Category Archives: Pensions

The pension crisis is bigger than the world’s 20 largest economies, by Simon Black

Posted on September 8, 2018 | Leave a comment

The pension crisis is barreling down the tracks and there’s no way to stop it or get out of the way. From Simon Black at sovereignman.com:

If your retirement plans consist entirely of that pension you’ve been promised, it’s time to start looking elsewhere.

As you probably know, pensions are giant pools of capital responsible for paying out retirement benefits to workers.

And right now many pension funds around the world simply don’t have enough assets to cover the retirement obligations they owe to millions of workers.

In the US alone, federal, state, and local governments, pensions are about $7 TRILLION short of the funding they need to pay out all the benefits they’ve promised.

(** And that doesn’t include another $49 trillion in unfunded Social Security obligations…)

Continue reading →

Leave a comment

Posted in Debt, Financial markets, Governments, Investing, Pensions

Tagged , ,

Social Security Fails, by John Stossel

Posted on August 17, 2018 | 2 comments

Within most of our lifetimes, on present course Social Security will be unable to meet its obligations. From John Stossel at theburningplatform.com:

Social Security is running out of money.

You may not believe that, but it’s a fact.

That FICA money taken from your paycheck was not saved for you in a “trust fund.” Politicians misled us. They spent every penny the moment it came in.

This started as soon as they created Social Security. They assumed that FICA payments from young workers would cover the cost of sending checks to older people. After all, at the time, most Americans died before they reached 65.

Now, however, people keep living longer. There just aren’t enough young people to cover my Social Security checks.

So Social Security is going broke. This year, the program went into the red for the first time.

Presidents routinely promise to fix this problem.

George W. Bush said he’d “strengthen and save” Social Security. Barack Obama said he’d “safeguard” it, and Donald Trump said that he’ll “save” it.

But none has done anything to save it.

“There is a plan out there to save it, but it requires some tough choices,” says Heritage Foundation budget analyst Romina Boccia.

Heritage proposes cutting payments to rich people and raising the retirement age to 70.

Good luck with that. Seniors vote. Most vote against politicians who suggest cutting benefits.

This summer, interviewing people for my new video about Social Security’s coming bankruptcy, was the first time I had heard the majority of such a group say they were aware there is a problem. One said, “We’re already at a trillion dollars (deficit) … (I)t’s almost like a big Ponzi scheme.”

Actually, more like a pyramid scheme. Ponzi schemes secretly take your money. But the Social Security trick is written into the law — there for anyone who bothers to look.

Social Security isn’t the only hard choice ahead of us. Medicare will run out of money in just eight years. At that point, benefits will automatically be cut. Social Security hits its wall in 15 years.

Amazingly, as we approach this disaster, Democrats say — spend even more.

To continue reading: Social Security Fails

2 Comments

Posted in Debt, Economy, Government, Pensions

Tagged ,

Another Way Of Looking At The Pension Crisis, As “A Stealth Mortgage on Your House”, by John Rubino

Posted on August 11, 2018 | Leave a comment

Public pensions are an average of $75,000 for each household. From John Rubino at dollarcollapse.com:

Money manager Rob Arnott and finance professor Lisa Meulbroek have run the numbers on underfunded pension plans and come up with an interesting – and highly concerning – new angle: That they impose a “stealth mortgage” on homeowners. Here’s how the Wall Street Journal reported it today:

The Stealth Pension Mortgage on Your House

Most cities, counties and states have committed taxpayers to significant future unfunded spending. This mostly takes the form of pension and postretirement health-care obligations for public employees, a burden that averages $75,000 per household but exceeds $100,000 per household in some states. Many states protect public pensions in their constitutions, meaning they cannot be renegotiated. Future pension obligations simply must be paid, either through higher taxes or cuts to public services.

Is there a way out for taxpayers in states that are deep in the red? Milton Friedman famously observed that the only thing more mobile than the wealthy is their capital. Some residents may hope that they can avoid the pension crash by decamping to a more fiscally sound state.

But this escape may be illusory. State taxes are collected on four economic activities: consumption (sales tax), labor and investment (income tax) and real-estate ownership (property tax). The affluent can escape sales and income taxes by moving to a new state—but real estate stays behind. Property values must ultimately support the obligations that politicians have promised, even if those obligations aren’t properly funded, because real estate is the only source of state and local revenue that can’t pick up and move elsewhere. Whether or not unfunded obligations are paid with property taxes, it’s the property that backs the obligations in the end.

To continue reading: Another Way Of Looking At The Pension Crisis, As “A Stealth Mortgage on Your House”

Leave a comment

Posted in Debt, Government, Pensions

Tagged

Is Social Security Worth Its Cost? by Kevin Dayaratna, Rachel Greszler and Patrick Tyrrell

Posted on July 14, 2018 | 1 comment

In sometimes excrutiating detail this Heritage Foundation report demonstrates why, for many Americans, Social Security will be worth nowhere near what it costs them. From Kevin Dayaratna, Rachel Greszler and Patrick Tyrrell at heritage.org:

SUMMARY

Americans would be better off keeping their payroll tax contributions and saving them in private retirement accounts than having to contribute to the government’s broken Social Security system. Social Security’s design has, over the decades, presumed that many Americans are too incompetent to make informed decisions for themselves, but few Americans believe that the government knows better than they do what is best for them and their families. Moreover, Social Security’s financial structure effectively guarantees that workers will receive extremely low—or even negative returns—on their payroll taxes.

KEY TAKEAWAYS

This report compares what Social Security can provide and what workers could receive if they had ownership of their Social Security payroll taxes.

This information can help individuals of all ages understand what they can expect to receive from Social Security or from private savings.

Virtually all Americans would be better off keeping their payroll taxes and saving them in private retirement accounts.

Select a Section 1/0

Social Security began as an anti-poverty insurance program, aimed at preventing workers from outliving their savings when they were no longer physically able to work. As such, Social Security was limited in nature, beginning as only a 2 percent payroll tax—and promising to never take more than 6 percent of workers’ pay. Today, Social Security’s Old Age and Survivors Insurance (OASI) retirement program takes 10.6 percent of workers’ pay, and its Disability Insurance (DI) program takes another 1.8 percent, for a combined total of 12.4 percent. This is more than most Americans pay in income taxes.

As Social Security has grown in size and scope, it has become more than just an insurance and poverty prevention program—and with millions of seniors living below the federal poverty line, it is not doing a great job even at that. Having reduced the incentive to save for retirement, Social Security now represents a significant portion of most workers’ retirement savings. Despite the fact that Social Security was intended to be an insurance program, providing a secure retirement income, individuals have no legal claim to their scheduled Social Security benefits, as the program can only pay out as much money as it has on hand and Congress can change benefit levels if it wants. Not surprisingly, more than 60 percent of workers under the age of 50 do not think Social Security will be able to pay them a benefit when they retire.

To continue reading: Is Social Security Worth Its Cost?

1 Comment

Posted in demographics, Government, Pensions

Tagged

Janus v AFSCME and the truth about Illinois pensions in one graphic, by Ted Dabrowski and John Klingner

Posted on July 10, 2018 | 3 comments

Here’s the short answer to why Illinois is broke: promised pension benefits have skyrocketed and tax revenues and incomes have not. From Ted Dabrowski and John Klingner at wirepoints.com:

One graphic perfectly captures the absurdity of Illinois pensions over the past three decades.

It’s what Justice Samuel Alito described as Illinois’ “generous public-employee retirement packages” when writing for the majority in the Janus v. AFSCME decision. “Illinois’ pension funds are underfunded by $129 billion as a result of generous public-employee retirement packages” he wrote.

Alito didn’t use the graphic below, but he could have because it makes his point.

In 1987, pension promises made to active workers and retirees in the state’s five state-run pension plans totaled just $18 billion. By 2016, they had ballooned to $208 billion.

That’s a cumulative 1,067 percent increase.

Contrast that to the state’s budget (general fund revenues) which was up just 236 percent over the same time period. Or household incomes, which were up just 127 percent. Or inflation, up just 111 percent.

Promised pension benefits have blown past any ability of the state, the economy or taxpayers to pay for them.

Read the report: Illinois state pensions: Overpromised, not underfunded

Wirepoints released a report on these booming benefits earlier this year, and while it received strong coverage online nationally, Illinois’ traditional media didn’t want to touch it. The findings interfere with the narrative that’s repeatedly promoted by public sector unions and politicians – that the crisis is all the taxpayers’ fault for failing to put in enough money towards pensions.

The report proved a lack of dollars wasn’t the issue. Illinois pension assets – buoyed by taxpayer contributions – also grew far faster than the same economic indicators in the graphic above. But taxpayer contributions could never keep up with the state’s explosive growth in promised benefits.

Overpromising is the real culprit of the pension crisis. Freezing and reversing that growth in promised benefits is the fair, and only, way to fix things.

The above graphic gives taxpayers every right to demand concessions from their public servants. The Janus ruling will hopefully give them more power to demand them.

And union members have a strong incentive to come to the bargaining table. After all, it’s their retirements that are teetering on the edge of insolvency in a state just one notch from junk status.

But If the unions won’t deal, Illinois should go ahead and freeze salaries, cut the subjects of collective bargaining, move to defined contribution plans, reduce headcounts and work with the feds on a form of state bankruptcy. With the constitution currently preventing any changes to pension benefits, those are the only levers taxpayers have to save this state from collapse.

http://www.wirepoints.com/janus-v-afscme-and-the-truth-about-illinois-pensions-in-one-graphic-wirepoints-original/

3 Comments

Posted in Collapse, Economy, Government, Pensions

Tagged ,

Will History Record Illinois As A Failure Of Democracy? by Mark Glennon

Posted on July 6, 2018 | 1 comment

Illinois will soon be a failed state.From Mark Glennon at wirepoints.com:

As America celebrates its Independence this week, it’s right to consider the most far-reaching questions raised by Illinois’ crisis.

Did the Founding Fathers miss something? Did we miss something the Founders stood for? Is our form of democracy fundamentally flawed?

The importance of those questions is part of why Wirepoints exists, and why we hope other states follow Illinois’ story.

Illinois inherited assets most states and nations envy. Its GDP remains larger than all but fifteen countries of the world. More importantly, it inherited constitutional self-government.

But it’s failing.

Illinois is bankrupt. The state and many of its towns and cities sink further into insolvency each day — the facts and numbers are irrefutable. Its moral insolvency is less quantifiable but no less apparent. Graft, both legal and illegal, is exposed incessantly, usually to no end. Scandal fatigue overtook the state long ago. Numbed voters left politicians free to do little good and plenty wrong.Not a single major reform, fiscal or otherwise, is currently under serious consideration in Illinois.

How can a democracy have done this to itself?

The reasons are myriad. Many are debatable. Some are particular to Illinois. Most of the 20,000 articles we’ve linked to or written on this site are about those reasons.

But on the overarching question of universal importance — whether Illinois has exposed some fundamental flaw of democracy — the story hasn’t ended. Nobody knows how Illinois’ crisis ultimately will sort out, but there is reason for qualified, partial optimism, albeit over a long time with much pain in the interim.

That optimism derives from the likelihood that much of our crisis will be resolved in courts — federal courts exercising their place in the federal system we inherited — and the hope that those courts will honor the foundational principles of American government. The Founders’ foresight, not their failure, perhaps may yet shape Illinois’ history. Perhaps.

The initial questions that might end up in the federal courts have already gotten some attention. If Illinois amended its constitution to delete its pension protection clause, would the United States Constitution’s Contract Clause still prohibit pension reform? Could the federal Bankruptcy Code be amended to allow bankruptcy for states? Could some other form of federal legislation authorize adjustment of pension obligations? And if Illinois eventually authorizes bankruptcy for municipalities, which is probably unavoidable at some point, many questions about that process remain unanswered by courts.

More fundamentally, it’s only a matter of time before a federal court faces a situation somewhere in Illinois where essential, basic government services fail. A court will face a “police power” question, as it’s called.

To continue reading: Will History Record Illinois As A Failure Of Democracy?

1 Comment

Posted in Collapse, Debt, demographics, Economy, Government, Pensions, Taxes

Tagged

The Dirty Dozen Sectors of Global Debt, by Jonathan Rochford

Posted on July 3, 2018 | Leave a comment

This is a very good survey of the diciest corners of the international credit markets, the ones most likely to start the global credit crisis that nobody will see coming. From Jonathan Rochford at narrowroadcapital.com:

When considering where the global credit cycle is at, it’s often easy to form a view based on a handful of recent articles, statistics and anecdotes. The most memorable of these tend to be either very positive or negative otherwise they wouldn’t be published or would be quickly forgotten. A better way to assess where the global credit cycle is at is to look for pockets of dodgy debt. If these pockets are few, credit is early in the cycle with good returns likely to lie ahead. If these pockets are numerous, that’s a clear indication that credit is late cycle. This article is a run through of sectors where I’m seeing lax credit standards and increasing risk levels, where the proverbial frog is well on the way to being boiled alive.

Global High Yield Debt

Last month I detailed how the US high yield debt market is larger and riskier than it was before the financial crisis. The same problematic characteristics, increasing leverage ratios and a high proportion of covenant lite debt, also apply to European and Asian high yield debt. Even in Australia, where lenders typically hold the whip hand over borrowers, covenants are slipping in leveraged loans. The nascent Australian high yield bond market includes quite a few turnaround stories where starting interest coverage ratios are close to or below 1.00.

Defined Benefit Plans and Entitlement Claims

For many governments, deficits in defined benefit plans and entitlement claims exceed their explicit debt obligations. The chart below from the seminal Citi GPS report uses somewhat dated statistics, but makes it easy to see that the liabilities accrued for promises to citizens outweigh the explicit debt across almost all of Europe.

In the US, S&P 500 companies are close to $400 billion underfunded on their pension plans. This doesn’t seem enormous compared to their annual earnings of just under $1 trillion, but the deficits aren’t evenly spread with older companies such as GE, Lockheed Martin, Boeing and GM carrying disproportionate burdens.

Latest forecasts have US Medicare on track to be insolvent in 2026. At the State government level Illinois ($236 billon) and New Jersey ($232 billion) both have enormous liabilities, mostly pension and healthcare obligations. If you want to understand how pension and entitlement liabilities have grown so large, my 2017 article on the Dallas Police and Fire Pension fiasco and John Mauldin’s recent article “the Pension Train has no Seatbelts” are both worth your time.

To continue reading: The Dirty Dozen Sectors of Global Debt

Leave a comment

Posted in Collapse, Debt, Economy, Government, Pensions

Tagged , ,

Unfunded Promises, by John Mauldin

Posted on July 2, 2018 | Leave a comment

Technically speaking, unfunded promises are not debt. However, governments have made a lot of unfunded promises, like Social Security and Medicare, and their recipients certainly regard them as a debt they are owed. From John Mauldin at mauldineconomics.com:

In describing the global debt train wreck these last few weeks, I’ve discovered a common problem. Many of us define “debt” way too narrowly.

A debt occurs when you receive something now in exchange for a promise to give something back later. It doesn’t have to be cash. If you borrow your neighbor’s lawn mower and promise to return it next Tuesday, that’s a kind of debt. You receive something (use of the lawn mower) and agree to repayment terms – in this case, your promise to return it on time and in working order.

One reason you try to get that lawnmower back on time and in the proper condition is that you might want to borrow it again in the future. In the same way that not paying your bank debt will make it difficult to get a bank loan in the future, not returning that lawnmower may make your neighbor a tad bit reluctant to lend it again.

Debt can be less specific, too. Maybe, while taking your family on a beach vacation, you notice a wedding taking place. Your 12-year-old daughter goes crazy about how romantic it is. In a moment of whimsy, you tell her you will pay for her tropical island beach wedding when she finds the right guy. That “debt,” made as a loving father to delight your daughter, gets seared into her brain. A decade later, she does find Mr. Right, and reminds you of your offer. Is it a legally enforceable debt? Probably not, but it’s at least a (now) moral obligation. You’ll either pay up or face unpleasant consequences. What is that, if not a debt?

These are small examples of “unfunded liabilities.” They’re non-specific and the other party may never demand payment… but they might. And if you haven’t prepared for that possibility, you may be in the same kind of trouble the US government will face in a few years.

Uncle Sam has made too many promises to too many people, with little regard for its future ability to fulfill them. These are debt. Worse, some of them are additional debt on top of the obligations we already see on the national balance sheet.

Even worse, entire generations have planned their retirement lives around the government fulfilling those promises. If those promises aren’t met, their lifestyles will indeed become a potential train wreck.

To continue reading: Unfunded Promises

Leave a comment

Posted in Collapse, Debt, Economy, Financial markets, Government, Pensions, Politics

Tagged

Opinion: The next bear market in stocks will spark a retirement crisis, by Howard Gold

Posted on June 27, 2018 | 2 comments

A bear market in stocks would substantially reduce the Baby Boomers’ already inadequate savings. From Howard Gold at marketwatch.com:

A recession could decimate even substantial retirement portfolios, and Social Security and Medicare are facing shortfalls
AFP/Getty Images

Almost lost amid the torrent of recent news was a sobering item that will surely have far-reaching consequences.

The U.S. government announced that for the first time since 1982, it is tapping into Social Security trust funds to pay current benefits to recipients and it is dipping into Medicare’s reserves to cover the costs of that program.

The trustees also projected that the trust fund will run out of money by 2034 and that Medicare’s fund for paying costly hospital bills will be depleted by 2026.

That may ultimately force a cowardly Congress to cut benefits, raise taxes, increase the eligibility age, or some combination of the three. For the 52% of Americans who rely on Social Security for more than half their retirement income and the 25% of retirees who get more than 90% of their income from the program, that would be a disaster.

Read: Fixing Social Security starts with us, the voters

But the 10,000 baby boomers who will turn 65 every single day from now until 2029 face an even broader retirement crisis that could cause big social and political fallout.

Over the next few years, we will almost surely confront a bear market and recession that could decimate even substantial retirement portfolios, not to mention financially dicey state and local pension plans and the federal government itself. And those governments will have few tools to fight it. Consider:

• We are in the 10th year of an economic recovery and bull market in stocks. The S&P 500 index SPX, -0.86%   has more than quadrupled from its March 2009 bottom, for a compound annual growth rate of 17.5% during that time. Since the S&P 500 has averaged a 10% annual gain over the past 89 years, at some point there has to be a reversion to the mean.

2 Comments

Posted in Business, Economy, Financial markets, Government, Pensions

Tagged , ,

The Pension Train Has No Seat Belts, by John Mauldin

Posted on June 18, 2018 | Leave a comment

Pensions are the same unsustainable trajectory as the rest of our debt-saturated world. From John Mauldin at mauldineconomics.com:

In describing various economic train wrecks these last few weeks, I may have given the wrong impression about trains. I love riding the train on the East Coast or in Europe. They’re usually a safe and efficient way to travel. And I can sit and read and work, plus not deal with airport security. But in this series, I’m concerned about economic train wrecks, of which I foresee many coming before The Big One which I call The Great Reset, where all the debt, all over the world, will have to be “rationalized.” That probably won’t happen until the middle or end of the next decade. We have some time to plan, which is good because it’s all but inevitable now, without massive political will. And I don’t see that anywhere.

Unlike actual trains, we as individuals don’t have the option of choosing a different economy. We’re stuck with the one we have, and it’s barreling forward in a decidedly unsafe manner, on tracks designed and built a century ago. Today, we’ll review yet another way this train will probably veer off the tracks as we discuss the numerous public pension defaults I think are coming.

Last week, I described the massive global debt problem. As you read on, remember promises are a kind of debt, too. Public worker pension plans are massive promises. They don’t always show up on the state and local balance sheets correctly (or directly!), but they have a similar effect. Governments worldwide promised to pay certain workers certain benefits at certain times. That is debt, for all practical purposes.

If it’s debt, who are the lenders? The workers. They extended “credit” with their labor. The agreed-upon pension benefits are the interest they rightly expect to receive for lending years of their lives. Some were perhaps unwise loans (particularly from the taxpayers’ perspective), but they’re not illegitimate. As with any other debt, the borrower is obligated to pay. What if the borrower simply can’t repay? Then the choices narrow to default and bankruptcy.

Today’s letter is chapter 6 in my Train Wreck series. If you’re just joining us, here are links to help you catch up.

To continue reading: The Pension Train Has No Seat Belts

Leave a comment

Posted in Business, Collapse, Debt, Economy, Financial markets, Governments, Pensions, Uncategorized

Tagged ,