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The looming pension disaster

Toshi

Harbinger of Doom
Oct 23, 2001
27,596
2,227
http://www.chrismartenson.com/blog/looming-pension-disaster/14565

[O]ne of the next shoes to drop is going to be a pension disaster. This too will be more easily measured in trillions than billions.

I am expecting a public pension wreck based on “management” so flawed as to cross over into gross negligence or worse.

March 3 (Bloomberg) -- The Chicago Transit Authority retirement plan had a $1.5 billion hole in its stash of assets in 2007. At the height of a four-year bull market, it didn’t have enough cash on hand to pay its retirees through 2013, meaning it was underfunded to the tune of 62 percent.

The CTA, which manages the second-largest public transit system in the U.S., had to hope for a huge contribution from the Illinois state legislature. That wasn’t going to happen.

Then the authority found an answer.

“We’ve identified the problem and a solution,” said CTA Chairman Carole Brown on April 16, 2007. The agency decided to raise money from a bond sale.
So far so good, eh? I mean especially if you don’t think about it too hard. After all, the only way a scheme to borrow money to plug a fiscal hole can work is if you are earning more from investing that cash that you are paying out in interest. Makes sense right?

Your investment gains have to exceed your interest costs or the scheme becomes a sure-fire money loser.

Well, here’s the punch line:

In the CTA deal, the fund borrowed $1.9 billion by promising to pay bondholders a 6.8 percent return. The proceeds of the bond sale, held in a money market fund, earned 2 percent -- 70 percent less than what the fund was paying for the loan.
Wow. I am speechless. That was the "plan"?

Borrow at 6.5% and earn 2%?

This is an unfortunately accurate illustration of the type of “talent” with which many state pensions have been saddled.

[...]

As long as the “perpetual growth machine” is chugging along, all of the collective assumptions about pensions more or less work out according to plan. But what happens when a model predicated on exponential expansion not only expands, but retreats?

Well, this is pretty much of an actuarial and financial disaster of biblical proportions. Here’s an example:

The nation’s largest public pension fund, California Public Employees’ Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that, according to Calpers spokesman Clark McKinley.

Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent.
At its height in October 2007, CalPERS had $260 billion in assets and at the end of 2008 it had $186 billion. Based on the stock market performance this year, we might estimate that CalPERs is now worth somewhere in the vicinity of $140 to $150 billion.

How long would it take CalPERS to “get even”? Well, ignoring inflation, even if we use their extremely generous and woefully unmet assumed rate of return of 7.75% it would take between 8 and 9 years, and that’s assuming that cash in meets cash out the entire time.

If we use their actual 10 year performance as a rate of return, then it’s a 20 year haul to climb back to even, again ignoring inflation.

[...]

What does this mean?

Among the many wrenching adjustments that we are just now beginning to face, state legislators must now include a trillion dollar pension shortfall to the list of things that must be negotiated. A government retirement plan can’t go bankrupt, even if it’s insolvent; state treasuries must put up the money if a fund runs dry.

So we are now facing the first actual set of hard choices in several generations. Choices that increasing look like they can no longer be passed to the future. The future is here, it has arrived. Will states decide to pay their retirement obligations, pave roads, educate children, or feed the hungry? These are the choices that now sit before us and I remain skeptical that we will successfully borrow our way out of the predicament this time.

It would seem that decades of intellectually weak and fiscally negligent political leadership has finally caught up with us.

The pain of this adjustment is going to send up a mighty hue and cry from the populace and politicians alike and the response, I fear, will be the same as it always is; print more money.

That is the weak and easy road to take, and so, with history as our guide, we can be nearly 100% sure that our leadership will follow that route as certainly as water will seek a drain.
the emperor truly has no clothes.
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
14,591
1,592
Colorado
Like I was saying, we're fuxored. I'm hoarding rice pasta and other nonperishables. If I can get the woman t go along, I'm getting a shotgun and glock, possibly a hunting rifle as well. Gotta be able to feed and defend yourself when the isht hits the fan.
 

Silver

find me a tampon
Jul 20, 2002
10,848
0
Orange County, CA
Keep in mind, the pension funds did much better than the banks.

Epic fail instead of Ted Haggard I'm not a faggot who likes meth and blowjobs fail.

Thank God we didn't have regulation to weigh down the investment returns...

(It doesn't matter. It will all inflate away. That's the only option we have left.)
 

$tinkle

Expert on blowing
Feb 12, 2003
14,591
5
i don't hate chicago, but i sure hate the way it's been run. anybody know of a city on the same order of size they could be a protege to?
 

moff_quigley

Why don't you have a seat over there?
Jan 27, 2005
4,408
1
Poseurville
Like I was saying, we're fuxored. I'm hoarding rice pasta and other nonperishables. If I can get the woman t go along, I'm getting a shotgun and glock, possibly a hunting rifle as well. Gotta be able to feed and defend yourself when the isht hits the fan.
<dons tin foil hat> I've been thinking seriously about this myself. Given you know quite a bit about what's going on in the financial world....care to make any guesses/predicitions of when the poo hits the fan? I realize that it's already been flung...
 

ire

Turbo Monkey
Aug 6, 2007
6,199
4
Like I was saying, we're fuxored. I'm hoarding rice pasta and other nonperishables. If I can get the woman t go along, I'm getting a shotgun and glock, possibly a hunting rifle as well. Gotta be able to feed and defend yourself when the isht hits the fan.
Are you afraid the old people are going to rise up when they can't retire? :p It's a sh!tty situation where the workers were promised a lot of perks for the lack of pay and now as those perks come due the money isn't there. I'm a State worker and the way they sell the positions is as a secure, decent job, with a great retirement. Governments have been promising big benefits at retirement because they are not obligated to fully fund those obligations and it allows them to defer dealing with them.... unfortunately the time to pay is here
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
14,591
1,592
Colorado
My guess? It really comes down to when the Govt. decides to stop making promises and stop spending so it can actually save. The estimates I have heard show the major California pensions starting to burn principle within the next few years, with depletion of capital coming by a few years +/- of 2015.

That being said, there is a lot that can happen between now and then. If the govt. inflates the piss out of our currency (which I expect to happen), then a fixed payment on $2000/month is not really $2000... it's $2000*current inflation rate. If that rate is 100%, you are actually only getting $1000 worth of value... The same way inflation helps the issuer of bonds (longterm fixed payments), it screws the holders, or in this case the pension recipient because the vaule of what they receive is substantially less than was expected.

Many pensions, notably those in the populous states/locales are grossly underfunded and funds are being added at rates below need because the projected growth rates are too high. Plus states, now that the economy is falling are looking to push the pension payments out 1-2 years for booms times (read more taxes inflow). NOW is when they should be backing up the truck, as security prices are falling, they can buy when everything is substantially down (not that I 100% agree with the current timing) and ride back up.
But then again, these are politicians, not intelligent individuals...
 

jimmydean

The Official Meat of Ridemonkey
Sep 10, 2001
29,953
2,754
Portland, OR
I've never worked for a company that offered a pension and only a few have even had matching 401k systems. That being said, I am taking my current company for all I can while it's still offered (hence my MBA attempt).

I don't count on social security, either. but if there is something there when the time comes, I'll be happy.
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
14,591
1,592
Colorado
It's not the old people, it's the poor and disenfranchised. When commitments to fund come up, those with a higher legal standing will win. Govts MUST fulfill their pension promises. When push comes to shove, it's the peripheral programs that will get cut, those supporting the poor and destitute will likely be the first to go, because if taxes are substantially increased, you will see people moving to states with less tax obligations.
I expect California to default within two years. There is no money, and the politicians have not stopped spending. I was at Chase yesterday and asked about a "9.15% tax free investment" sign I saw; It was California Muni's. Thpse notes were issued at 6.5% just two months ago. Trading at 9.15% means they are selling for ~$865 (face is $1000), for that type of discount, the market is pricing in a high risk of default. Especially given that they were JUST issued!
 

1453

Monkey
:twitch:

don't you mean 2000/(1+inflation rate) a year from now?

If the govt. inflates the piss out of our currency (which I expect to happen), then a fixed payment on $2000/month is not really $2000... it's $2000*current inflation rate. If that rate is 100%, you are actually only getting $1000 worth of value... The same way inflation helps the issuer of bonds (longterm fixed payments), it screws the holders, or in this case the pension recipient because the vaule of what they receive is substantially less than was expected.
BTW I think you are preaching to the choir, I can't imagine most people on RM not knowing how bonds and inflation work.

Although you can make a fortune by short selling the value of pre-owned Jettas to PSP. :rofl:
 
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ire

Turbo Monkey
Aug 6, 2007
6,199
4
It's not the old people, it's the poor and disenfranchised. When commitments to fund come up, those with a higher legal standing will win. Govts MUST fulfill their pension promises. When push comes to shove, it's the peripheral programs that will get cut, those supporting the poor and destitute will likely be the first to go, because if taxes are substantially increased, you will see people moving to states with less tax obligations.
I expect California to default within two years. There is no money, and the politicians have not stopped spending. I was at Chase yesterday and asked about a "9.15% tax free investment" sign I saw; It was California Muni's. Thpse notes were issued at 6.5% just two months ago. Trading at 9.15% means they are selling for ~$865 (face is $1000), for that type of discount, the market is pricing in a high risk of default. Especially given that they were JUST issued!
I suspect we'll see higher taxes on the local level to help cover these obligations. California is, or at least is talking, about raising taxes to plug the huge whole in their budget.
 

ohio

The Fresno Kid
Nov 26, 2001
6,640
4
SF, CA
California is, or at least is talking, about raising taxes to plug the huge whole in their budget.
Yeah, talking about it, but can't do it because of our ****ing budgeting process. How we can pass a constitutional amendment to prevent gay marriage but can't pass one to let a budget pass by simple majority is beyond me.
 

X3pilot

Texans fan - LOL
Aug 13, 2007
5,861
1
SoMD
I suspect we'll see higher taxes on the local level to help cover these obligations. California is, or at least is talking, about raising taxes to plug the huge whole in their budget.
But, with no jobs and no homes being owned, what's the point in raising taxes when there will be no tax money collected, other than to say we did something?

Or are they considering increased sales tax, like in PA?

Personally, I think it's time to expect everyone to be accountable for their own retirement and no expect diddly from your employer. Yeah, you were promised a pension for 20-30 years of work but the sooner folks realize that all their promised entitlements are going to cost them more from those very entitlements, the less the ass pain will be and we start to reconstitute some semblance of an economy.
 

ire

Turbo Monkey
Aug 6, 2007
6,199
4
Personally, I think it's time to expect everyone to be accountable for their own retirement and no expect diddly from your employer. Yeah, you were promised a pension for 20-30 years of work but the sooner folks realize that all their promised entitlements are going to cost them more from those very entitlements, the less the ass pain will be and we start to reconstitute some semblance of an economy.
I somewhat agree...I save 35% of my income and have studied up on investing and differing retirement strategies. I think it's unreasonable to expect the average person to gain this type of knowledge....most of America can't even live within their means, let alone set a budget and save for retirement. You also have people who are not just ignorant, but who probably aren't smart enough to understand how to properly save for retirement.

The pension system itself isn't a bad idea, but there needs to be some reasonable expectations....what the UAW has won in negotiations is completely unreasonable and now GM is sinking partly due to these obligations. Some type of system with forced employer match and auto enroll may work instead of a pension, but typically people end up with less for retirement when they manage their own money.
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
14,591
1,592
Colorado
but typically people end up with less for retirement when they manage their own money.
That is entirely of their own decison. If they decide to live for now, f* em. I'm living well below my means so that I can continue to live at a lifestyle I enjoy once I do not have an income. I have no sympathy.
 

ohio

The Fresno Kid
Nov 26, 2001
6,640
4
SF, CA
so did you think the budget was a good budget?
No. It's a ****ing horrendous budget, but to echo Def, some budget is better than no budget. We're beholden to a bunch of stonewalling class-A moronic assholes, so a reasonable sane budget is impossible.

We can't pay our bills, but we can't raise taxes, we can't cut our number one budget item (corrections prisons), and have taken the initial steps to dismantle the greatest higher education system on Earth, California's #1 growth engine.

This is NOT that complicated. Raise the ****ing taxes and eliminate Prop 13.

Prop 13 needs to be tossed right out. You can't afford your neighborhood anymore? Boo-****ing hoo, the reason you can't afford it is because your home quadrupled in value even accounting for the crash. You don't need to retire in a 4-bedroom home in LA. Sell it for an astronomical profit and move into something smaller, like the rest of the country does, you selfish pricks, so that a family tjhat gives a **** about someone other than themselves can pay appropriate property taxes to send our children to school.
 

ohio

The Fresno Kid
Nov 26, 2001
6,640
4
SF, CA
That is entirely of their own decison. If they decide to live for now, f* em. I'm living well below my means so that I can continue to live at a lifestyle I enjoy once I do not have an income. I have no sympathy.
In some sense I agree, but at the same time if we know the pattern is, year after year after year for the history of time, people do a worse job of managing their money than they need to to NOT be publicly supported in their retirement, we're doing ourselves a disservice as tax-payers to not find a way to help them better manage their money. Hopefully in a way that doesn't punish those who manage their finances well/wisely.
 

$tinkle

Expert on blowing
Feb 12, 2003
14,591
5
You don't need to retire in a 4-bedroom home in LA. Sell it for an astronomical profit and move into something smaller, like the rest of the country does, you selfish pricks, so that a family tjhat gives a **** about someone other than themselves can pay appropriate property taxes to send our children to school.
you send aborted babies to school? what do you teach them - sign stacking? throw up graffiti w/ their cord blood? on hot days does the state-funded school lunch include frozen embryo poppers?
 

dante

Unabomber
Feb 13, 2004
8,815
8
looking for classic NE singletrack
...and asked about a "9.15% tax free investment" sign I saw; It was California Muni's. Thpse notes were issued at 6.5% just two months ago. Trading at 9.15% means they are selling for ~$865 (face is $1000), for that type of discount, the market is pricing in a high risk of default. Especially given that they were JUST issued!
Are you sure that the 9.15% was before any tax savings? (Or that the 6.5% rate was post-tax savings?) 6.5% pre-tax (face value) works out to 9.1% post-tax if you're in the highest income bracket (figuring 35% for fed, and 5% for state?)... How they can get away with preaching huge rates of return and then only in the tiny letters note that it's post-tax savings if you're in the highest tax bracket I'll never know. There should be some law against having huge print offering something that 1% of the people can actually take advantage of.
 

Defenestrated

Turbo Monkey
Mar 28, 2007
1,657
0
Earth
you send aborted babies to school? what do you teach them - sign stacking? throw up graffiti w/ their cord blood? on hot days does the state-funded school lunch include frozen embryo poppers?
If human life is really so valuable, why do Americans make so much war?

Americans don't give a fvck about life, but a lot of them subscribe to the teachings of some ancient scriptures, which ironically they do a good job at perverting anyway.

Shouldn't we worry about ending the lives of fully developed human beings before raging about scraping some cells out of a uterus?

Besides, in 20 years when that kid is on welfare or in some prison what will you think of him then? I'm not even implying that abortions are destined to be low in society, even if this may be the case, what I'm saying is if you are going to play the morality card, its best to be consistent. Care about life from beginning to end or don't care at all.

Get a little perspective.
 
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