Category Archives: Pensions

Mauldin: Social Security Is Screwing Millennials, by John Mauldin

The older generations like to rag on millennials, but spend little time thinking about the ways it’s indubitably screwing them, even though the screwees may be their own children or grandchildren. From John Mauldin at realinvestmentadvice.com:

Social Security is a textbook illustration of how government programs go off the rails.

It had a noble goal: to help elderly and disabled Americans, who can’t work, maintain a minimal, dignified living standard.

Back then, most people either died before reaching that point or didn’t live long after it. Social Security was never intended to do what we now expect, i.e., be the primary income source for most Americans during a decade or more of retirement.

Life expectancy when Social Security began was around 56. The designers made 65 the full retirement age because it was well past normal life expectancy.

No one foresaw the various medical and technological advances that let more people reach that age and a great deal more, or the giant baby boom that would occur after World War II, or the sharp drop in birth rates in the 1960s, thanks to artificial birth control.

Those factors produced a system that simply doesn’t work.

A few modest changes back then might have avoided today’s challenge. But now, we are left with a crazy system that rewards earlier generations at the expense of later ones.

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Illinois cities are getting crushed by pension costs. Just look at Peoria, Illinois. By Ted Dabrowski and John Klingner

Illinois is just a preview of coming attractions for most of the rest of the United States. From Ted Dabrowski and John Klingner at wirepoints.org:

Illinois politicians’ refusal to address skyrocketing municipal pension costs is destroying cities across the state. Some cities like Harvey and East St. Louisare beyond repair, with the Illinois Comptroller already stepping in to confiscate city revenues on behalf of the municipalities’ grossly underfunded pension plans. Most other cities are deteriorating quickly. They’re fighting ever-increasing pension costs that are swallowing city budgets and chasing residents away. More than half of Illinois’ 650 public safety plans are less than 60 percent funded.

Peoria is one of those struggling cities. No, it’s not a Harvey or an East St. Louis, but it’s certainly in a downward spiral like many other cities. Peoria officials are adding new taxes and fees to deal with the city’s struggling budget. A new utility tax was added in 2018, along with a public safety pension fee that’s being ratcheted up over the next couple of years. Their efforts to tax more are likely to be futile. The numbers justify those doubts.

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Illinois’ financial decay spreads to cities across the state, by Ted Dabrowski and John Klingner

De facto insolvency is spreading across Illinois’s municipalities. From Ted Dabrowski and John Kligner at wirepoints.org:

Illinois’ finances aren’t just decaying at the top, they’re falling apart everywhere. The state’s one-size-fits-all pension laws and overly generous benefits have left many cities suffocating under impossible pension debts as their populations shrink, tax burdens jump and resident incomes stagnate.

Without an amendment to the Illinois Constitution’s pension protection clause – and subsequent pension reforms – expect many cities to head toward insolvency.

The map below shows just how wide and deep the crisis is. Of the 630 downstate police and fire pension funds that reported data to the Illinois Department of Insurance in 2017, 57 percent had funded ratios lower than 60 percent. And nearly 100 funds had funded ratios below 40 percent.

What’s worse, the downstate pension decline has occurred during one of the nation’s longest-ever bull runs. If Illinois public safety pensions are doing this poorly in a great economy, imagine their struggles during an eventual downturn.

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Labor Day Reflections on Retirement and Working for 49 Years, by Charles Hugh Smith

Current economic policies will obliterate the idea of retirement for many people. From Charles Hugh Smith at oftwominds.com:

What happens when these monstrous speculative bubbles pop?

Let’s start by stipulating that if I’d taken a gummit job right out of college, I could have retired 19 years ago. Instead, I’ve been self-employed for most of the 49 years I’ve been working, and I’m still grinding it out at 65.

By the standards of the FIRE movement (financial independence, retire early), I’ve blown it. The basic idea of FIRE is to live frugally and save up a hefty nestegg to fund an early comfortable retirement. As near as I can make out, the nestegg should be around $2.6 million–or if inflation kicks in, maybe it’ll be $26 million. Let’s just say it’s a lot.

You’ve probably seen articles discussing how much money you’ll need to “retire comfortably.” The trick of course is the definition of comfortable. The conventional idea of comfortable (as I understand it) appears to be an income which enables the retiree to enjoy leisurely vacations on cruise ships, own a boat and well-appointed RV for tooling around the countryside, and spend as much time golfing or boating as he/she might want.

FIRE retirees might opt for socially aware volunteer work or hiking trips in remote regions. Whatever the activities, the basic idea here is: retirement = no work = enough cash to do whatever I please.

Needless to say, Social Security isn’t going to fund a comfortable retirement, unless the definition is watching TV with an box of kibble to snack on.

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“We Are Going Up In Flames”: New Jersey In “Worse Shape Than Any Other State” Senate President Admits, by Tyler Durden

It looks like New Jersey, rather than Illinois, may be winning the race to the fiscal bottom. From Tyler Durden at zerohedge.com:

For years, it was conventional wisdom that the most financially-challenged state in the US – whether it comes to overall debt burden, outlays, tax collections, underfunded pension and retirement obligations, or simply credit rating – was Illinois, followed closely by New Jersey in second place.

However, according to New Jersey’s Senate president, conventional wisdom is wrong. In an interview with Bloomberg, Senator Stephen Sweeney, a Democrat, said that that credit-rating companies may be underestimating the severity of the state’s financial strains by giving it the second-lowest grade after Illinois.

“We are in worse shape than Illinois,” Sweeney said. “We are not investing in education, we are not investing in the areas that we want because all the money is going to pensions and health care.”

As Bloomberg notes, these comments underscore the persistent fiscal pressure on New Jersey, a high-tax state contending with massive debts to employee pension funds after years of failing to set aside enough to cover the $212 billion of benefits that have been promised. As extensively discussed in the past, New Jersey’s retirement system had about $82 billion of assets in 2018, only 38% of what it needs to cover checks that are owed in the decades ahead. That’s lower than any other state system in the U.S., according to data compiled by Bloomberg. The state’s obligation for retirees’ health care benefits adds another $90.5 billion. The state’s solution? Raise expected pension fund returns from 7.0% to 7.5%!

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The $6 Trillion Pension Bailout Is Coming, by Lance Roberts

Pension funds are one bear market away from Armageddon. From Lance Roberts at realinvestmentadvice.com:

Fiscal responsibility is dead.

This past week, Trump announced he had reached an agreement with Congress to pass a continuing resolution which will suspend the debt ceiling until July 2021.

The good news is that it will ONLY increase spending by just $320 billion. 

What a bargain, right?

It’s a lie.

That is just the “starting point” of proposed spending. Without a “debt ceiling” to constrain spending, the actual spending will be substantially higher.

However, the $320 billion is also deceiving because that is on top of the spending we have already committed. As I noted just recently:

“In 2018, the Federal Government spent $4.48 Trillion, which was equivalent to 22% of the nation’s entire nominal GDP. Of that total spending, ONLY $3.5 Trillion was financed by Federal revenues, and $986 billion was financed through debt.

In other words, if 75% of all expenditures is social welfare and interest on the debt, those payments required $3.36 Trillion of the $3.5 Trillion (or 96%) of revenue coming in.” 

Do some math here.

The U.S. spent $986 billion more than it received in revenue in 2018, which is the overall “deficit.” If you just add the $320 billion to that number you are now running a $1.3 Trillion deficit.

Sure enough, this is precisely where I forecast we would be in December of 2017.

“Of course, the real question is how are you going to ‘pay for it?’ On the ‘fiscal’ side of the tax reform bill, without achieving accelerated rates of economic growth – ‘the debt will balloon.’

The reality, of course, is that is what will happen because there is absolutely NO historical evidence that cutting taxes, without offsetting cuts to spending, leads to stronger economic growth.”

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Congress courageously sticks US taxpayers with a $6 trillion liability, by Simon Black

It’s an odds on favorite bet that if Congress decides to “fix” the US’s looming pension problem, it will make that problem worse. From Simon Black at sovereignman.com:

There seems to be an unwritten rule with lawmakers that, every time they create a terrible piece of legislation, they give it the most noble-sounding name.

The USA PATRIOT Act from 2001 was a great example. It sounds great. Who wouldn’t love a law named for Patriots?

And yet that was easily among the most freedom-killing laws ever passed in US history, giving the federal government nearly unlimited authority to wage war and spy on its own people.

There are so many other examples– the USA FREEDOM Act from 2015 (which renewed many of the worst provisions of the PATRIOT Act).

Or the HIRE Act from 2010, which created some of the most heinous tax rules of the last fifty years.

The names of these laws all sounded wonderful. But their effects were absolutely terrible.

The new SECURE Act will likely be no different.

If you haven’t heard of SECURE, it’s a new piece of legislation aimed at ‘fixing’ the US retirement system.

SECURE stands for “Setting Every Community Up for Retirement Enhancement”, which is pretty clever when you think about it.

People want to associate their retirement with a word like ‘secure’. So even without knowing anything about the law, most people will probably have good feelings about it based solely on the name.

But if you actually read the legislation, SECURE contains a number of predictably terrible consequences.

For starters, SECURE is a basically a gigantic tax increase. And it’s a tax increase that will particularly affect your children when you pass away.

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