequences.
Change the pension laws if this is in any way possible, and bring them to a sustainable level.
LikeLiked by 1 person
Administrators have strong incentives to lay low until crisis strikes. Later, a market crash may get them off the hook. If not? Whether or not an excuse materializes, who else will staff the committee to investigate and fix the problem?
LikeLike
The is nothing more greedy than Public Sector Unions/workers who have BOUGHT their grossly excessive pensions & benefits from our self-interested vote-selling, contribution-soliciting Elected Officials with BRIBES disguised as campaign contributions and election support.
Public Sector pensions EVERYWHERE are ROUTINELY 2 to 4 times (4 to 6 times for Safety workers) greater in “value upon retirement”* than those typically granted Private Sector workers who retire at the SAME age, with the SAME pay, and the SAME years of service.
* the far greater PUBLIC Sector “value upon retirement” arises from not just the MUCH greater per-year-of-service pension formula- factors, but the MUCH younger Public Sector full/unreduced retirement ages, and COLA increases, almost unheard of in Private Sector plans.
———————
Taxpayers ….REFUSE to fund anything of greater value than what YOU get in retiree pensions & benefits from YOUR employer.
LikeLike
“How about dealing with the problem before panic sets in rather than after?”
That’s the “Catch-22”. Any honest attempt at “…. dealing with the problem” is what will TRIGGER the panic. And then down the Slippery Slope we will merrily go.
LikeLiked by 1 person
Mish, do you have this posted on Facebook? Some of my less than financially educated public employees really need to read this. Since they do not believe what I have been saying for 4 years now. The pension system is F****** by fund managers and lack of contribution by Government. Pension managers are too optimistic in the Rate of Return, and mayors, state managers or town selectman defer contributions. Even worse promise Defined benefit pensions without studying the funding of said plans. A typical response, I get, “Well they have to give us what is agreed upon by contract, so they will raise taxes.” My only response is to shake my head, and respond “ You are an idiot, why do you think people are leaving the state in the first place?”
Rodrigo Furtado, and I do not have a pension waiting for me at the end of my career.
LikeLike