Category Archives: Pensions

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?

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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

The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It, by John Mauldin

European politicians, like their American counterparts, have made many promises they cannot keep. From John Mauldin at mauldineconomics.com:

I’ve written a lot about US public pension funds lately. Many of them are underfunded and will never be able to pay workers the promised benefits—at least without dumping a huge and unwelcome bill on taxpayers.

And since taxpayers are generally voters, it’s not at all clear they will pay that bill.

Readers outside the US might have felt safe reading those stories. There go those Americans again… However, if you live outside the US, your country may be more like ours than you think.

This week the spotlight will be on Europe.

The UK Is Headed to a Retirement Implosion

The UK now has a $4 trillion retirement savings shortfall, which is projected to rise 4% a year and reach $33 trillion by 2050.

This in a country whose total GDP is $3 trillion. That means the shortfall is already bigger than the entire economy, and even if inflation is modest, the situation is going to get worse.

Plus, these figures are based mostly on calculations made before the UK left the European Union. Brexit is a major economic shift that could certainly change the retirement outlook. Whether it would change it for better or worse, we don’t yet know.

A 2015 OECD study found workers in the developed world could expect governmental programs to replace on average 63% of their working-age incomes. Not so bad. But in the UK that figure is only 38%, the lowest in all OECD countries.

This means UK workers must either build larger personal savings or severely tighten their belts when they retire. Working past retirement age is another choice, but it could put younger workers out of the job market.

UK retirees have had a kind of safety valve: the ability to retire in EU countries with lower living costs. Depending how Brexit negotiations go, that option could disappear.

To continue reading: The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It

 

Stanford Says Soaring Public Pension Costs Devastating Budgets For Education And Social Services, by Tyler Durden

In 15 years, public pensions share of California’s budget has tripled. From Tyler Durden at zerohedge.com:

A new study from Joe Nation of Stanford’s Institute for Economic Policy Research entitled “Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030,” says that the devastating consequences of the ill-advised, Cadillac pensions doled out to America’s public employees over the past several decades are only getting started. 

Looking back at taxpayer contributions to public pensions in California, Nation found that they’ve increased by 5 times since 2002-2003 and are very likely to double again by 2029-2030.  Not surprisingly, that kind of hyper-inflationary growth has massively outstripped increases in tax revenue, even in the great progressive state of California (shocking, we know), meaning that pension contributions now account for 11.4% of California’s operating budget, up 3x from the 3.9% it consumed in 2002-2003.

For more than a decade, public pension costs have been rising sharply in California. There is contentious debate about what is driving these cost increases—significant retroactive benefit increases, unrealistic assumptions about investment earnings, operational practices that mask or delay recognition of true system costs, poor governance, 1 to name the most commonly cited. But there is agreement on one fact: public pension costs are making it harder to provide services that have traditionally been considered part of government’s core mission.
  • Employer pension contributions (i.e., pension contributions plus debt service on any Pension Obligation Bonds) from 2002-03 to 2017-18 expanded on average 400%, i.e., contributions in nominal dollars are now five times greater.
  • Employer contributions are projected to rise an additional 76% on average from 2017-18 to 2029-30 in the baseline projection and 117%, i.e., more than double, in the alternative projection.
  • Employer pension contributions from 2002-03 to 2017-18 have increased at a much faster rate than operating expenditures. As noted, pension contributions increased an average of 400%; operating expenditures grew 46%. As a result, pension contributions now consume on average 11.4% of all operating expenditures, more than three times their 3.9% share in 2002-03.
  • The pension share of operating expenditures is projected to increase further by 2029-30: to 14.0% under the baseline projection—that is, even if all system assumptions, including assumed investment rates of return, are met—or to 17.5% under the alternative projection.
  • The average employer funding amount expressed as a percent of active member payroll, i.e., the employer contribution rate,5 has increased from 17.7% in 2008-09 to 30.8% in 2017-18. By 2029-30, it reaches 35.2% under the baseline projection and 44.2% under the alternative projection.
  • On a market basis, the average funded ratio fell from 58.5% in 2008 to 43.0% in 2015. By 2029 it improves to 48.2% in the baseline projection, but falls to 39.0% in the alternative projection. The unfunded liability per jurisdiction household on an actuarial basis also rose from an average $1,682 in 2008 to $5,071 in 2015; the unfunded liability per household on a market basis is $21,491, up from $9,127 in 2008.

To continue reading: Stanford Says Soaring Public Pension Costs Devastating Budgets For Education And Social Services

Global Retirement Reality, by John Mauldin

Here’s the reality: there won’t be enough money for most people to have what we now consider a decent retirement. From John Mauldin at mualtineconomics.com:

Today we’ll continue to size up the bull market in governmental promises. As we do so, keep an old trader’s slogan in mind: “That which cannot go on forever, won’t.” Or we could say it differently: An unsustainable trend must eventually stop.

Lately I have focused on the trend in US public pension funds, many of which are woefully underfunded and will never be able to pay workers the promised benefits, at least without dumping a huge and unwelcome bill on taxpayers. And since taxpayers are generally voters, it’s not at all clear they will pay that bill.

Readers outside the US might have felt smug and safe reading those stories. There go those Americans again, spending wildly beyond their means. You are correct that, generally speaking, we are not exactly the thriftiest people on Earth. However, if you live outside the US, your country may be more like ours than you think. Today we’ll look at some data that will show you what I mean. This week the spotlight will be on Europe.

First, let me suggest that you read my last letter, “Build Your Economic Storm Shelter Now,” if you missed it. It has some important background for today’s discussiion, as well as a special invitation to attend my Strategic Investment Conference next March 6–9 in San Diego. With so much change occurring so quickly now, next year’s conference is an event you shouldn’t miss.

Global Shortfall

I wrote a letter last June titled “Can You Afford to Reach 100?” Your answer may well be “Yes;” but, if so, you are one of the few. The World Economic Forum study I cited in that letter looked at six developed countries (the US, UK, Netherlands, Japan, Australia, and Canada) and two emerging markets (China and India) and found that by 2050 these countries will face a total savings shortfall of $400 trillion. That’s how much more is needed to ensure that future retirees will receive 70% of their working income. This staggering figure doesn’t even include most of Europe.

To continue reading: Global Retirement Reality

What Could Go Wrong? (For Public Pensions, More Than You Know), by Patrick Watson

Public pensions will play a big part in the next financial crisis. From Patrick Watson at mauldineconomics.com:

Here’s a loaded question for you: “What could go wrong?”

In some contexts, it can express mistaken confidence, as in, “Sure I’ll put my hand between that crocodile’s jaws. What could go wrong?”

Investors should ask the same question before entering a position. “What risks am I taking with this trade? What could go wrong if it doesn’t go as planned?”

But here’s the problem: What if you never think to ask the question because you have no idea you’re in that trade?

And guess what—this is your problem if you are a taxpayer anywhere in the US.


Photo: DWS via Flickr

Pension Pain

Part of my job is helping John Mauldin with the research for his Thoughts from the Frontline letters. Regular readers know John isn’t a doom-and-gloom guru. He’s optimistic on most of our big challenges.

Except for a few things—like the brewing state and local pension crisis.

The more John and I dig into it, the worse it looks. We have both spent many hours trying to find any good news or a silver lining, without success.

All over the US, states, cities, school districts, and other governmental entities have promised their workers generous retirement benefits, but haven’t set aside enough cash to pay what they will owe. At some point, perhaps soon, either they will have to cut benefits to retirees or stick taxpayers with a huge bill, or both.

You can read John’s September 16 letter, Pension Storm Warning, to learn more. Then you’ll see why he says to Build Your Economic Storm Shelter Now.

What else could go wrong? Plenty.


Photo via Flickr

Healthcare Goes on the Books

Local governments often give retired police officers, firefighters, teachers, and other workers a pension plus healthcare benefits.

Healthcare is expensive even in the best circumstances. Imagine your health insurer had promised to cover your medical expenses but hadn’t set aside any cash to pay for it.

Remarkably, that’s exactly what has happened. Governments currently disclose their retiree healthcare liabilities only in footnotes to their financial statements. Many have saved little to no money to cover those future expenses.

That’s about to change.

Starting in 2018, the Governmental Accounting Standards Board—the source of generally accepted accounting principles (GAAP) for state and local governments—will force officials to record healthcare liabilities on their balance sheets. Pew Charitable Trusts estimates the national shortfall will add up to $645 billion.

To continue reading: What Could Go Wrong? (For Public Pensions, More Than You Know)

Pension Storm Warning, by John Mauldin

Governments have made promises of pension benefits that they will never be able to keep. From John Mauldin at maudlineconomics.com:

This time is different are the four most dangerous words any economist or money manager can utter. We learn new things and invent new technologies. Players come and go. But in the big picture, this time is usually not fundamentally different, because fallible humans are still in charge. (Ken Rogoff and Carmen Reinhart wrote an important book called This Time Is Different on the 260-odd times that governments have defaulted on their debts; and on each occasion, up until the moment of collapse, investors kept telling themselves “This time is different.” It never was.)

Nevertheless, I uttered those four words in last week’s letter. I stand by them, too. In the next 20 years, we’re going to see changes that humanity has never seen before, and in some cases never even imagined, and we’re going to have to change. I truly believe this. We have unleashed economic and technological forces we can observe but not entirely control.

I will defend this bold claim at greater length in my forthcoming book, The Age of Transformation.

Today we will zero in on one of those forces, which last week I called “the bubble in government promises,” which I think is arguably the biggest bubble in human history. Elected officials at all levels have promised workers they will receive pension benefits without taking the hard steps necessary to deliver on those promises. This situation will end badly and hurt many people. Unfortunately, massive snafus like this rarely hurt the politicians who made those overly optimistic promises, often years ago.

Earlier this year I called the pension mess “The Crisis We Can’t Muddle Through.” Reflecting since then, I think I was too optimistic. Simply waiting for the floodwaters to drop down to muddle-through depth won’t be enough. We face an entire new ocean, deeper and wider than we can ever cross unaided.

To continue reading: Pension Storm Warning