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The Suddenly Poor Life: Millions Will Lose Their Pensions

Discussion in 'Coffee Shack (Daily News/Economy)' started by Goldhedge, Mar 4, 2016.



  1. southfork

    southfork Mother Lode Found Mother Lode

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    (cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans)

    Retiring wont do any good, courts will rule in favor of .gov as they have in other pension plans, the .gov pensions plans are a rape of the taxpayers to begin with

    QUOTE="searcher, post: 1242608, member: 242"]Kentucky Public Employee Retirements Surge As Fears Of Pension Collapse Mount

    [​IMG]
    by Tyler Durden
    Sep 6, 2017 4:35 AM


    Slowly but surely it is becoming increasingly clear to public workers in states with massively underfunded pensions that they've been lied to for the past several decades as their states can't possibly afford to pay for the retirement they've all been promised. As a local radio station in Bowling Green points out today, fears over potential pension changes in Kentucky have resulted in a surge of early retirements as workers move to lock in payouts before any potential cuts go into effect.

    More state workers retired last month than the year before amid concerns that the legislature and Gov. Matt Bevin will make changes to state retirement plans.

    David Smith, executive director for the Kentucky Association of State Employees, said state workers have been retiring after consultants hired by the state recommended drastic changes to the pension systems.

    “There are folks that are saying you know what, I don’t care, I’m going to lock in my retirement now and get out while I can and fight it as a retiree if they go and change the retiree benefits,” he said.

    The Lexington Herald-Leader reports that there was a 20 percent jump in state worker retirements last month.

    “Who are they going to replace them with if they truly offer up what they’re proposing or what was proposed? Who is going to want to work for state government? I wouldn’t,” Smith said.

    As we pointed out last week, Kentucky's public pensions face a daunting funding hole of $33-$84 billion, depending on your discount rate assumptions, according to a recent analysis conducted by PFM Group.

    [​IMG]



    The problem is that the aggregate underfunded liability of pensions in states like Kentucky have become so incredibly large that massive increases in annual contributions, courtesy of taxpayers, can't possibly offset liability growth and annual payouts. All the while, the funding for these ever increasing annual contributions comes out of budgets for things like public schools even though the incremental funding has no shot of fixing a system that is hopelessly "too big to bail."

    [​IMG]



    So what can Kentucky do to solve their pension crisis? Well, as it turns out they hired a pension consultant, PFM Group, in May of last year to answer that exact question. Unfortunately, PFM's conclusions, which include freezing current pension plans, slashing benefit payments for current retirees and converting future employees to a 401(k), are somewhat less than 'perfectly acceptable' for both pensioners and elected officials who depend upon votes from public employee unions in order to keep their jobs...it's a nice little circular ref that ensures that taxpayers will always lose in the fight to fix America's broken pension system.

    Be that as it may, here is a recap of PFM's suggestions to Kentucky's Public Pension Oversight Board courtesy of the Lexington Herald Leader:

    An independent consultant recommended sweeping changes Monday to the pension systems that cover most of Kentucky’s public workers, creating the possibility that lawmakers will cut payments to existing retirees and force most current and future hires into 401(k)-style retirement plans.

    If the legislature accepts the recommendations, it would effectively end the promise of a pension check for most of Kentucky’s future state and local government workers and freeze the pension benefits of most current state and local workers. All of those workers would then be shifted to a 401(k)-style investment plan that offers defined employer contributions rather than a defined retirement benefit.

    PFM also recommended increasing the retirement age to 65 for most workers.

    The 401 (k)-style plans would require a mandatory employee contribution of 3 percent of their salary and a guaranteed employer contribution of 2 percent of their salary. The state also would provide a 50 percent match on the next 6 percent of income contributed by the employee, bringing the state’s maximum contribution to 5 percent. The maximum total contribution from the employer and the employee would be 14 percent.

    For those already retired, the consultant recommended taking away all cost of living benefits that state and local government retirees received between 1996 and 2012, a move that could significantly reduce the monthly checks that many retirees receive. For example, a government worker who retired in 2001 or before could see their benefit rolled back by 25 percent or more, PFM calculated.

    The consultant also recommended eliminating the use of unused sick days and compensatory leave to increase pension benefits.

    Even if all of that is accomplished, State Budget Director John Chilton said Kentucky would still need to find an extra $1 billion a year just to keep its frozen pension systems afloat. Moreover, absent tax hikes the state will ultimately be forced to cut funding for K-12 schools by $510 million and slash spending at most other agencies by nearly 17% to make up the difference.

    Meanwhile, PFM warned that the typical "kick the can down the road approach" would not work in Kentucky and that current retiree benefits would have to be cut.

    “This is the time to act,” said Michael Nadol of PFM. “This is not the time to craft a solution that kicks the can down the road.”

    “All of the unfunded liability that the commonwealth now faces is associated with folks that are already on board or already retired,” he said. “Modifying benefits for future hires only helps you stop the hole from getting deeper, it doesn’t help you climb up and out on to more solid footing going forward.”

    Of course, no amount of math and logic will ever be sufficient to convince a bunch of retired public employees that they have been sold a lie that will inevitably fail now or fail later (take your pick) if drastic measures aren't taken in the very near future.

    Nicolai Jilek, the legislative representative for the Kentucky Fraternal Order of Police, said expecting first responders to work until they are 60 is problematic given the physical requirements of the job.

    “We’re very grateful that PFM is just offering recommendations … that they are not lawmakers because his plan would be horrible for first responders,” Jilek said.

    Stephanie Winkler, president of the Kentucky Education Association, shared a similar sentiment.

    “The PFM had some pretty drastic recommendations that we think are not what’s in the best interest of public school employees and public school students,” Winkler said.

    Jim Carroll, president of Kentucky Government Retirees, said his group would likely sue if the legislature proceeds with PFM’s recommendation to roll back the cost of living adjustment that retirees received between 1996 and 2012.

    “We think its very clear that the cost of living adjustments that were granted to us are ours as long as we are retirees in the system,” Carroll said.

    As such, no matter the long-term consequences, we suspect the "kick the can down the road" approach to pension reform will continue to win right up until the plans actually run out of money...then we'll all lose together.

    http://www.zerohedge.com/news/2017-...etirements-surge-fears-pension-collapse-mount[/QUOTE]
     
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  2. gringott

    gringott Killed then Resurrected Midas Member Site Supporter

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    Buy some lube and prepare to bend over Kentucky StateGov employees.
     
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  3. searcher

    searcher Mother Lode Found Site Supporter ++ Mother Lode

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    The Coming Run On Banks And Pensions


    -- Published: Thursday, 7 September 2017

    By Dave Kranzler

    “There are folks that are saying you know what, I don’t care, I’m going to lock in my retirement now and get out while I can and fight it as a retiree if they go and change the retiree benefits,” he said. – Executive Director for the Kentucky Association of State Employees, Proposed Pension Changes Bring Fears Of State Worker Exodus

    The public awareness of the degree to which State pension funds are underfunded has risen considerably over the past year. It’s a problem that’s easy to hide as long as the economy is growing and State tax receipts grow. It’s a catastrophe when the economic conditions deteriorate and tax revenue flattens or declines, as is occurring now.

    The quote above references a report of a 20% jump in Kentucky State worker retirements in August after it was reported that a consulting group recommended that the State restructure its State pension system. I personally know a teacher who left her job in order to cash completely out of her State employee pension account in Colorado (Colorado PERA). She knows the truth.

    But the problem with under-funding is significantly worse than reported. Pensions are run like Ponzi schemes. As long as the amount of cash coming in to the fund is equal to or exceeds beneficiary payouts, the scheme can continue. But for years, due to poor investment decisions and Fed monetary policies, beneficiary payouts have been swamping investment returns and fund contributions.

    Pension funds have notoriously over-marked their illiquid risky investments and understated their projected actuarial investment returns in order to hide the degree to which they are over-funded. Most funds currently assume 7% to 8% future rates of return. Unfortunately, the ability to generate returns like that have been impossible with interest rates near zero.

    In the quest to compensate for low fixed income returns, pension funds have plowed money into stocks, private equity funds and illiquid and very risky investments, like subprime auto loan securities and commercial real estate. Some pension funds have as much as 20% of their assets in private equity. When the stock market inevitably cracks, it will wipe pensions out.

    As an example of pensions over-estimating their future return calculations, the State of Minnesota adjusted the net present value of its future liabilities from 8% down to 4.6% (note: this is the same as lowering its projected ROR from 8% to 4.6%). The rate of under-funding went from 20% to 47%.

    I can guarantee you with my life that if an independent auditor spent the time required to implement a bona fide market value mark-to-market on that fund’s illiquid assets, the amount of under-funding would likely jump up to at least 70%. “Bona fide mark-to-market” means, “at what price will you buy this from me now with cash upfront?”

    For instance, what is the true market price at which the fund could sell its private equity fund investments? Harvard is trying to sell $2.5 billion in real estate and private equity investments. The move was announced in May and there have not been any material updates since then other than a quick press release in early July that an investment fund was looking at the assets offered. I would suggest that the bid for these assets is either lower than expected or non-existent other than a pennies on the dollar “option value” bid.

    At some point current pension fund beneficiaries are going to seek an upfront cash-out. If enough beneficiaries begin to inquire about this, it could trigger a run on pensions and drastic measures will be implemented to prevent this.

    Similarly, per the sleuthing of Wolf Richter, ECB is seeking from the European Commission the authority to implement a moratorium on cash withdrawals from banks at its discretion. The only reason for this is concern over the precarious financial condition of the European banking system. And it’s not just some cavalier Italian and Spanish banks. I would suggest that Deutsche Bank, at any given moment, is on the ropes.

    But make no mistake. The U.S. banks are in no better condition than their European counter-parts. If Europe is moving toward enabling the ECB to close the bank windows ahead of an impending financial crisis, the Fed is likely already working on a similar proposal.

    All it will take is an extended 10-20% draw-down in the stock market to trigger a massive run on custodial assets – pensions, banks and brokerages. This includes the IRA’s. I would suggest that one of the primary motivations behind the Fed/PPT’s no-longer-invisible hand propping up the stock and fixed income markets is the knowledge of the pandemonium that will ensue if the stock market were allowed to embark on a true price discovery mission.

    Like every other attempt throughout history to control the laws of economics and perpetuate Ponzi schemes, the current attempt by Central Banks globally will end with a spectacular collapse. I would suggest that this is one of the driving forces underlying the repeated failure by the western Central Banks to drive the price of gold lower since mid-December 2015. I would also suggest that it would be a good idea to keep as little of your wealth as possible tied up in banks and other financial “custodians.” The financial system is one giant “Roach Motel” – you check your money in but eventually you’ll never get it out.

    http://investmentresearchdynamics.com/

    http://news.goldseek.com/GoldSeek/1504796460.php
     
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  4. 90%RealMoney

    90%RealMoney Midas Member Midas Member

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    Add to all of this, that they say the entire gains in the DOW 30 since Trump got elected, is due to like 5 stocks! Probably the same with the Nas. Amazon, Apple, Google, Facebook, and a couple others, responsible for most of the run up.
     
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  5. Uglytruth

    Uglytruth Gold Member Gold Chaser

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    So what they are really saying.
    * Pensions are a failure. Private sector figured this out 35-40 years ago.........
    * 401K are the way to stick it to the employee! Private sector figured this out 35-40 years ago.........
    * If you don't hold it you don't own it! CEO's with golden parachutes figured this out years ago.

    Anymore I don't read the articles for what they say I read the articles for what they don't say or direction they point......
     
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  6. gringott

    gringott Killed then Resurrected Midas Member Site Supporter

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    Man, I hope everybody here has a financial hard hat and boots with springs in the soles.
     
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  7. Uglytruth

    Uglytruth Gold Member Gold Chaser

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    If they demand payment it cripples the company & then they loose their pensions anyhow........ right?

    https://www.bloomberg.com/news/arti...paign=headline&cmpId=yhoo.headline&yptr=yahoo

    Down $20 Billion, Boeing Stuffs Pension Fund With Its Own Shares





      • Pension’s funding deficit is second-biggest in the S&P 500
      • With shares at record, stock transfer seen as risky approach




      • Like so many companies in America, Boeing Co. has largely neglected the gaping deficit in its employee pension as it doled out lavish rewards to shareholders.

        What’s raising eyebrows is how it plans to shore up the retirement plan.

        Last month, Boeing made its largest pension contribution in over a decade. But rather than put up cash and lock in the funding, the planemaker transferred $3.5 billion of its own shares, including those it bought back in years past. (The administrator says it expects to sell them over the coming year.)
        It’s a bold move, and one cheered by many on Wall Street. Yet to pension experts, it isn’t worth the risk. After a record-setting, 58 percent rally this year, Boeing is betting it can keep producing the kind of earnings that push shares higher. If all goes well, not only will the pension benefit, but Boeing says it will be able to forgo contributions for the next four years.

        But if anything goes awry, the $57 billion pension -- which covers a majority of its workers and retirees -- could easily end up worse off than before.

        [​IMG]
        “It’s an irresponsible thing to do certainly from the perspective of the plan participants,” said Daniel Bergstresser, a finance professor at the Brandeis International Business School. “Ideally, you would like to put assets in the pension plan that won’t fall in value at exactly the same time that the company is suffering.”

        Under Chief Executive Officer Dennis Muilenburg, Boeing’s pension shortfall has widened as the Chicago-based company stepped up share buybacks. The $20 billion gap is now wider than any S&P 500 company except General Electric Co. And relative to earnings, Boeing shares are already trading close to the highest levels in a decade, a sign there might be more downside than upside.

        For a closer look at the S&P 500’s biggest underfunded pensions, click here.

        ‘Good Value’
        Boeing disagrees and sees the strategy as a win-win.

        “We continue to see Boeing stock as a good value,” spokesman Chaz Bickers said. “This action further reduces risk to our business while increasing the funding level of our pension plans. Our employees and retirees benefit as well since this action provides funding earlier, giving the plan sponsor more flexibility to grow the plans’ assets.”

        It’s too early to tell how things will play out -- especially for a company whose shares have historically been sensitive to the ups and downs of the economy -- and early returns are mixed. Gains have slowed markedly since Boeing transferred 14.4 million shares to its pension on Aug. 1, but the 2.4 percent advance is still more than the S&P 500. (The plan has the option to dispose of the shares at any time.)

        Analysts see Boeing climbing to $262.86 a share in the coming year, supported by a near-record $423 billion backlog of jet orders that’s equal to about seven years of factory output. That would be good for a 7.2 percent gain from Thursday’s price of $245.23, and roughly in line with analysts’ estimates for the broader market. In the previous 12 months, Boeing stock nearly doubled.

        Price Targets
        Of course, Boeing isn’t the only company to opt for stock instead of cash when it comes to its pensions. GE’s plan holds more than $700 million of shares and IBM had about $28 million of stock in its U.S. pensions. But Boeing’s transfer is notable because it was one of the largest in recent memory and happened just one day after the company’s shares reached an all-time high.

        Pension experts and academics have long debated how much company stock is too much for retirement plans, particularly because workers’ livelihoods become even more intertwined with their employer’s fortunes when they own shares. The dangers came into full view when Enron’s collapse a decade ago saddled its employees with millions of worthless shares in their 401(k)s.

        With pensions like Boeing’s, the risks to the company can be greater when share prices plunge because employers are on the hook to cover any shortfall. And for Boeing, the deficit is already considerable.

        “It would have been a cleaner decision to contribute cash to the pension,” said Vitali Kalesnik, the head of equity research at Research Affiliates. “Boeing to a degree is a very cyclical company.”

        Boeing’s pension went deep into the red after the global financial crisis in 2008 hurt aircraft sales, while delays in its 787 Dreamliner program burned up cash. Record-low interest rates in the years since hurt pension returns across corporate America, and made it hard for Boeing to claw its way out.

        Pension Freeze
        At the end of 2016, its pension had $57 billion in assets and $77 billion in obligations -- a funding ratio of 74 percent, data compiled by Bloomberg show.

        Boeing froze pensions for Seattle-area Machinist union members last year under a hard-fought contract amendment. It also switched non-union workers to a defined contribution plan.

        And the stock transfer last month, combined with a planned $500 million cash payment this year, would be equal to all the company’s contributions during the previous five years. Nevertheless, it still leaves Boeing with roughly $15 billion in unfunded pension liabilities, although the shortfall should gradually shrink over the next four years, according to Sanford C. Bernstein & Co.

        To be clear, Boeing has the money. In the past three years, the company generated enough excess cash to buy back $30 billion of its own shares.

        But using equity instead of cash does have its advantages. It allows Boeing to conserve its free cash flow -- a key metric for investors -- by transferring Treasury shares that were repurchased at far lower values than today’s prices. In addition, Boeing will get a $700 million tax benefit, which will offset the cost of its $500 million cash contribution.

        Risk Strategy
        The strategy shows how Boeing can “look at risk differently, be proactive and manage that today, and take that uncertainty out over the next five years,” Greg Smith, Boeing’s chief financial officer and chief strategist, told an investor conference on Aug. 9.

        It’s not the first time Boeing has plowed stock into its underfunded pension. In 2009, the company contributed $1.5 billion. The shares jumped 27 percent that year and 21 percent in 2010. By 2011, the plan had cashed out.

        But this time, Boeing’s valuation is much higher. With a price-earnings ratio of 23, the stock is more than three times as pricey as it was at the start of 2009. Given the nature of Boeing’s business, its earnings could be vulnerable to geopolitical shocks or an economic slowdown that saps demand for air travel.

        What’s more, the longer its pension remains under water, the more expensive it becomes to maintain. The Pension Benefit Guaranty Corp., a government agency that acts as a backstop when plans fail, has tripled its rates for companies with funding deficits, and more increases are on the way.

        There’s a limit to how long Boeing can put off underfunded liabilities. Over the next decade, the company expects to pay out about $46 billion to retirees.
     
    Last edited: Sep 15, 2017
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  8. gringott

    gringott Killed then Resurrected Midas Member Site Supporter

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    Am I the only guy noticing that everywhere I look there is a story about not taking Social Security until 70?
    Last one was in AARP, with some financial guy giving some gobbly gook about it is best to wait. My head hurt trying to follow it.

    There must be a serious avalanche of people taking it as early as possible.

    Keep in mind, the Social Security Administration says it does not matter, the statistics show you end up getting the same amount of money in the end. So when do you want your money? When you are 62 and can still enjoy some hookers and blow, or when you are past 70 and a bowel movement is your greatest treat?
     
  9. Uglytruth

    Uglytruth Gold Member Gold Chaser

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    Is it still true if you take it at 62, evaluate your health and if you choose you can "pay back" all the money you received at the end of the year and get the next higher payout?
     
  10. latemetal

    latemetal Platinum Bling Platinum Bling

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    As it was explained to me, if I took SS at 62, I would need to live past 82 for it to be a mistake...given all my past bad habits, I'll go out early if my health is good.
     
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  11. Mr Paradise

    Mr Paradise Midas Member Midas Member

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    Take the cash at 62 even if you don't need it. You can always take the money and invest it on your terms which over the long run should outperform the payout difference in waiting till 67 or later.
     
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  12. GOLDBRIX

    GOLDBRIX God,Donald Trump,most in GIM2 I Trust. OTHERS-meh Site Supporter Platinum Bling

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    1). AARP went LEFT when it joined Barry in ObamaCare. PROG. .Gov made a deal to allow AARP's Health Insurance Program to stay alive as long as AARP provided BARRY in his second term with their mailing
    list and work phone banks.

    2). The nickname "So-So Security" is appropriate. You may as well get it as early as you can. Sooner or later the young working class will be cut out and cut off. They will need to rely on 401ks Traditional or ROTHS for their potential retirement.

    As it comes to public retirements most State and Federal plans will be adjusted to New Employees. EVERY politician wants re-elected. The second you bust the deal you made with current employees and retirees you may as well start collecting moving boxes. You won't get elected to Dog Catcher, and those you screwed over in the Unemployment Office will put your unemployment paperwork on the bottom of their Things to Do pile.

    The FEDS agencies are whispering ( leaking) they are requesting to reduce their obligations to subsidize current FERS retirement plans.
    FED Workers need to be contacting their congress and Senators about this tactic.
     
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  13. searcher

    searcher Mother Lode Found Site Supporter ++ Mother Lode

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  14. GOLDBRIX

    GOLDBRIX God,Donald Trump,most in GIM2 I Trust. OTHERS-meh Site Supporter Platinum Bling

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  15. latemetal

    latemetal Platinum Bling Platinum Bling

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    Not only that, they keep giving my money to Israel and other sleazy countries...
     
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  16. GOLDBRIX

    GOLDBRIX God,Donald Trump,most in GIM2 I Trust. OTHERS-meh Site Supporter Platinum Bling

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    Of course we SHOULD take care of our own Before and Above All Others.
    And
    Are we paying for allies ?
     
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  17. Treasure Searcher

    Treasure Searcher Gold Chaser Platinum Bling

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    I talked to a lady that is retired from Kmart in management. Since I worked at Kmart years ago, we talk about the chain when we meet each other. I was just a work-a-bee at Kmart and never knew there was a pension program. Must have been just for management? Anyway, when Kmart and Sears merged, both pension plans merged into one. This lady was supposed to recieve X many dollars at retirement. Now after the merger of the Kmart and Sears pension plans into one, she claims she only gets 10% of what she is supposed to get.

    At the closest Kmart store, where I live, there is a lady that has worked at that store since the day it was opened in the mall. She even made the 6:00 clock news about all the decades she works there. Lady must be at least in her 70's. When I go to Kmart, she is still working there. Now I know why she is still working. Probably only got a 10% pension payout after all those decades of work and still has to keep working.

    Another pension plan that did not live up to its promises.
     
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  18. edsl48

    edsl48 Silver Member Silver Miner

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    WHat I don't understand though is while we often discuss Social Security going bankrupt why isn't welfare similarly discussed as going bankrupt?
    (Someone should ask AARP what their thoughts are on this)
     
  19. searcher

    searcher Mother Lode Found Site Supporter ++ Mother Lode

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    Pension Storm Warning

    -- Published: Sunday, 17 September 2017

    By John Mauldin

    Storms from Nowhere
    Blood from Turnips
    Promises from Air
    Chicago, Lisbon, Denver, Lugano, and Hong Kong

    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.

    [​IMG]

    Source)

    Anybody who lives in Houston can tell you that 13 inches in 24 hours is not all that unusual. But how do Robert Bea’s points apply to today’s topic, public pensions? Both pension plan shortfalls and hurricanes are known risks for which state and local governments must prepare. And in both instances, too much optimism and too little preparation ultimately have devastating results.

    Admittedly, public pension liabilities don’t come out of nowhere the way hurricanes seem to – we know exactly where they will strike. In many cases, we know approximately when they’ll strike, too. Yet we still let our elected officials make impossible-to-fulfill promises on our behalf. The rest of us are not so different from those who built beach homes and didn’t buy hurricane or storm surge insurance. We just face a different kind of storm.

    Worse, we let our government officials use predictions about future returns that are every bit as unrealistic as calling a 13-inch rain in Houston a 100-year event. And while some of us have called pension officials out, they just keep telling lies – and probably will until we reach the breaking point.

    Puerto Rico is a good example. The Commonwealth was already in deep debt before Irma blew in – $123 billion worth of it. There’s simply no way the island can repay such a massive debt. Creditors can fight in the courts, but in the end you can’t squeeze money out of plantains or pineapples. Not enough money, anyway. Now add Irma damages, and the creditors have even less hope of recovering their principal, let alone interest.

    Puerto Rico is presently in a new form of bankruptcy that Congress authorized last year. Court proceedings will probably drag on for years, but the final outcome isn’t in doubt. Creditors will get some scraps – at best perhaps $0.30 on the dollar, my sources say – and then move on. We’re going to find out how strong those credit insurance guarantees really are.

    “That’s just Puerto Rico,” you may say if you’re a US citizen in one of the 50 states. Be very careful. Your state is probably not so much better off. In 10 years, your state may well be in the same place where Puerto Rico is now. I’d say the odds are better than even.

    Are your elected leaders doing anything about this huge issue, or even talking about it? Probably not.

    As it stands now, states can’t declare bankruptcy in federal courts. Letting them do so would raises thorny constitutional issues. So maybe we’ll have to call it something else, but it’s going to end the same way. Your state’s public-sector retirees will not get what they were promised, and they won’t take the outcome kindly.

    Disappearing Pensions” I shared this chart from my good friend Danielle DiMartino Booth:

    [​IMG]

    Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade. You read that right – not doubled, tripled or quadrupled: quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe.

    You will also notice in the chart that much of that change happened in 2008. Why was that? That’s when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments. Also, some strapped localities conserved cash by promising public workers more generous pension benefits in lieu of pay raises.

    According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”).

    Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50-60% next year. That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25% – a step in the right direction but not nearly enough.

    Think about this as an investor. Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of you don’t. Yes, some strategies have a good shot at doing it, but there’s no guarantee.

    And if you believe Jeremy Grantham’s seven-year forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years.

    [​IMG]

    Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return – about the average for most pension funds – then that means in 30 years that $1 million will have grown to $8 billion (approximately). Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%.

    Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it. Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is with huge cuts to other needed services or with massive tax cuts to pension benefits.

    The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart:

    [​IMG]

    The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere. What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all?

    That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference.

    But wait, it gets worse. The graph we showed earlier stated that unfunded pension liabilities for state and local governments was $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.

    [​IMG]

    We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion. Following the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues. Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work.

    Pension trustees don’t face personal liability. They’re literally playing with someone else’s money. Some try very hard to be realistic and cautious. Others don’t. But even the most diligent can’t control when the next recession comes, or when the stock market will crash, leaving a gaping hole in their assets while liabilities keep right on rising.

    I have had meetings with trustees of various government pensions. Many of them want to assume a more realistic discount rate, but the politicians in their state literally refuse to allow them to assume a reasonable discount rate, because owning up to reality would require them to increase their current pension funding dramatically. So they kick the can down the road.

    Intentionally or not, state and local officials all over the US made pension promises that future officials can’t possibly keep. Many will be out of office when the bill comes due, protected from liability by sovereign immunity.

    We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.

    But wait, it gets still worse. (Do you see a trend here?) Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them – assuming they get their projected returns. What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep. Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona.

    This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown.

    I was heavily involved in politics at both the national and local levels in the 80s and 90s and much of the 2000s. Trust me, local politics is far nastier and more vicious. And there is nothing more local than police and firefighters and teachers seeing their pensions cut because the money isn’t there. Tax increases of up to 100% are going to become commonplace. But even these new revenues won’t be enough… because we will be acting with too little, too late.

    This is the core problem. Our political system gives some people incentives to make unrealistic promises while also absolving them of liability for doing so. It also places the costs of those must-break promises on innocent parties, i.e. the retirees who did their jobs and rightly expect the compensation they were told they would receive.

    So at its heart the pension crisis is really not a financial problem. It’s a moral and ethical problem of making and breaking promises that profoundly impact people’s lives. Our culture puts a high value on integrity: doing what you said you would do.

    We take a job because the compensation package includes x, y and z. Then someone says no, we can’t give you z, so quit and go elsewhere.

    The pension problem is going to get worse as more and more retirees get stuck with broken promises, and as taxpayers get handed higher and higher bills. These are irreconcilable demands in many cases. It’s not possible to keep contradictory promises.

    What’s the endgame? I think much of the US will end up like Puerto Rico. But the hardship map will be more random than you can possibly imagine. Some sort of authority – whether bankruptcy courts or something else – will have to seize pension assets and figure out who gets hurt and how much. Some courts in some states will require taxes to go up. But courts don’t have taxing authority, so they can only require cities to pay, but with what money and from whom?

    In many states we literally don’t have the laws and courts in place with authority to deal with this. And just try passing a law that allows for states or cities to file bankruptcy in order to get out of their pension obligations.

    The struggle will get ugly, and innocent people on both sides will be hurt. We hear stories about retired police chiefs and teachers with lifetime six-digit pensions and so on. Those aberrations (if you look at the national salary picture) are a problem, but the more distressing cases are the firefighters, teachers, police officers, or humble civil servants who served the public for decades, never making much money but looking forward to a somewhat comfortable retirement. How do you tell these people that they can’t have a livable pension? We will see many human tragedies.

    On the other side will be homeowners and small business owners, already struggling in a changing economy and then being told their taxes will double. This may actually happen in Dallas; and if it does, we won’t be alone for long.

    The website Pension Tsunami posts scores of articles, written all across America, about pension problems. We find out today that in places like New York and Chicago and Cook County, pension funds have more retirees collecting than workers paying into the fund. There are more retired cops in New York and Chicago than there are working cops. And the numbers of retirees just keep growing. On an individual basis, it is smart for the Chicago police officer to retire as early possible, locking in benefits, go on to another job that offers more retirement benefits, and round out a career by working at least three years at a private job that qualifies the officer for Social Security. Many police and fire pensions are based on the last three years of income; so in the last three years before they retire, these diligent public servants work enormous amounts of overtime, increasing their annual pay and thus their final pension payouts.

    As I’ve said, this is the crisis we can’t muddle through. While the federal government (and I realize this is economic heresy) can print money if it has to, state and local governments can’t print. They actually have to tax to pay their bills. It’s the law. It’s also an arrangement with real potential to cause political and social upheaval that Americans have not seen in decades. The storm is only beginning. Think Hurricane Harvey on steroids, but all over America. Of all the intractable economic problems I see in the future (and I have a vivid imagination), this is the most daunting.

    Dallas Money Show on October 5–6. You can click on the link for details. I will speak at an alternative investments conference in Denver on October 23–24 (details in future letters) and return to Denver on November 6 and 7, speaking for the CFA Society and holding meetings. After a lot of small back-and-forth flights in November, I’ll end up in Lugano, Switzerland, right before Thanksgiving. Busy month! Then there will be a (currently) lightly scheduled December, followed by an early trip to Hong Kong in January. It looks like Lacy Hunt and his wife, JK, will join Shane and me there. Lacy and I will come back home exhausted from trying to keep up with the bundles of indefatigable energy that JK and Shane are.

    Boston was a very intriguing two full days of meetings. There is the potential to expand the services that my firms can offer readers and investors into areas that I never knew might be possible. It is truly exciting, and I hope we can pull it off.

    I am off to meet with a close friend from out of town and compare notes on the world, one of my favorite things to do. I know we all have times when we wish we were being more productive, when we wondering why are we here and not moving the ball forward. But when I get to spend time with good friends, old or new, I somehow never feel that way. And while our pension systems may be going to hell in a handbasket, friendships will remain forever. You have a great week.

    Your wishing I could see a better path forward analyst,

    [​IMG]
    John Mauldin
    subscribers@MauldinEconomics.com

    Copyright 2017 John Mauldin. All Rights Reserved.

    http://news.goldseek.com/GoldSeek/1505655101.php
     
    Last edited: Sep 17, 2017 at 9:01 AM
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  20. edsl48

    edsl48 Silver Member Silver Miner

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    To quote John Bogle the former CEO of Vanguard that brought us the index funds "every market reverts towards the mean." In view of this not only are there pension issues but also personal savings people have accumulated for their retirement. The market has been on very substantial growth over the past several years and, based upon by assorted quantitative evaluations as well as assorted subjective opinions, it is simply over valued. Considering this and assuming Bogle's research is valid we will soon see a reversion to the mean or a drop in value that will decimate many retirees savings including any pension funds they may be invested in.
    My wife and I often go to one of the "feed and fleece em" investment seminars for the free meal. The last one we went to the person holding the conference asked if anyone had moved part of their retirement funds into safer CDs or bond funds with the market so high. I was the only one to raise my hand meaning out of a room full of soon to be or retired individuals are riding the market highs in a state of euphoria.
    My take on it all is that will the Government and Federal Reserve continue the assorted programs to pump the market to prevent a reversion to the mean with the resultant crash in pensions and savings? This is an important question to me because we all often read that the Government printing presses will run in overtime to keep the party going. Would any politician, who after all has the main goal of getting re-elected, allow, at this time, anything that would cause an effect of lowering investment values? I think this is why many of us invest in the PMs. Over the years we have seen ourselves called "gold bugs, worry warts etc" but the time of significant currency valuation may now be closer than we think. The question is will the political class let the markets fall or are they trapped into simply printing money and inflating the problems of falling investment prices away?
     
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  21. Goldhedge

    Goldhedge Modal Operator/Moderator Site Mgr Site Supporter

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    Public workers from two more towns expected to lose CalPERS pensions
    BY ADAM ASHTON

    aashton@sacbee.com


    SEPTEMBER 13, 2017 12:01 AM

    Ten workers and retirees from government agencies in two far corners of California likely will see their pensions slashed because their employers have not paid bills to the state’s largest retirement fund in more than a year.

    Trinity County Waterworks District No. 1 west of Redding and Niland Sanitary District from Imperial County are in line to become the third and fourth government agencies to break with CalPERS over the past 12 months in a manner that shortchanges their retirees.

    The CalPERS Board of Administration is scheduled next week to vote on ending contracts with the two small districts because they’re in default.


    Read more here: http://www.sacbee.com/news/politics-government/the-state-worker/article172960601.html#storylink=cpy
     
  22. Garyw

    Garyw Am I a Retired Veteran or a Right Wing Fanatic? Silver Miner

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    Pension funds is not the biggest disaster at all. With a few more hurricane disasters the insurance companies who depend on people making insurance paymetnts find that there are more claims than funds coming in and ask for a government bail out next time there will be no money to fund the bail outs. That day will be in weeks or months not years. Insurance companies have been raping people for many years and now it is time for the well to run dry. It is almost over folks those who survive are the ones that already are accustomed to living on nothing. We that pay cash now for what we want and live without will still be here when those who have to scale back will fail. Those who have things that are paid for and owe nothing will prevail. Those who lived on credit will not have time to catch up. It is the preppers who will prevail. I knew unions would fail when they started to fail 40 years ago(when Jimmy Hoffa got a pair of concrete boots.) There is far more non union owner operators than union members. Even government Pers will end soon.
     
    Last edited: Sep 17, 2017 at 10:27 PM
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  23. Uglytruth

    Uglytruth Gold Member Gold Chaser

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    Lately I have been looking at everything as a trap. Debt is a huge one & they pulled a fast one with the low interest mortgages before the 2007 crap. Housing prices went up & wages were stagnant. huge amounts of debt being carried by the sheeple. Then they crashed the market & took all the down payments & equity. Credit cards and now 30-70K cars are the new thing. With the few remaining pennies people have healthcare is breaking both business owners, workers & older people. The American dream is dead & if you don't think so put yourself in a hard working , smart 22 year old's shoes & look at what he is facing. I've had some pretty eye opening conversations with some young men lately....... and they are not happy or optimistic.

    I agree living with little is the only answer the average person has but few will settle for that. The want generation that can't sacrifice anything will never save anything. Zero interest rates don't bother them any. The problem is that time has run out & while it may be extended a little the signs are clear.
     
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  24. edsl48

    edsl48 Silver Member Silver Miner

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    Pension Storm Warning

    BY JOHN MAULDIN


    SEPTEMBER 16, 2017

    Email
    Storms from Nowhere
    Blood from Turnips
    Promises from Air
    Chicago, Lisbon, Denver, Lugano, and Hong Kong

    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.
    Storms from Nowhere?

    This year marks the first time on record that two Category 4 hurricanes have struck the US mainland in the same year. Worse, Harvey and Irma landed directly on some of our most valuable and vulnerable coastal areas. So now, in addition to all the problems that existed a month ago, the US economy has to absorb cleanup and rebuilding costs for large parts of Texas and Florida, as well as our Puerto Rico and US Virgin Islands territories.
    Now then, people who live in coastal areas know full well that hurricanes happen – they know the risk, just not which hurricane season might launch a devastating storm in their direction. In a note to me about Harvey, fellow Rice University graduate Gary Haubold (1980) noted just how flawed the city’s assumptions actually were regarding what constitutes adequate preparedness. He cited this excerpt from a recent Los Angeles Times article:



    The storm was unprecedented, but the city has been deceiving itself for decades about its vulnerability to flooding, said Robert Bea, a member of the National Academy of Engineering and UC Berkeley emeritus civil engineering professor who has studied hurricane risks along the Gulf Coast.

    The city’s flood system is supposed to protect the public from a 100-year storm, but Bea calls that “a 100-year lie” because it is based on a rainfall total of 13 inches in 24 hours.

    “That has happened more than eight times in the last 27 years,” Bea said. “It is wrong on two counts. It isn’t accurate about the past risk and it doesn’t reflect what will happen in the next 100 years.” (Source)

    Anybody who lives in Houston can tell you that 13 inches in 24 hours is not all that unusual. But how do Robert Bea’s points apply to today’s topic, public pensions? Both pension plan shortfalls and hurricanes are known risks for which state and local governments must prepare. And in both instances, too much optimism and too little preparation ultimately have devastating results.

    Admittedly, public pension liabilities don’t come out of nowhere the way hurricanes seem to – we know exactly where they will strike. In many cases, we know approximately when they’ll strike, too. Yet we still let our elected officials make impossible-to-fulfill promises on our behalf. The rest of us are not so different from those who built beach homes and didn’t buy hurricane or storm surge insurance. We just face a different kind of storm.

    Worse, we let our government officials use predictions about future returns that are every bit as unrealistic as calling a 13-inch rain in Houston a 100-year event. And while some of us have called pension officials out, they just keep telling lies – and probably will until we reach the breaking point.

    Puerto Rico is a good example. The Commonwealth was already in deep debt before Irma blew in – $123 billion worth of it. There’s simply no way the island can repay such a massive debt. Creditors can fight in the courts, but in the end you can’t squeeze money out of plantains or pineapples. Not enough money, anyway. Now add Irma damages, and the creditors have even less hope of recovering their principal, let alone interest.

    Puerto Rico is presently in a new form of bankruptcy that Congress authorized last year. Court proceedings will probably drag on for years, but the final outcome isn’t in doubt. Creditors will get some scraps – at best perhaps $0.30 on the dollar, my sources say – and then move on. We’re going to find out how strong those credit insurance guarantees really are.

    “That’s just Puerto Rico,” you may say if you’re a US citizen in one of the 50 states. Be very careful. Your state is probably not so much better off. In 10 years, your state may well be in the same place where Puerto Rico is now. I’d say the odds are better than even.

    Are your elected leaders doing anything about this huge issue, or even talking about it? Probably not.
    Now then, people who live in coastal areas know full well that hurricanes happen – they know the risk, just not which hurricane season might launch a devastating storm in their direction. In a note to me about Harvey, fellow Rice University graduate Gary Haubold (1980) noted just how flawed the city’s assumptions actually were regarding what constitutes adequate preparedness. He cited this excerpt from a recent Los Angeles Times article:



    The storm was unprecedented, but the city has been deceiving itself for decades about its vulnerability to flooding, said Robert Bea, a member of the National Academy of Engineering and UC Berkeley emeritus civil engineering professor who has studied hurricane risks along the Gulf Coast.

    The city’s flood system is supposed to protect the public from a 100-year storm, but Bea calls that “a 100-year lie” because it is based on a rainfall total of 13 inches in 24 hours.

    “That has happened more than eight times in the last 27 years,” Bea said. “It is wrong on two counts. It isn’t accurate about the past risk and it doesn’t reflect what will happen in the next 100 years.” (Source)

    Anybody who lives in Houston can tell you that 13 inches in 24 hours is not all that unusual. But how do Robert Bea’s points apply to today’s topic, public pensions? Both pension plan shortfalls and hurricanes are known risks for which state and local governments must prepare. And in both instances, too much optimism and too little preparation ultimately have devastating results.

    Admittedly, public pension liabilities don’t come out of nowhere the way hurricanes seem to – we know exactly where they will strike. In many cases, we know approximately when they’ll strike, too. Yet we still let our elected officials make impossible-to-fulfill promises on our behalf. The rest of us are not so different from those who built beach homes and didn’t buy hurricane or storm surge insurance. We just face a different kind of storm.

    Worse, we let our government officials use predictions about future returns that are every bit as unrealistic as calling a 13-inch rain in Houston a 100-year event. And while some of us have called pension officials out, they just keep telling lies – and probably will until we reach the breaking point.

    Puerto Rico is a good example. The Commonwealth was already in deep debt before Irma blew in – $123 billion worth of it. There’s simply no way the island can repay such a massive debt. Creditors can fight in the courts, but in the end you can’t squeeze money out of plantains or pineapples. Not enough money, anyway. Now add Irma damages, and the creditors have even less hope of recovering their principal, let alone interest.

    Puerto Rico is presently in a new form of bankruptcy that Congress authorized last year. Court proceedings will probably drag on for years, but the final outcome isn’t in doubt. Creditors will get some scraps – at best perhaps $0.30 on the dollar, my sources say – and then move on. We’re going to find out how strong those credit insurance guarantees really are.

    “That’s just Puerto Rico,” you may say if you’re a US citizen in one of the 50 states. Be very careful. Your state is probably not so much better off. In 10 years, your state may well be in the same place where Puerto Rico is now. I’d say the odds are better than even.

    Are your elected leaders doing anything about this huge issue, or even talking about it? Probably not.
    There’s a hospital district, port authority, several college districts, the flood control district, a multitude of utility districts, and the Harris County Department of Education. Some homes may fall within 10 or more jurisdictions.



    What about those thousands of flooded homes in and around Houston; how much are they worth? Right now, I’d say their value is zero in many cases. Maybe they will have some value if it’s possible to rebuild, but at the very least they ought to receive a sharp discount from the tax collector this year.

    Considering how many destroyed or unlivable properties there are all over South Texas, I suspect cities and counties will lose billions in revenue even as their expenses rise. That’s a small version of what I expect as city and state pension systems all over the US finally face reality.

    Here in Dallas I pay about 2.7% in property taxes. When I bought my home over four years ago, I checked our local pension and was told we were 100% funded. I even mentioned in my letter that I was rather surprised. Turns out they lied. Now, realistic assessments suggest they will have to double the municipal tax rate (yes, I said double) to be able to fund fire and police pension funds. Not a terribly popular thing to do. At some point, look for taxpayers to desert the most-indebted cities and states. Then what? I don’t know. Every solution I can imagine is ugly.

    Disappearing Pensions” I shared this chart from my good friend Danielle DiMartino Booth:


    [​IMG]
    Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade. You read that right – not doubled, tripled or quadrupled: quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe.

    You will also notice in the chart that much of that change happened in 2008. Why was that? That’s when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments. Also, some strapped localities conserved cash by promising public workers more generous pension benefits in lieu of pay raises.
    According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”).



    Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50-60% next year. That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25% – a step in the right direction but not nearly enough.

    Think about this as an investor. Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of you don’t. Yes, some strategies have a good shot at doing it, but there’s no guarantee.

    And if you believe Jeremy Grantham’s seven-year forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years.
    [​IMG]
    Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return – about the average for most pension funds – then that means in 30 years that $1 million will have grown to $8 billion (approximately). Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%.

    Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it. Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is with huge cuts to other needed services or with massive tax cuts to pension benefits.

    The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart:
    [​IMG]
    The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere. What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all?
    That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference.



    But wait, it gets worse. The graph we showed earlier stated that unfunded pension liabilities for state and local governments was $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.
    [​IMG]
    We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion. Following the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues. Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work.

    Pension trustees don’t face personal liability. They’re literally playing with someone else’s money. Some try very hard to be realistic and cautious. Others don’t. But even the most diligent can’t control when the next recession comes, or when the stock market will crash, leaving a gaping hole in their assets while liabilities keep right on rising.

    I have had meetings with trustees of various government pensions. Many of them want to assume a more realistic discount rate, but the politicians in their state literally refuse to allow them to assume a reasonable discount rate, because owning up to reality would require them to increase their current pension funding dramatically. So they kick the can down the road.

    Intentionally or not, state and local officials all over the US made pension promises that future officials can’t possibly keep. Many will be out of office when the bill comes due, protected from liability by sovereign immunity.

    We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.

    But wait, it gets still worse. (Do you see a trend here?) Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them – assuming they get their projected returns. What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep. Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona.
    This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown.



    I was heavily involved in politics at both the national and local levels in the 80s and 90s and much of the 2000s. Trust me, local politics is far nastier and more vicious. And there is nothing more local than police and firefighters and teachers seeing their pensions cut because the money isn’t there. Tax increases of up to 100% are going to become commonplace. But even these new revenues won’t be enough… because we will be acting with too little, too late.

    This is the core problem. Our political system gives some people incentives to make unrealistic promises while also absolving them of liability for doing so. It also places the costs of those must-break promises on innocent parties, i.e. the retirees who did their jobs and rightly expect the compensation they were told they would receive.

    So at its heart the pension crisis is really not a financial problem. It’s a moral and ethical problem of making and breaking promises that profoundly impact people’s lives. Our culture puts a high value on integrity: doing what you said you would do.

    We take a job because the compensation package includes x, y and z. Then someone says no, we can’t give you z, so quit and go elsewhere.

    The pension problem is going to get worse as more and more retirees get stuck with broken promises, and as taxpayers get handed higher and higher bills. These are irreconcilable demands in many cases. It’s not possible to keep contradictory promises.

    What’s the endgame? I think much of the US will end up like Puerto Rico. But the hardship map will be more random than you can possibly imagine. Some sort of authority – whether bankruptcy courts or something else – will have to seize pension assets and figure out who gets hurt and how much. Some courts in some states will require taxes to go up. But courts don’t have taxing authority, so they can only require cities to pay, but with what money and from whom?

    In many states we literally don’t have the laws and courts in place with authority to deal with this. And just try passing a law that allows for states or cities to file bankruptcy in order to get out of their pension obligations.
    The struggle will get ugly, and innocent people on both sides will be hurt. We hear stories about retired police chiefs and teachers with lifetime six-digit pensions and so on. Those aberrations (if you look at the national salary picture) are a problem, but the more distressing cases are the firefighters, teachers, police officers, or humble civil servants who served the public for decades, never making much money but looking forward to a somewhat comfortable retirement. How do you tell these people that they can’t have a livable pension? We will see many human tragedies.



    On the other side will be homeowners and small business owners, already struggling in a changing economy and then being told their taxes will double. This may actually happen in Dallas; and if it does, we won’t be alone for long.

    The website Pension Tsunami posts scores of articles, written all across America, about pension problems. We find out today that in places like New York and Chicago and Cook County, pension funds have more retirees collecting than workers paying into the fund. There are more retired cops in New York and Chicago than there are working cops. And the numbers of retirees just keep growing. On an individual basis, it is smart for the Chicago police officer to retire as early possible, locking in benefits, go on to another job that offers more retirement benefits, and round out a career by working at least three years at a private job that qualifies the officer for Social Security. Many police and fire pensions are based on the last three years of income; so in the last three years before they retire, these diligent public servants work enormous amounts of overtime, increasing their annual pay and thus their final pension payouts.

    As I’ve said, this is the crisis we can’t muddle through. While the federal government (and I realize this is economic heresy) can print money if it has to, state and local governments can’t print. They actually have to tax to pay their bills. It’s the law. It’s also an arrangement with real potential to cause political and social upheaval that Americans have not seen in decades. The storm is only beginning. Think Hurricane Harvey on steroids, but all over America. Of all the intractable economic problems I see in the future (and I have a vivid imagination), this is the most daunting.

    Boston was a very intriguing two full days of meetings. There is the potential to expand the services that my firms can offer readers and investors into areas that I never knew might be possible. It is truly exciting, and I hope we can pull it off.



    I am off to meet with a close friend from out of town and compare notes on the world, one of my favorite things to do. I know we all have times when we wish we were being more productive, when we wondering why are we here and not moving the ball forward. But when I get to spend time with good friends, old or new, I somehow never feel that way. And while our pension systems may be going to hell in a handbasket, friendships will remain forever. You have a great week.

    Your wishing I could see a better path forward analyst,

    John Mauldin

    subscribers@mauldineconomics.com
     
  25. Thecrensh

    Thecrensh Gold Member Gold Chaser

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    Exactly. I would love to invest in the markets, but am not because I feel that at any moment it could all implode. The system is broken and nobody wants to address the issue at hand. Actually, very few even realize it's broken or care.
     
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  26. arminius

    arminius Gold Member Gold Chaser Site Supporter ++

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    Until the checks stop coming in. And the swelling into the streets happens...
     
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  27. Thecrensh

    Thecrensh Gold Member Gold Chaser

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    But by then it will be too late. America will be an overnight 2nd world nation.
     
  28. searcher

    searcher Mother Lode Found Site Supporter ++ Mother Lode

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  29. searcher

    searcher Mother Lode Found Site Supporter ++ Mother Lode

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  30. GOLDBRIX

    GOLDBRIX God,Donald Trump,most in GIM2 I Trust. OTHERS-meh Site Supporter Platinum Bling

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  31. searcher

    searcher Mother Lode Found Site Supporter ++ Mother Lode

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    lol
     
  32. Thecrensh

    Thecrensh Gold Member Gold Chaser

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    And then it does become your problem....
     
  33. searcher

    searcher Mother Lode Found Site Supporter ++ Mother Lode

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  34. tom baxter

    tom baxter back from 2004

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    It's pretty obviously that now. It's only the smoke and mirrors of debt that give the impression it aint
     
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  35. gringott

    gringott Killed then Resurrected Midas Member Site Supporter

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    The world's greatest financial swindle that started in 1913 is unwinding as we speak. Look out below!
     
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  36. southfork

    southfork Mother Lode Found Mother Lode

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  37. Mr Paradise

    Mr Paradise Midas Member Midas Member

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    Fair & Equal that we keep hearing about isn't going to include $6,000/month pensions you were promised nor will it include the generational wealth passed down from majority white family units to their children.

    Take away the baby boomer generation pensions and replace it with something fair and equal and require the trillion in outstanding student loans debt that Generation X and the millenials have accrued be paid back by any type of inheritance.

    Or they could screw up the medical system so bad that the baby boomers have to go to the grave flat broke in exchange for staying alive and well on that shuffleboard court.
     
  38. searcher

    searcher Mother Lode Found Site Supporter ++ Mother Lode

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  39. edsl48

    edsl48 Silver Member Silver Miner

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    An Illinois Pension story happening now

    Illinois House Majority Leader Barbara Flynn Currie, D-Chicago, has announced she will not run for re-election in 2018.

    Large pension payouts await the longtime lawmaker. And the fund from which those payouts will be drawn is one example of how Illinois’ most powerful politicians have shown little interest in leading the state out of its pension crisis.

    The secret to a big spike

    A little-known provision within the General Assembly Retirement System, or GARS, gifts massive pension payouts to state lawmakers who have been in office the longest – the very men and women responsible for the state’s pension crisis, and who refuse needed reforms.

    When she steps down, Currie will start drawing a six-figure pension after one year.

    That’s because GARS allows lawmakers who were elected before 2003 to hoard pension “spikes.” After serving 20 years in office or turning age 55, whichever comes later, these lawmakers bank a 3 percent boost to their eventual pensions each year.

    Currie has been in the House since 1979 and is now 77. Therefore, she has been collecting 3 percent boosts every year since her 20th year of service concluded at the start of 2000.

    When she retires as majority leader, her salary will likely stand at over $91,000, including her base salary and leadership bonus. That means her first-year pension payment will be more than $77,000.

    Then the spikes kick in. Her second-year pension will total more than $121,000, according to GARS rules.

    Of course, Currie has contributed a portion of each paycheck to GARS throughout her career. But within three years, the state will have paid back more than her entire contribution in pension checks.

    Currie is not the only active member of the General Assembly who will benefit from this provision upon retirement. House Speaker Mike Madigan, Senate President John Cullerton and other longtime lawmakers on both sides of the aisle are also set to cash in.

    The state’s worst pension system

    The Land of Lincoln is home to the nation’s worst pension crisis. Moody’s Investors Service calculates Illinois’ state pension debt is more than $250 billion.

    GARS is Illinois’ worst-funded state pension system, with just under 14 cents for every dollar needed to make future payments. That means it can only afford to pay out benefits for two more years.

    Taxpayers actually pay 2.5 times for their lawmakers – once for salaries and 1.5 times to bail out the lawmakers’ failed pension fund.

    In addition to providing 401(k)s to all new government workers – a sensible change for GARS would be to put the system out to pasture. Otherwise, taxpayers will continue to be asked to bail it out.

    Nearly 40 state representatives and 11 state senators have already opted out of GARS, along with Gov. Bruce Rauner and Lt. Gov. Evelyn Sanguinetti.

    Abolishing GARS would show true leadership in addressing the state’s biggest fiscal problem. And lawmakers would face little opposition.

    But with longtime legislative leaders such as Currie set to receive large payments from the status quo, one can see why change may be difficult.
     
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  40. GOLDBRIX

    GOLDBRIX God,Donald Trump,most in GIM2 I Trust. OTHERS-meh Site Supporter Platinum Bling

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    What most states fail to take into consideration is their politicians are mostly PART-TIME or at least seasonal.

    If they are not working 2,000+ hours work in a year their benefits SHOULD BE prorated for the time they are actually in office.
    Most state politicians are outside the Gov. , Lt. Gov, Treasurer, ... are only working 1/3 of a work year.

    That would cut 2/3rds of that pension problem, and free up monies for the long term 2080 hours a year employees they are currently looking at screwing.

    If the PEOPLE make it less interesting to be PROFESSIONAL, LIFE LONG, POLITICIANS. Those legislators will be more prone to give up their seats to fresh idea people ( as the Constitution originally intended). A side job not a career.
     
    Last edited: Sep 21, 2017 at 3:22 PM
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