Category Archives: Pensions

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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The Death of the Liberal Idea, by Dmitry Orlov

As Vladimir Putin recently noted, the liberal idea is collapsing on its own contradictions. From Dmitry Orlov at cluborlov.blogspot.com:

Last week’s G20 gathering in Osaka was a signal event: it signaled how much the world has changed. The centerpieces of the new configuration are China, Russia and India, with the EU and Japan as eager adjuncts, and with Eurasian integration as the overarching priority. The agenda was clearly being set by Xi and Putin. May, Macron and Merkel—the European leaders not quite deserving of that title—were clearly being relegated to the outskirts; two of the three are on their way out while the one keeping his seat (for now) is looking more and more like a toyboy. The Europeans wasted their time haggling over who should head the European Commission, only to face open rebellion over their choice the moment they arrived back home.

And then there was Trump, let loose now that the Robert Mueller farce has come to its inevitable conclusion. He was running around trying to figure out which of America’s “partners” can still be thrown under the bus before the roof comes down on Pax Americana. It’s a stretch goal because he is out of ammo. He has already threatened all-out war—twice, once against North Korea, once against Iran, but, given the disasters in Afghanistan, Iraq, Syria and Libya, sanity caused him to keep his military Humpty-Dumpty safely seated on the wall.

Trump hasn’t completely given up on trade war yet, but here too he is encountering problems and is being forced to backtrack: Huawei is being recalled from the sanctions doghouse. Trump must knock out another major player—either China, Russia or the EU—before Eurasia becomes cemented together via land trade routes controlled by China, Russia and Iran instead of sea routes patrolled by the US Navy; if he doesn’t succeed, then the US is out of the game, its military might and the US dollar both rendered irrelevant. Of these, the EU seems like the softest target, but even the Europeans somehow managed launch the mechanism that allows them to circumvent US sanctions against Iran. Trump is definitely in a tough spot. What is the author of “The Art of the Deal” to do when nobody wants to negotiate any more deals with the US, now knowing full well that the US always finds ways to renege on its obligations?

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Lightfoot wants state taxpayer bailout of Chicago pension debts, by Ted Dabrowski and John Klingner

The new Chicago mayor wants the rest of the state to pay for Chicago’s profligacy. From Ted Dabrowski and John Klingner at wirepoints.org

It didn’t take long for new Chicago Mayor Lori Lightfoot to propose a plan that would wash her hands of Chicago’s pension crisis altogether. According to a recent report in Crain’s, Lightfoot wants the state to take over Chicago’s pension debts and merge them with the other pension plans throughout the state. The move would make all state taxpayers responsible for paying down the city’s debts.

The plan to shift city debts to the state would bail out the mayor from having to raise about $1 billion in additional taxes to pay for increasing pension costs by 2023. A massive tax hike is something she’s desperate to avoid.

But while Lightfoot may think the cost-shift is a solution, it will only make things worse for Illinois. She should expect significant pushback from many sides.

Start with downstate and suburban residents. Sure, their public safety pension funds would get consolidated under the state, too, but it’s the Chicago funds that are some of the biggest and worst-funded in the state. The four city-run funds are collectively funded at just 27 percent and face an official shortfall of $28 billion.

In contrast, the 650 downstate pension plans are 55 percent funded and have a shortfall of nearly $10 billion. The end result of any statewide pooling of pension funds will be a net bailout for Chicago.

Non-Chicagoans aren’t going to just accept yet another bailout of the city. Downstaters’ most recent bailout of Chicago came when the state’s new education funding formula locked in special subsidies for Chicago Public Schools. That included hundreds of millions in hold-harmless funding as well as $200 million-plus annually to pay for the district’s pension costs.

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