Category Archives: Pensions

Social Security proposes “immediate and permanent reduction” in benefits, by Simon Black

It’s a fact: Social Security will run out of money, and not that many years in the future. From Simon Black at sovereignman.com:

On a deep, dark evening last June in the spectacularly celestial deserts of northern Chile, scientists made a phenomenal discovery.

It was a supernova… one that they named ASASSN-15lh.

This wasn’t just any supernova. It was the BIGGEST and BRIGHTEST supernova ever recorded.

Supernovas are exploding stars whose ejected mass and energy can create a light show so brilliant that they can sometimes be seen with the naked eye in our own night sky.

At its most luminous, ASASSN-15lh was over 500 BILLION times brighter than our own sun, and FAR greater than the previous record holder.

This is so bright that, according to one of the lead researchers, if it had been located within our own galaxy there would have been no darkness on earth for weeks.

Fortunately for us, ASASSN-15lh was from a galaxy far, far away– 3.8 BILLION light years away. So its intensity didn’t have much of an effect on Planet Earth.

Of course, such a prodigious distance also means that ASASSN-15lh actually went supernova 3.8 billion years ago.

The star was so far away from our planet that it took billions of years for the light from the supernova to reach us.

It’s mind boggling to think about. But in a way, the same can be said of many of the financial risks that we face.

Consider the exploding star of Social Security, one of the largest and most important pension programs in the world.

Literally tens of millions of people depend on it.

The Social Security Administration itself reports that 62% of recipients rely on the program for at least HALF of their income.

And further research by the Center on Budget and Policy Priorities (CBPP) shows that, without Social Security, 22.1 million Americans would fall below the poverty line.

Needless to say, major cuts to the program would have nuclear effects.

And yet, year after year, the Social Security Board of Trustees publishes an annual report that describes the program’s terminal financial challenges in excruciating detail.

To continue reading: Social Security proposes “immediate and permanent reduction” in benefits

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California Supreme Court Set For Ruling That Could Cut Pensions For Public Workers, by Tyler Durden

If bloated public pensions are to be reduced, lawmakers are going to have to go to court and get legal precedents and supposed state constitution guarantees that have been held not to permit reductions and changes for existing state and local employees overturned. From Tyler Durden at zerohedge.com:

For decades now public pensions have been guided by one universal rule which stipulates that current public employees can not be ‘financially injured’ by having their future benefits reduced.  On the other hand, that ‘universal rule’ also necessarily stipulates that taxpayers can be absolutely steamrolled by whatever tax hikes are necessary to fulfill the bloated pension benefits that unions promise themselves.

Alas, that one ‘universal rule’ may finally be at risk as the California Supreme Court is currently considering a case which could determine whether taxpayers have an unlimited obligation to simply fork over whatever pension benefits are demanded of them or whether there is some “reasonableness” test that must be applied.  Here’s more from VC Star:

At issue is the “California Rule,” which dates to court rulings beginning in 1947. It says workers enter a contract with their employer on their first day of work, entitling them to retirement benefits that can never be diminished unless replaced with similar benefits.

It’s widely accepted that retirement benefits linked to work already performed cannot be touched. But the California Rule is controversial because it prohibits even prospective changes for work the employee has not yet done.

The ballooning expenses are an issue that Gov. Jerry Brown will face in his final year in office despite his earlier efforts to reform the state’s pension systems and pay down massive unfunded liabilities.

His office has taken the unusual step of arguing one case itself, pushing aside Attorney General Xavier Becerra and making a forceful pitch for the Legislature’s right to limit benefits.

“Lots of people in the pension community are paying attention to these cases and are really interested in what the California Supreme Court is going to do here,” said Amy Monahan, a University of Minnesota professor who studies pension law.

“For years, self-interested parties, overly generous promises whose true costs were often shrouded by flawed actuarial analyses, and failures of public leadership had caused unsustainable public pension liabilities,” his office wrote. A ruling is expected before Brown leaves office in January 2019.

Meanwhile, it’s not just California taxpayers that have an interest in the Supreme Court’s decision as twelve other states also observe a variation of the ‘California Rule’, said Greg Mennis, director of the Public Sector Retirement Systems project at Pew Charitable Trusts. One of them, Colorado, has walked it back a bit, he said, requiring “clear and unmistakable intent to form a contract before pensions will be contractually protected.”

To continue reading: California Supreme Court Set For Ruling That Could Cut Pensions For Public Workers

Forget The Phony Pension Accounting, Here’s How Much Your State Pension Is Really Underfunded, by Tyler Durden

If a pension administrator assumes a 7 percent annual return, the pension looks a lot less underfunded than if the administrator assumes a 3 percent annual return. The problem is, there are no safe investments returning 7 percent these days. From Tyler Durden at zerohedge.com:

The phony assumptions that go into calculating public pension underfundings in the United States are a frequent topic for us.  As our readers are aware, state pension administrators are given fairly wide leeway to simply pick a discount rate out of thin air.  Of course, since pensions are nothing but a massive stream of future liabilities that stretch out into perpetuity, every 100 bps increase can substantially, and artificially, lower the fund’s reported underfunded level.

In fact, we estimated the impact of higher discount rates on underfunding levels in a post entitled “An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion“…here was the result:

Pension Underfudning

Fortunately, we’re not the only ones that see through the ridiculously phony assumptions that go into duping retirees and taxpayers as the team at American Legislative Exchange Council (ALEC) has just dropped a report which reviews the financial health of public pensions all over the country if you toss out their 7.5% discount rate and replace it with a risk free rate…

Faulty accounting and reporting methods obscure the magnitude of unfunded liabilities. Partly in response to the devastating impact of the Great Recession, the Governmental Accounting Standards Board (GASB) made two significant changes in 2012 (Statement No. 67, Financial Reporting for Pension Plans and Statement No. 68, Accounting and Financial Reporting for Pensions) to the methods used for measuring the financial health of pension plans. GASB intended these changes to increase transparency, consistency, and comparability of pension information. Public pensions are now required to report their assets and liabilities using a standardized actuarial cost method, to disclose investment returns, and to include unfunded pension liabilities on state balance sheets.

Unfortunately, states have found ways to work around these requirements and paint an unrealistically rosy picture of their pension funding status.

The Center for State Fiscal Reform at ALEC analyzes the annual official financial documents of more than 280 state-administered pension plans using more realistic investment return assumptions in order to gain a clearer picture of the pension problem. The unfunded liabilities of each pension plan are revalued using a discount rate equal to a risk-free rate of return, best represented by debt instruments issued by the United States government. This year’s study uses a risk-free rate of 2.142 percent, derived from an average of the 10- and 20-year U.S. Treasury bond yields over the course of 12 months spanning April 2016 to March 2017. Based on these revised investment return assumptions, we report on total unfunded pension liability, unfunded pension liabilities per capita, and the funding ratio of these plans.

To continue reading: Forget The Phony Pension Accounting, Here’s How Much Your State Pension Is Really Underfunded

Truth and Consequences, by xrugger

How many public employees realize their salaries, benefits, and pensions are too good to be true? From xrugger at theburningplatform.com:

Every time I read a story about the financial travails of a state like Illinois, I am reminded how thoroughly corrupted and dishonest the various levels of government in this country have become. Additionally, the employees of said governments have reached a level of willful ignorance that is truly astounding.

Governments have promised vastly more than they can deliver in terms of pensions and benefits. Now, to a simple man like me, making a promise with the full knowledge that the promise will one day be broken is what we commonly refer to as a lie. So that makes government a collection of lying scumbags who will promise anything to their public sector drones in order to maintain control over, not only said drones, but over the rest of us as well. Political liars will promise anything to anyone in order to maintain their power and prerogatives. That power is built on a rapidly deteriorating foundation of mendacity and delusion.

Therefore, that makes government employees innocent victims right. Wrong. It makes government employees who willingly voted for, and maintained in power, those who lied to them, partners in the lie. They knew at some level they were being lied to. What does that make them with regard to the lie? Go ahead. Say it with me. It makes them complicit in the lie and by being complicit in the lie; they forfeit any claim to victimhood.

It goes something like this: Politicians lie to win elections. Voters all know this, but they believe the bullshit because they want to believe the bullshit and the lies of politicians validate their world view and make them “feel” better. With public employees, it goes a step further. When they believe the lies, they not only “feel” better, their lives are materially improved by believing the lie and keeping the liars in power. By accepting that material improvement in their lives (generous pension, benefits, early retirement ages, etc.), they have become partners in the lie. The best part for both the liars and the lied to is that they do not have to pay for it…at least not right away and that is kind of the point.

To continue reading: Truth and Consequences

Spain’s Pension System Hits Crisis Point (and Everyone Ignores it), by Don Quijones

The global pension pile-up continues. From Don Quijones at wolfstreet.com:

But how did things get this bad?

By most measures, sun-blessed Spain is an idyllic place to grow old in. Life expectancy is among the highest in the world, and the national pension fund’s payout ratio (pension as percent of final salary) is the second highest in Europe after Greece. But if current trends are any indication, that may soon be about to change.

The country’s Social Security Reserve Fund, which was meant to serve as a nationwide nest egg to guarantee future pension payouts — given Spain’s burgeoning ranks of pensioners — has been bled virtually dry by the government. This started ever so quietly in 2012 when the government began withdrawing cash from the fund. Some of it was used to fill part of the government’s own fiscal gaps while billions more were tapped to cover the Social Security system’s growing deficits. As a result the pension pot has shrunk from over €66 billion in 2011 to just €15 billion in 2016.

To avoid wiping out the fund altogether this year, the Spanish government extended a €10.1 billion interest-free loan to Spain’s social security system, which enabled it to pay out the two extra pension payments due in June and December. That way, only €7-7.5 billion will be tapped from Spain’s public pension nest egg. Emptying the pot altogether this year would have been politically unpalatable, says El País. Instead, it will be emptied next year as the social security system racks up yet another massive annual shortfall.

Last year it registered its biggest deficit in its history (€18.1 billion), which was covered by the pension pot. In 2017, the deficit is forecast to be €16.6 billion, according to the government’s own projections. That’s roughly 1.5% of Spanish GDP. Another €18-20 billion will be needed next year. Successive deficits are expected until at least 2020, when there will still be an annual deficit of around 0.5% of GDP — and that’s according to the government’s own rosy figures!

To continue reading: Spain’s Pension System Hits Crisis Point (and Everyone Ignores it)

Are You Infuriated Yet? by Chris Martenson

There are rants and then there are rants. This is a first-class rant from Chris Martenson, focused on pensions and medical care. from Martenson at peakprosperity.com:

More and more, I’m encountering people who are simply infuriated with how our “leaders” are running (or to put it more accurately, ruining) things right now. And I share that fury.

It’s perfectly normal human response to be infuriated when an outside agent hurts you, especially if the pain seems unnecessary, illogical or random.

Imagine if your neighbor enjoyed setting off loud explosives at all hours of the day and night. Or if he had a habit of tailgating and brake-checking you every time he saw your car on the road. You’d been well within your rights to be infuriated.

Or to use a much more common example from the real world : When your politicians repeatedly pass laws that hurt you in favor of large corporations — that, too, is infuriating. Especially if those actions run directly counter to their campaign promises.

There’s a lot of be infuriated about in the world today, so go ahead and embrace your rage. By doing so, you’ll be in a better mindset to understand things like Brexit, Catalonia, and Trump, each of which is a reflection of the fury of your fellow citizens, who are finally waking up to the fact that they’ve been victims for too long.

An easy prediction to make is that this simmering anger of the populace is going to start boiling over more violently in the coming years. Welcome to the Age of Fury.

‘Over The Top’ Dumb

Do you ever get the sense that, as a society, we’re being dangerously reckless? Perhaps so dumb that we might not recover from the repercussions of our stupidity for many generations, if ever?

There are economic and financial idiocies in motion that are, by themselves, unsolvable predicaments without a peaceful solution. But when combined with resource depletion and declining net energy, they’re positively intractable.

Take for example the hundreds of trillions of dollars-worth of underfunded entitlement and pension promises. Those promises cannot be kept and they cannot be paid. Everybody with a basic comprehension of math can conclude as such.

Yet we continue to operate as if the opposite were true. We comfort ourselves that, somehow, all the promised future payouts will be made in full — even though the funds are insolvent, their returns are much lower than the actuarial projections require, and payout demand mercilessly rises each year.

Spoiler alert: This isn’t some future disaster lying in wait. It’s unfolding right now.

To continue reading: Are You Infuriated Yet?

Uncle Sam’s Unfunded Promises, by John Mauldin

John Mauldin gets two articles on SLL tonight, and they’re both excellent. From Mauldin at mauldineconomics.com:

Here’s a surprisingly profound question: What is a promise? Dictionaries offer various definitions. I like this one: “An express assurance on which expectation is to be based.”


Image: Simon James via Flickr

That definition captures the two-sided nature of a promise. One party offers an assurance, which the other converts into an expectation. You deposit money in your checking account, and the bank assures you that you can have it back on demand. You expect that the bank will fulfill its promise when you visit an ATM.

Governments likewise make promises, but those are different. Government is the ultimate enforcer of promises, but we have no recourse if it chooses to break them – except at the ballot box. As we’ve seen in recent weeks regarding public pensions, that’s ineffective when the promises were made long ago by officials who are no longer in office.

The federal government’s keeping its promises is important for everyone in the US, because almost all of us are part of the largest public pension system: Social Security. We pay taxes our whole working lives and expect the government to give us retirement benefits. But what happens if it can’t?

Three weeks ago we visited the problems with local and state pensions. Last week we looked at European pensions. This week we are going to take a hard look at the unfunded liabilities and debt of the US government. And even though the federal unfunded pension liabilities dwarf those of state and local pensions, I want to make it clear that I believe the state and local problems will be far more intractable.

I have to warn you: You may be hopping mad when you finish reading this.

Doubled Debt

In the United States we have two national programs to care for the elderly. Social Security provides a small pension, and Medicare covers medical expenses. All workers pay taxes that supposedly fund the benefits we may someday receive. That’s actually not true, as we will see in a little bit.

To continue reading: Uncle Sam’s Unfunded Promises