Submitted by Leo Kolivakis, publisher of Pension Pulse.
As a follow-up to my last post on checkmate for pensions, the FT reports that the collapse in value of US state and local government pension plans is a disastrous double blow for them:
They are being forced to sell off assets at huge discounts to pay out pensions, and are at the same time seeing their funding levels plummet to dangerous new lows.
In the past year the funds, whose collective $2,000bn-plus in assets make them key investors in every asset class, have lost about 40 per cent of their value through investment losses.
The 2,600 pension plans provide retirement savings for 22m public employees in towns and cities across the US, and range in size from the giant Calpers, with $120bn (€91bn, £81bn) in assets, to tiny small town funds which pay pensions for local garbage collectors and police.
Phillip Silitschanu, a senior analyst at Aite Group, a consultancy, says the pensions “could face a cash flow collapse, they are liquidating assets to meet their monthly cash flow needs; instead of selling positions that are down 10 per cent, they are being forced to liquidate positions down 40 per cent. It is a firesale liquidation of assets to have the cash on hand to meet obligations”.
Bill Atwood, the executive director of the Illinois State Board of Investments, says: “Right now it’s very bad. For the full year 2009 (ending in June) we will have $270m negative cash flow on $8.5bn in assets.”
State pension benefits are protected by law, and must be paid even if the fund is making a loss. Calpers, the largest fund, has lost $70bn in value in the past eight months, but still has to pay $11bn in benefits this year. Unless the fund starts recouping its losses soon, the California state government, which is already mired in a huge deficit, will have to lift contributions to Calpers starting from next year.
Bad as the cashflow crisis is, the accompanying collapse in funding levels – an issue largely outside the control of the pension managers – is considered by most in the industry to be of greater significance.
US pension plans are in generally worse shape than those in Europe. They were more underfunded, meaning they did not have the money to meet future pension commitments, even before the financial crisis hit, and their losses over the past year have been greater because they had larger allocations to equities. Funding has now fallen to about 50 per cent, according to industry estimates.
Mr Silitschanu said: “As terrible a predicament that everyone thought these pension funds were in three or four years ago, they are much worse now.”
Like several others, he believes some form of federal intervention is likely, possibly in the form of the state governments being forced to cut benefits in order to qualify for the money they receive as part of the economic stimulus package.
Hank Kim, the executive director of the National Conference on Public Employee Retirement Systems, the pension industry body, says: “I don’t think federal government involvement is a realistic possibility.
“Public plan assets are down, but they are still in a very good financial situation. The issue is whether they have adequate cash flow to meet their obligations,” he argues.
However, few others believe the plans are in a good financial situation. Cutting benefits for new employees and raising the age of retirement are some previously unthinkable strategies being considered by state governments in an effort to contain the problem.
Merging weaker funds with others is another plan. Illinois’ five state retirement systems, which are collectively only about half funded, could be merged into one fund, as could those in Arkansas.
Those less than 50 per cent funded include schemes in Philadelphia; West Virginia; Pittsburgh; Providence, Rhode Island; Little Rock, Arkansas; Jersey City, Wilmington, Delaware and Atlanta.
Most experts believe that the situation is even worse than these official funding figures suggest, because of the way the funds calculate returns and liabilities. Almost all funds base their funding levels on an assumption of an annual return of 8 per cent, but in the decade to 2004 the average return was only 6.5 per cent.
Successive state governments have expanded pension benefits, but often failed to lift contributions. No government has wanted to cut pensions.
Now, a 40% haircut mentioned above is definitely “firesale liquidation of assets”. Someone is desperate for liquidity and someone else is picking up the assets on the cheap (or at least that’s what they think).
It’s no wonder that things are heating up in the private equity secondary market. One senior private equity manager wrote me that he is getting offers from other limited partners (LPs) to pay him to take stakes of some big name PE funds off their books.
When I inquired as to why an LP would pay another one to take PE funds off their book, the senior pension fund manager wrote me:
“There are many instances of this on offer…some arrangements are so punitive on default that it’s better to pay someone to take the contingent funding obligation. I sent you this request from someone as it includes some big names in the business.”
And while I will not disclose the individual fund names he sent me, they are big names in private equity. It is striking to see how desperate some LPs are to resort to offering to pay others to take over their private equity fund stakes.
This just proves that the crisis is particularly brutal on smaller limited partners facing serious liquidity issues. Forced selling by pension funds or other limited partners (endowments, insurance companies, etc.) can be disastrous for some illiquid asset classes like private equity, real estate, and to a lesser extent, hedge funds.
The problem is that the secondary market in private equity is full of inefficiencies and most limited partners looking to unload their stakes will get hosed in the process.
As for cash flow problems facing many pensions, they are the product of a giant experiment that was destined to fail. Instead of securing retirement income for millions of hard working people, over the last decade, pension fund managers slashed their allocations to government bonds and they heavily increased their allocations first to stocks and then to alternative investments like private equity, real estate and hedge funds.
In order to deal with this pension crisis, policymakers are faced with some tough choices ahead. These include cutting benefits, increasing contributions, raising the retirement age or increasing taxes to make up for the shortfall.
There is no magic solution to this pension calamity. The pension promise is all a matter of having sufficient assets to meet future liabilities. Pension fund managers can pray for another long bull market in stocks, but remember that is the same bull that killed pension funds.
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this is a huge problem and will be the undercurrent that gives directions to the equity markets for years to come. At the end of the day market prices are a function of supply and demand, not price discovery and arbitrage. As I see it, there is going to be a huge supply of assets and very little demand. This will eventually spill over to the MF industry as retiring individuals need to liquidate holdings in order to cover shortfalls in pensions and other retirement savings. But hey Cramer just told me that I need to buy so stuff like this doesn’t matter.
Good write up Leo. For several years now, I have been fearing the same with most defined benefit plans, which I was a part of at work. I was laid off in Nov and am now waiting for my pension docs. I will be taking my commuted value out as I want to manage my own money.most pension managers simply followed the herd into PE / RE / commodities and hedgies..i don’t think most of these guys understand what a debt based, fractional reserve, fiat money system is and how it works..their portfolios will be destroyed in any deflation..as for “solutions”, actually, people here are already starting to make changes..so far, they amount to taking more from younger workers to help keep paying those alrady retired. For example, teachers (Ontario) passed some changes about 4-5 months ago that takes a lot more from younger teachers, yet basically leaves the retiree pension untouched. Another recent change here in Ontario was done by the gov’t, which implemented a new “exit” penalty on anyone who decides to leave the pension and take the commuted value with them. This exit fee, by way of an interest penalty of about .90 % may reduce a laid off/departing worker’s pension value by up to 30 % if they are under 55..again, notice the theme..gets younger people to pay for the retired ones..can’t wait to see how this plays out over the next 5 yrs..as hard as it will be for politicans to do, there is no avoiding a cut in benefits for retired folks..that must be part of the solution…
JO
They have done similar things in New York state with the teachers retirement system. New York State broke up the retirement system into tiers, tier 1, tier 2, etc.
The upper tiers are better compensated at the expense of the lower ones. Guess who the upper tiers are made up of?
Be careful about cashing out of them, they are offering it at a steep cost. It may be worth it, but carefully consider the benefit of “staying in the crowded trade”. If you cash out, you are on your own going forward. Being in with a group of people can be a benefit, even if the people in charge are incompetent. See the banks in the US.
“In the past year the funds, whose collective $2,000bn-plus in assets make them key investors in every asset class, have lost about 40 per cent of their value through investment losses.”
Mother of Mercy, can this be the end of FICO? The mere fact that _pension funds_ COULD be so exposed indicates the depth of cognitive dysfunction in this, our dear country. Employment-specific pensions have been an archaism and a craziness in the US of A, a bolser against ‘socialism.’ Well, the stuffing is knocked out of ’em. We need a _national_ pension plan that is comprehensive and adequante. We won’t get it from Bo Prez, but the conditiona a-building will bring this closer. Creative desertification, anyone?
another example of why the Fed policy of 0% interest rates will be a real disaster. When you run policy over a long term with only with the consumer in mind the cost of that is borne by savers. The funds had to move into risky asset classes because the Fed kept interest rates too low for too long. Under current market conditions the low interest policy is not going to help consumption much (borrowers are already maxed out) and will only cut spending by the one group that should and could spend prudentially- savers.
The mere fact that _pension funds_ COULD be so exposed indicates the depth of cognitive dysfunction in this, our dear country.
Yes.
Not to mention greed. Pensions for public workers in the US are oftentimes absurdly generous (the workers themselves, or some of them, have a say in determining how much they’ll get), and those getting them sure as hell do not want to pay for them (via high contributions). So fund administrators, who for political reasons cannot rely on taxpayers — most of whom of course work in the private sector and have a far less cushy retirement to look forward to — have to take risks looking for returns high enough to fund those future liabilities.
House of cards. Sodom and Gomorrha.
So the root of the problem is that local government entered into an agreement with its employees to under pay them in exchange for a good pension. The local government then pocketed the money it saved in wages instead of putting it into the pension. The pension administrators then had little choice but to chase high risk strategies to make up the funding.
Local government thought they could get something for nothing and voted officials did not even attempt to get the message across that local taxes needed to rise to pay for all this. The buck may stop with the local politician who was afraid to explain to the electorate that you can not have something for nothing, or with the local taxpayer who we are told is unable to accept the message that taxes need to rise.
As for the limited partners, pension funds and private equity triangle I am a little confused. Paying somebody to take the contingent funding obligation because of the punitive arrangements in default sounds like a party is near default. Its not clear to me, but I assume you are suggesting some private equity funds are struggling as pensions fire sale their PE stakes. Could you clarify that a bit.
I would love to see the pension count for politicians. Start with the Senate.
Most of the career politicians in the US have a very long list of defined pensions.
Just another robbery.
Leo,
The problem was clear for over a decade. The can was kicked down the road several times and is now in the ditch.
Planning for 8% annual ROI became normalized among fund managers.
over the last decade, pension fund managers slashed their allocations to government bonds
30 yr T-bond rates haven’t been above 6% since Y2K. In such an environment and needing a minimum of 8%, every dollar put into government debt instruments just puts you further behind the power curve. iow the next dollar needs 10% annualized ROI. This is already Madoff territory
“Equity” weighting accordingly rose to 70% to 75% in many funds.
and they heavily increased their allocations first to stocks
Naturally there would be an elephant herd stampede to promised higher returns elsewhere. Thus the mid-decade S&P 500 bull market. Which was not matched by a comparable bull in the NASDAQ Composite, which is real economic dynamism manifests. This is what one would expect to see in an institutionally driven bull market.
and then to alternative investments like private equity, real estate and hedge funds.
Just in case anyone was wondering where the fuel came from to power last year’s commodity bubble blowoff. viz, at one time CALSTRS had 14% of its portfolio in “alternative investments”.
(I am from a generation of workers, in a country in which defined benefits was no longer on offer when I entered the workforce).
Let me think about these defined benefit pensions:
1) I give a portion of my pay for investment for my retirement.
2) When I retire, I am (practically) guaranteed a pay back on my investment.
3) The younger investers are basically paying more to cover for the payments for the older workers.
What a great deal! Where have I heard such a proposition before?
http://en.wikipedia.org/wiki/Madoff
(Serious now)
JO, I’d also consider exercising caution before cashing out of your defined benefit plan. It will be difficult for pensions to reduce payouts without political backlash (of which you are part of that voice).
Secondly, if you are taking on the full responsibility of investments on your shoulders, or paying for someone to assist you. Unless your previous profession was related to the markets, consider that this inherently increases your risk.
Given, pension managers have done an incredibly bad job, but are you willing to bet against them (essentially) with your life savings?
If you are in a large enough union/pension, it is also possible there will be federal intervention. Even if payment reductions is a concession to federal intervention, it may still be better than cashing out.
Degenerate gamblers.
(I am from a generation of workers, in a country in which defined benefits was no longer on offer when I entered the workforce)…3) The younger investers are basically paying more to cover for the payments for the older workers.
You got it. And so many people think today’s youth don’t pay attention.
Obviously this is going to be worked out in the political arena. But not necessarily in electoral venues. And I fully expect the drooling old geezers (formerly progressive radicals in the 1960s) who set up such a corrupt intergenerational bargain to lose. And that generation of self-centered, degenerate spoiled assholes deserve to “lose”.
Depend on it. In the very near future there is going to be means testing on both Social Security and Medicare. And there will be steep progressive taxation on “unearned income” and retirement benefits above some arbitrarily set level.
Leo — Thanks for your posts. This is a horrifying situation. I need to find Yves’ happy animal photo of the day.
Anon 10:36
Screw you. Yeah, all us boomers planned this farce. No we don’t deserve to retire after working 40 or more years. Grow up
This turnstile is the real crisis, and how it begins to affect the real economy. As the unemployment increases, falling income for pension funds, while expenditures increased by “early retirement.” The system is collapsing
Leo,
In order to deal with this pension crisis, policymakers are faced with some tough choices ahead. These include cutting benefits, increasing contributions, raising the retirement age or increasing taxes to make up for the shortfall.
Cutting benefits and raising the retirement ages is clearly the solution. It’s equitable the pain be suffered by those who were improvident, selfishly greedy ad failed to implement a sustainable pension system when they had the power to do so.
I expect most defined benefit plans will be retroactively converted to defined contribution plans. If indeed defined benefit plans aren’t outlawed entirely for being a primary source of systemic market instability.
“Increasing contributions” is a non-starter. In the case of non-federal government pensions this is synonymous with higher taxes. For private corporations increased contributions means lower earnings, dividends and share prices. See pension fund portfolio equity weightings for the follow on effects.
“Dr. Phil” had a 24 y/o girl on his show the other day. My wife compelled me to watch the show. She was a recent college graduate with a degree in interior design. And she has $80k of student loans that can’t even be discharged in bankruptcy. Her monthly student loan payment was larger than her apartment rent.
Interior design jobs are of course generally unavailable. Wal-Mart and Company (Praise The Great Gods of Free Trade) don’t pay enough to meet those expenses even when they are hiring. Forget saving for her own retirement, paying for health insurance or stimulating the eCONomy buying houses, cars and durable goods.
She had accordingly turned to prostitution via Craig’s List to meet her monthly overhead.
Dr. Phil, being a world class System Prostitute himself, chose to focus the entire blame on her. I was disappointed he chose not to explore how it’s possible for a young person to graduate owing $80k for what in my view is a fraudulent “higher education” anyway.
No sir, higher taxes to further increase her burdens are not on the table. It’s the drooling old ratbag geezers who made this mess who must pay. Screw’em.
They can be happy with a single tiny room and minimal maintenance, and praise the heavens they weren’t just euthanized for being useless eater parasites.
I would be interested in seeing a real analysis of private retirement savings (401k, 403b, IRAs) versus pension funds.
The articles I have seen in the WSJ, NYT etc. all talk about how horribly the individual accounts did last year and how badly individuals are investing their money. However, when I look at the aggregate numbers that they toss around in the various columns, I see losses that are less than what seem to be hitting the pension funds and as far as I can tell the typical 401k asset allocation is about 60/40 equity/bonds which is quite sane, especially considering that most people have not retired and are still in accumulation mode.
I have never been eligible for a penison and am relying on 401k/IRA savings. The portability has worked well through job changes and I expect that I can replace most of my current income at retirment in about 10 to 15 years, even after the past year.
Some of the target date funds seem to have done poorly, but most seem to have hit the loss percentages that I would have expected in a major bear market that should be expected every 15 to 30 years. Since most people are in accumulation mode, the opportunity to buy at low prices should be beneficial in the long run.
I would be appalled to think I have to move away from my private savings with vested corporate contributions to rely on pension funds run the way the post above describes. Ultimately, the biggest problem in the private savings system simply seems to be an inadequate level of contributions. That needs to be differentiated from investment performance. Pension funds seem to have problems with both so it is unclear how they are better for people than individual accounts.
Nowhereman,
Exactly where you’re at. See my post of 11:54am, made before I saw your comment. Definitely applies to you.
Hoepfully you did the right thing by your own kids. Mine are graduating without owing student loans. The first graduated early in December, Summa Cume Laude. And she got hired by a small pr agency in February. Chosen from 200 resumes submitted and 15 candidates interviewed in person for one opening.
Just don’t plan on retiring on my kids’ backs to hedonistically pleasure yourself, jerko. Or my grandkids’ backs.
Enjoy.
“There is no magic solution to this pension calamity”
Bring back Greenspan and bubbles?
O, yeah, that caused the problem.
Gonna be ironic – the collapse of pension payouts because there is no income from those gubermint bonds that pay 1.2%
Ultimately, the biggest problem in the private savings system simply seems to be an inadequate level of contributions.
Size definitely matters. In this case, the bigger the institution the greater the degree of mismanagement, underfunding and short term gamesmanship. The penultimate example is the US Congress’ multi-decade mismanagement of Social Security.
However, as Helicopter Ben reminds us, the Feds have “…a technology called a printing press…”. So the crisis is expressing itself at state/local government and in large corporations.
I agree with Leo about the systemic depth and breadth of the pension crisis. Where I differ from Leo is over things like “G20” solutions. Small is where it’s at.
HAH! No Soup for You!!!
“Just don’t plan on retiring on my kids’ backs to hedonistically pleasure yourself, jerko. Or my grandkids’ backs.”
—
I think this is the sort of nastiness that Yves was talking about when she dedicated a post asking it to stop.
That’s enough reason to ask people to tone it down. But also consider that it’s what the elite finance class wants – for all the proles to turn on each other, blaming each other rather than the elite. Like the false left/right dichotomy and associated squabbling, this internecine fighting keeps us from doing anything about our real problem.
– StewPDX
“Just don’t plan on retiring on my kids’ backs to hedonistically pleasure yourself, jerko. Or my grandkids’ backs.”
I think that’s a substantive comment, well the “jerko” was unnecessary, but it expresses an economic point.
Maybe just a bit of word cleanup is called for, but this is legitimate discussion, uncomfortable for some (including myself) of course.
Leo,
I can’t grasp that politicians think they could legislate that pensions can never go down. Those pension funds are invested in markets and most of those investments come with little or no guarantee. Perhaps the politicians also think they can ensure thwarting an alien invasion with the passage of a strongly worded proclamation. And thinking you can get at least 8% avg growth every year with little to no risk? Better just buy some weed for those retirees. It’ll probably be the only thing keeping them from storming the offices with pitchforks.
I have read some excellent comments above and some childish ones too. Please refrain from posting stuff that will reduce the quality of exchanges.
The pension crisis is serious and it has reached a breaking point because politicians ignored it, preferring to believe the pie-in-the sky forecasts of industry consultants.
The shift towards stocks and then to alternative investments was done because bond yields were too low and stocks offered higher yields (with higher risk). Alternative investments were suppose to offer absolute reurns and important diversification benefits.
The problem is that pensions ended up fueling the credit bubble as they blinfdly shoved billions into hedge funds,private equity funds, and private real estate funds, enriching the financial oligarchs without any consideration of the consequences of their collective actions.
Nothing is done in a vacuum. newton’s third law states that for every action, there is an equal (in size) and opposite (in direction) reaction force.
If global pension funds are busy shoveling billions into alternative investments, all chasing alpha, then this is tantamount to a global institutional Ponzi scheme.
Very few pension fund managers stopped to think about how their collective actions are contributing to systemic risk, fueling credit or commodity bubbles.
Well, the chicken has come home to roost and the global financial crisis has exposed some serious cracks in pension systems around the world.
The U.S. may be in worse shape than other countries, but not by much. Most OECD countries are facing serious issues with their pension systems.
If you think the solution is just to switch from a defined benefit to defined contribution plan, then you are sadly mistaken.
Most people are terrible at managing their own money and most DC plans have fared a lot worse than most DB plans because they are even more exposed to stocks.
I believe the time has come to implement DB plans for everyone, including private sector workers.
For the most part, private companies offering DB plans have done a terrible job.
I think we need to create something analogous to the Swedish pension system where you have several large funds managing retirement income (AP1, AP2, etc.).
I would cap the size of these funds and set governance standards that are second to none, with full transparency, full acountability and risk management where you would never see any fund losing more than 10% in any given year.
The time has come to consider a radical transformation of global pension systems, allowing people to retire in dignity and security.
regards,
Leo Kolivakis
I think some people need to be reminded that pensions were a tradeoff for lower wages. Companies undoubtedly thought it was a better option for them than paying higher wages at the time. It is entirely the companies’ responsibility to fund those defined benefit plans if there is a shortfall. I really can’t believe how narrow-minded some people are. To blame workers who have upheld their part of the contract and completely let these companies off the hook is ridiculous. They have used the pension plan, intended for ordinary workers, to further enrich overpaid executives and have plundered the plans when there were surpluses. Just like “conservative” governments everywhere. It’s a return to responsible government and corporate governance that we need. Nothing will change unless and until integrity returns.
“It is entirely the companies’ responsibility to fund those defined benefit plans if there is a shortfall.”
Indeed! case in point: GM. They made the decision in the 80s to underfund the pension and health care plans because, combined with unrealistic assumptions about rates of return that they could REPORT AS INCOME, it boosted their earning/share, the all-important metric to please Wall Street.
Needless to say that more responsible behavior would have put them in a much better position than the one they’re now.
On the public side of the pension disaster, it is even worse. Politicians kept on beefing up the pension plans to get re-elected while pushing bullshit to the workers by telling them that no increases in contributions were needed.
And OUR kids are supposed to pay for all of this? Guess what will happen when they start to seize the levers of power? See how sacrosanct a “contract” can be in the face of a stark reality; there it is, now it is not!
As for the managers who aided and abetted this system, what can one say? They “internalized” assumptions they knew where not sustainable but went along nonetheless.What is the punishment for that?
Leo wrote:
“The pension crisis is serious and it has reached a breaking point because politicians ignored it, preferring to believe the pie-in-the sky forecasts of industry consultants.”
It’s far worse: politicians systematically shove aside those who don’t tell them exactly what they want to hear, and reward those who do. You get a selection bias that is pernicious in the extreme.
Note that Fed and Treasury officials are getting tough on chicanery:
They MAY consider removal of management after large sums are lost
Banks pass stress tests…but were stressed! Tough, tough stuff!
Going forward we can sleep better at night knowing that our pensions and 401ks will only be offered securitized loans of the new and improved “bankster’s choice” variety.
“Hank Kim, the executive director of the National Conference on Public Employee Retirement Systems, the pension industry body, says: “I don’t think federal government involvement is a realistic possibility.
“Public plan assets are down, but they are still in a very good financial situation. The issue is whether they have adequate cash flow to meet their obligations,” he argues. “
Now they can fudge the numbers with the new FASB rule and look OK.
the childish comments crack me up. its a gerrific relief in the middle of the intensity.
LeeAnne
its a terrific relief in the middle of the intensity.
Thanks.
Interesting Comments!
I was curious about why so many pension funds are doing so poorly. I always thought they were the stodgy ones who never ventured beyond a mutual fund as an exciting investment. And those bonds they placed their money in all had to be AAA rated which brings up another issue altogether with the way CDO, etc, have been rated as of late.
I was snooping around the MI Teacher Pension funds by googling and found they expected to receive an 8% return on their funds. Now that to me seems somewhat high. It does allow the school districts to skimp on contibutions into the pension funds with the hope that the “free” ride will continue. 8% does seem to be rather high unless you get one of those AIG-FP AAA rated tranched CDO (same that quickly three times). Seems those young financial engineers (like Volcker’s grandson) were just following orders and raised the Nuremberg defense to justify their actions.
Francois brings up an interesting point about GM underfunding pensions and healthcare funds by overforecasting returns. Under the new UAW agreement, the union was taking over pensions and healthcare funding at ~60 cents on the dollar until W$ decided cliff diving was more fun than earning their money the old fashion way in a safe fiduciary manner. I am not sure all of those babyboomer union workers were in charge of setting the rate of return on their pension funds; but, they will soon pay the price when Obama PGBCs those pension funds. It will be 40 cents on the dollar for something they did not cause, had adequately placed funds into for the future, and trusted after 25-40 years of factory work. No $million bonuses for them!
The safe bet today is SS. It will be around well beyond most of us posting here today unless you beleive the Peterson Institute or the Lori Montgomery’s of the world or Bush “its bankrupt!”. The gap in payments versus revenue starting in 2017/19 (when payments overtake revenues) for the next 75 years is ~1.92% or 1 tenth of 1% increase per year for employee and employer. Sounds easy enough to fix unless you believe the $51 trillion in PV cost today that Peterson Institute touts? I wouldn’t start the increase now as it will be spent on everything else except for what it was intended and everyone will be whining about the TF and how it doesn’t exist. Can anyone tell me what the first payment out of the TF will be in 2019 and the last payment is in 2040 approximately?
When Obama began the attack on automotive, he intentionally, or unintentionally, started the class and/or age warfare. Gotta save W$ or else we all go under; but, the life boat is crowded so we will throw the hourly workers out of the boat. Those evil union workers are what brought down automotive with their $75/hour wages. Lets push them out of the life boat as their healthcare and pensions are ill-gotten anyways. They lived the good life already at the expense of everyone else and the younger ages.
The issue is with W$, derivatives, lack of tranparency, etc. No action has been taken to correct the problem that has caused us to be here today pointing fingers at age groups or classes or each other. This is exactly what they want and you are falling into the trap and obscuring the isses of AIG-FP, AAA rated bonds, the AIG conduits of money to sachs, barclays, merrill, etc.
Keep in mind that most pensioned state employees are outside the social security system (nothing paid in, nothing paid out). So if you cut or reduce our pensions, we’re royally screwed.
anon (state pensions)
I am not advocating cuts. I am explaining an issue as I see it and the resulting generational and class warfare going on right now. It is not beyond certain individuals to pit classes and generations against each other to obscure the real issue.
I am sympathetic to the pensioners, but at the same time, they should have demanded better accountability from their representatives.
I don’t think anyone believes that a person who has worked for 30-40 years for the promise of a pension should be ditched.
How about we kick the middle man out of the picture?
You know how your kids need a bigger house, and you are looking at downsizing? Don’t let them go to a bank for a mortgage. In effect they are paying the bank to borrow your pension money. A simple promissory note can be drafted very easily by an attorney. That, or a lease, etc.
If you remove the money from them, they will die. Starve the beast, use your head, not your fear.
Attitudes need to change, trust needs to be restored. Its nothing that hasn’t happened a thousand times before.
What? No mention of the Eurozone pension problems?
By all accounts the Eurozone Europeans have it worse – or better depending on how you look at it (worse for the system while better for the individuals) – a more rapidly aging workforce, 30 hour workweeks, strict labor laws that make it nearly impossible to fire workers, declining birthrates, higher corporate taxes, and racist attitudes towards non-Caucasian immigrants.
What business in their right mind would ever choose to open in the Eurozone?
Leo,
The pension crisis is serious and it has reached a breaking point because politicians ignored it, preferring to believe the pie-in-the sky forecasts of industry consultants.
These projections were very comfortable to politicians and corporate executives at annual budget pork feeding time. It’s what they demanded to hear. And by George, the market came through and supplied that demand!
The question is what mechanism is going to overcome this propensity to underfund? We’ll still be stuck with the mis-match of decision makers with relatively short tenures leaving behind long term messes.
then this is tantamount to a global institutional Ponzi scheme.
Yes, it is. And I think the victims are just as stuck with losses as are Madoff’s investors. If we can’t make $50 billion whole, and we can’t, then forget about $5 trillion.
Very few pension fund managers stopped to think about how their collective actions are contributing to systemic risk, fueling credit or commodity bubbles.
Any who did so were replaced by other managers offering what politicians and executives wanted to hear anyway. Within a fund manager’s purview the most he could have offered was advice that expecting 8% year in and year out was unrealistic and required excessive risk taking. iow, 5% or 4% annualized returns was down to earth. And oh-by-the-way, please increase your annual contributions accordingly.
Such advice was offered by some advisors. It was not accepted by the advisees.
If you think the solution is just to switch from a defined benefit to defined contribution plan, then you are sadly mistaken.
How do you propose to fix these broken DB plans? That is, without burdening emerging generations with far higher tax rates than the old geezers had to pay. And for whose benefit the young people are now to be economically pillaged?
This way lies revolt and revolution. It’s an attempt at imposing intergenerational serfdom and debt slavery. It’s an evil idea.
The case of corporations is a bit simpler. Just take away the stock holders’ equity, and then go to work haircutting the bond holders’ claims. Afterwards we can start work zeroing out senior debt held by banks. With much gnashing of teeth this is what’s going on at GM.
As for future reform of defined benefit plans, what expected ROI should be used? Observing that this planning factor will drive required annual contributions.
I personally have one in mind, which is subject to constant change. That’s the year’s average 30 year long bond rate. And I don’t anything higher can be responsibly offered.
But I don’t believe that defined benefit plans can be salvaged. They’re going to have to be retroactively converted to defined contribution plans, using the shrunken capital bases that remain and equitably redefining the future benefits.
There are of course those who will be happy to try young people, and worse young people with young children, to satiate their golden years hedonism. This will be resolved politically. Through Clauswitzian extensions of politics by other means if necessary.
I was shocked to learn in Adam Curtis’s film, “The Mayfair Set,” how pensions, governed by strict rules to maximize returns, join with private equity firms to by-out companies and move their operations overseas.
They liquidate the assets in England and the U.S., set up the factory with foreign-government subsidies in China and elsewhere, and then cash out.
My understanding does not include how fees are extracted from that really make these deals enticing.
Of course, society is left to absorb the externalized cost, while pensions managers enjoy the good times.
Hey, at least the air is cleaner in the U.S…
We need a _national_ pension plan that is comprehensive and adequante. We won’t get it from Bo Prez, but the conditiona a-building will bring this closer.
I think Richard Kline must have written this for any passing Rip Van Winkles who still think it’s 1939.
Nearly all modern people with IQs above very severely retarded will start inquiring into the current state of Social Security. Particularly before providing the – ahem – “fiduciaries” of SS with further vast resources and powers.
Anon (Social Security):
I do believe that most people are in favor of raising the cap on SS because they believe it to be necessary now rather than wait till its necessary. Even at that, SS was expected to deplete its funding and drop below 100% of projecyted payouts well before 2017/19. It didn’t. The target dates for payouts exceeding revenues has been steadily moving outwards and the same applies for the TF. The planning for depletion takes into account an Intermediate Cost projection as opposed to a Low Cost projection. Reality is somewhere in between.
Most modern people (and I will not denigrate those less fortunate to make my point) need to understand the fundamentals of SS before engaging in a discussion on how it may need some tweeks – which it doesn’t right now. Any cap increase suggested is only to increase the GF as the TF is large enough and growing.
Anyone follow Bruce Webb around here? He has the numbers correct.
How about the losses in bonds? How do they stack up alongside the losses in stocks for the pension funds?
Reminds me of that old saying: “At first, the general partner has the experience and the limited partners have the money. In the end, the general partner has the money and the limited partners have the experience.”
And don’t forget: Main Street can’t survive without Wall Street!
Anonymous @6:02 pm
From your mouth to God’s ear. Let’s trust each other rather than banks. And especially families can learn the lesson of rich families, and keep things within the family. It’s legal and it’s right.
I too will sign anonymous. This is the most subversive idea in the whole thread. And the most Godly.
PS it’s comments like this, that are the reason we need anonymous commenting.
First Quarter Dividend Statistics – What to Make of Them?
http://seekingalpha.com/article/129520-first-quarter-dividend-statistics…
While March proved positive for equities, with the S&P 500 up 8.5% from February, the month also capped one of the worst quarters for shareholders, with companies slashing dividends by the most since Standard & Poor's began keeping records in 1955….Companies announced 46 dividend cuts totaling a record $42 billion in the first quarter, with the slashing expected to cut actual payments by 18% in the second quarter, the worst since a 24% decline in the third quarter of 1958, according to Howard Silverblatt, senior index analyst at Standard & Poor's. Last year [2008] brought 61 dividend cuts totaling a combined…$40.3 billion, while the first quarter of 2009 brought 44 more cuts totaling $42 billion.”
The venomous comments by some of the Anons suggest that they don’t understand much about the recent history of pensions.
In retrospect I guess pensions, like Social Security and 401Ks, were just too tempting a fruit for the banksters and their corrupt enablers in DC to not make a grab for. In the 80’s pin-striped thieves like Boesky and Milken enriched themselves and their partners to the tune of gazillions taking over “underperforming” companies, stripping the pensions and leveraging every conceivable asset the companies had by issuing junk bonds. The thing that left me appalled and furious at the time was that the courts and government did nothing to stop this. Millions of families who had counted on these pensions for security in their old age, had worked at these companies faithfully for their entire careers and who had, reasonably enough, viewed their pensions as a part of their hard earned compensation were left with nothing.
I was early into my career at the telephone company and a long way from retiring but I decided that if it was now OK to tear up contracts and rip off people’s pensions just as they approached or were already in retirement, then I’d better have a plan B. So I started saving heavily into my company’s 401k.
Along came the 90’s and the masters of the universe came up with another clever way to steal pensions – defined contribution plans. These plans shifted investment risk from the employer to employee and often left older workers with a much reduced “cash balance” resulting in greatly reduced payouts at retirement. Again, congress did nothing. The courts finally stepped in with rulings that the plans put out by IBM and others constituted age discrimination and the plans fell out of favor among corporations although workers near retirement at smaller companies below the court’s radar were still adversely affected, i.e. robbed.
Then in the 00’s we saw abuses of 401Ks with limited investment options and heavy emphasis on company stock ownership. These destroyed employees’ retirement savings at Enron, MCI, Lehman and scores of other craporations.
And don’t forget corporate friendly Fed policies that made it impossible to earn interest rates that beat inflation and led to serial bubbles which have destroyed an incalculable amount of household wealth.
The Rebooblicans did all they could to steal Social Security but, thank goodness, they failed. It might only be worth a dime on the dollar by the time the we retire, but at least it’s something.
The final act will start in about four years when the Fed looks at how many trillions it has poured into saving the financial crooks who caused this debacle. At that point it will only have three choices for dealing with an unbearable national debt: Default. Inflate it away. Call in the Army to put down the revolt. I think massive inflation is in our future. Just three years of 15% inflation will halve the debt. Of course, it will also halve the purchasing power of our savings. So there goes my plan B, the 401K.
A thirty year long unholy alliance between government, corporate and Wall St. kleptocrats has caused unbelievable harm to savers. It has made a joke of contracts. It has undercut integrity and fair dealing at every level of society. It has made saps and suckers out of the most responsible, prudent members of society. It has turned many of us who love and believe in our country into furious cynics.
I can understand people who buy a cheaper house down the block and walk out on the loan they hold on their current home. I get people who tell credit card companies to pound sand. It makes a sad kind of sense to me when people pour tar on their carpets and paint their walls with feces before leaving their foreclosed homes.
If I owed money I’d probably be doing the same thing but I’m just one of the poor stupid schmucks who worked hard, paid off the mortgage in 18 years, avoided credit cards, sacrificed, drove used cars, saved, paid bills and has now seen retirement savings go up in smoke for the umpteenth time.
What’s been done to my country really ought to be a crime.
So fund administrators, who for political reasons cannot rely on taxpayers — most of whom of course work in the private sector and have a far less cushy retirement to look forward to — have to take risks looking for returns high enough to fund those future liabilities.
I can’t seem to get numb enough; I am always stunned when I read these kind of comments.
Those poor, poor working fund managers being forced to look for high returns because some uncaring person went ahead and took the job with the pension.
Why that forces them to take high risks is not explained.
I wonder how many anonymous near-confessions happen on these boards.
You really can’t get something for nothing so keep on working.
Retirement is based on growth, personal or otherwise. If no one is producing (maybe it’s shipped overseas) I don’t know where you expect to get pennies from heaven with low or no growth.
Government can’t even discourage pirates in row boats with destroyers or fund credit cards for digital tv signals without extensions, how can you expect and rely on government to take care of your retirement?
A Ponzi scheme ends when the bottom can’t support the top. Even being taxed to death won’t be enough.
anon (retirement):
How can one depend upon the gov for retirement? W$ and private industry has screwed it up so badly, decreased the potential of our now “hopeful” retirement, and cost us $trillions; why should we allow them the opportunity to play with our future retirement again? I do not know about you; but, I could retire on a $million W$ bonus and live comfortably in conjunction with SS.
As far as growth in business/manufacturing? Business moved to Asia/China to avoid legislative and customary infrastructure costs in the US which was the major impetus for the move besides the miniscule increase achieved by lower wages. They would have not moved for a change in direct labor cost as the content of labor is exceedingly low. The cost and length of the supply chain would have eaten them up.
What Ponzi scheme are you referring too? Madoff? State funding of pensions such as CalPer?
I believe the Texas Permanent School Fund (fka the Permanent University Fund) budgeted for 14% growth !
Was referring to our banking system of factional reserve with interest that compounds (Ponzi Scheme) which every other financial scheme is based on, SS, credit, debt, investment, on and on.
When consumers stop consuming this banking system comes to a screeching halt. Without consumer demand requests for more credit/debt/money the banks just dry up due to their leverage ratios and no way to fund them as consumers now save or pay down debt when the banks need to loan or create more debt (so called growth).
Consumers, obviously, would survive no-growth phases except they are being taxed to prop up the banking system. A banking system we could live without.
Leo, I believe you have added much value to the pension debate. I look forward to continue reading your notes.
US pension plans are in generally worse shape than those in Europe.
It’s irrelevant. Americans are used to little social safety net. Go to Borders or Barnes and Noble and you’ll see 80 year olds stocking books on shelves. We are not afraid, nor are we ashamed to do it, and we always bounced back as a nation. We’ll be fine in the end.
However, I am more concerned that Europe will completely collapse once its social safety nets begin to crumble. Frenchmen, Spaniards, Italians, Greeks, Austrians, etc, are too unproductive, too entitled, too lazy, and too arrogant to be able to pull themselves up from the bootstraps. They will continue to do precisely what they did at the G20 last week, pointing the fingers at the US and others, while sinking into the abyss of becoming Third World as every day passes.
Vinny GOLDberg
In Debt We Trust wrote: What? No mention of the Eurozone pension problems? By all accounts the Eurozone Europeans have it worse – or better depending on how you look at it (worse for the system while better for the individuals) – a more rapidly aging workforce, 30 hour workweeks, strict labor laws that make it nearly impossible to fire workers, declining birthrates, higher corporate taxes, and racist attitudes towards non-Caucasian immigrants. What business in their right mind would ever choose to open in the Eurozone?
You and I agree on everything. I have been saying everything you mentioned, only to be repudiated by arrogant and ignorant Europeans in denial. I spent the first half of my life in Europe, and the past 25 years in the US, so I can say with confidence that the factors you mentioned will likely drive Europe faster into the Third World than Sarkoszy could say “Somalia”.
However, you are incorrect on only one point, namely about racist attitudes against non-Caucasian immigrants. Western Europeans are still societies of feudal mentality, so they are racist against anybody who is not of their own ethnic makeup. Frenchmen discriminate Spaniards, Spaniards discriminate Frenchmen, etc. However, they especially like to discriminate Eastern Europeans, which is particularly annoying to me, because most Eastern Europeans are far better educated, harder-working, and overall more decent human beings than most I met in the West.
Europe remains a feudal society with a very thin veneer of civilization to cover up the backwardness that lies beneath. They’d feel very comfortable in the company of Somali pirates…LOL
Vinny GOLDberg