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Crafty_Dog
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« on: September 16, 2012, 10:44:43 AM »

Kicking this thread off with, of all things, an editorial from Pravda on the Hudson  shocked cheesy

Editorial
 
The Road to Retirement
 
Published: September 15, 2012 120 Comments
 

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Even before the Great Recession, Americans were not saving enough, if anything, for retirement, and policy experts were warning of a looming catastrophe. The economic downturn and its consequences — including losses in jobs, income, investments and home equity — have made that bad situation much worse.



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And yet, judging by the presidential campaign, this clear and present danger is a political nonissue.

Medicare, of course, is an issue. But Social Security, a critical source of income for most retirees, is barely mentioned, though the parties have sharply different views on how to improve it. The Democratic platform correctly acknowledges that it can be strengthened and preserved, implying that a modest mix of tax increases and benefit cuts is needed. The Republican platform vows to “give workers control over, and a sound return on, their investments.” That sounds like privatization, which would be cruel folly.

Neither side, however, is grappling with the fact that the nation’s retirement challenges go well beyond both programs, and that most Americans, by and large, cannot afford to retire.

The crux of the problem is that as traditional pensions have disappeared from the private sector, replacement plans have proved woefully inadequate. Fewer than half of the nation’s private sector workers have 401(k) plans, and more than a third of households have no retirement coverage during their work lives, according to the Center for Retirement Research at Boston College.

The center also found that among people ages 55 to 64 who had a 401(k), the recession and slow recovery left the typical worker with just $54,000 in that account in 2010, while households with workers in that age group had $120,000 in all retirement accounts on average. That is not nearly enough.

Nor do most Americans have significant wealth in other assets to fall back on. According to Federal Reserve data, median net worth declined by a staggering 40 percent from 2007 to 2010, to $77,000; for households near retirement, ages 55 to 64, the decline was 33 percent, to $179,000. Home equity, once thought of as a cushion in retirement, has been especially devastated. The bursting of the housing bubble has erased nearly $6 trillion in equity, and left nearly 13 million people owing a total of $660 billion more on their mortgages than their homes are worth, according to Moody’s Analytics.

A separate study by AARP has found that as of December 2011, people ages 50 and older accounted for 3.5 million underwater loans, with 1.2 million in or near foreclosure. That is on top of the more than 1.5 million older Americans who have already lost their homes in the bust since 2007.

Many people who are coming up short take refuge in the notion that they can continue working. But can they?

Working longer can help to rebuild savings, and, more important, allow one to delay taking Social Security, which improves the ultimate payout. As a practical matter, however, keeping a job is no sure thing. Workers ages 55 to 64 have been less likely than younger ones to lose their jobs in recent years; their jobless rate has averaged 6.1 percent in the past year, compared with 7.3 percent for workers ages 25 to 54. But when older workers become unemployed, they are much more likely to be out of work for long periods and less likely to find new jobs, while those who do become re-employed usually take a big pay cut.

More saving is clearly needed, along with ways to protect retirement savings from devastating downturns. The question is how. In addition to strengthening and preserving Social Security, the nation needs new forms of retirement coverage, along the lines of the “Automatic Individual Retirement Accounts” that President Obama has proposed in recent budgets, which would require companies that did not offer retirement plans to automatically divert 3 percent of an employee’s pay into an I.R.A., unless the employee opted out. A similar plan was recently proposed by Senator Tom Harkin, Democrat of Iowa.

The proposals are not cure-alls, but they could be important steps toward an ultimate aim of expanding retirement coverage and reducing reliance on 401(k)’s, which have proved far too vulnerable to investing mistakes and market downturns to be the core of a retirement plan.

Millions of Americans are headed for insecure retirements, but with new policies, millions more could escape that fate.
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Crafty_Dog
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« Reply #1 on: April 06, 2013, 08:14:22 AM »



http://www.capitalisminstitute.org/obama-anti-retirement/
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Crafty_Dog
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« Reply #2 on: April 09, 2013, 09:50:35 PM »

Andy Kessler: The Pension Rate-of-Return Fantasy
Counting on 7.5% when Treasury bonds are paying 1.74%? That's going to cost taxpayers billions..
By ANDY KESSLER

It has been said that an actuary is someone who really wanted to be an accountant but didn't have the personality for it. See who's laughing now. Things are starting to get very interesting, actuarially-speaking.

Federal bankruptcy judge Christopher Klein ruled on April 1 that Stockton, Calif., can file for bankruptcy via Chapter 9 (Chapter 11's ugly cousin). The ruling may start the actuarial dominoes falling across the country, because Stockton's predicament stems from financial assumptions that are hardly restricted to one improvident California municipality.

Stockton may expose the little-known but biggest lie in global finance: pension funds' expected rate of return. It turns out that the California Public Employees' Retirement System, or Calpers, is Stockton's largest creditor and is owed some $900 million. But in the likelihood that U.S. bankruptcy law trumps California pension law, Calpers might not ever be fully repaid.

So what? Calpers has $255 billion in assets to cover present and future pension obligations for its 1.6 million members. Yes, but . . . in March, Calpers Chief Actuary Alan Milligan published a report suggesting that various state employee and school pension funds are only 62%-68% funded 10 years out and only 79%-86% funded 30 years out. Mr. Milligan then proposed—and Calpers approved—raising state employer contributions to the pension fund by 50% over the next six years to return to full funding. That is money these towns and school systems don't really have. Even with the fee raise, the goal of being fully funded is wishful thinking.

Pension math is more art than science. Actuaries guess, er, compute how much money is needed today based on life expectancies of retirees as well as the expected investment return on the pension portfolio. Shortfalls, or "underfunded pension liabilities," need to be made up by employers or, in the case of California, taxpayers.

In June of 2012, Calpers lowered the expected rate of return on its portfolio to 7.5% from 7.75%. Mr. Milligan suggested 7.25%. Calpers had last dropped the rate in 2004, from 8.25%. But even the 7.5% return is fiction. Wall Street would laugh if the matter weren't so serious.

And the trouble is not just in California. Public-pension funds in Illinois use an average of 8.18% expected returns. According to the actuarial firm Millman, the 100 top U.S. public companies with defined benefit pension assets of $1.3 trillion have an average expected rate of return of 7.5%. Three of them are over 9%. (Since 2000, these assets have returned 5.6%.)

Who wouldn't want 7.5%-8% returns these days? Ten-year U.S. Treasury bonds are paying 1.74%. There is almost zero probability that Calpers will earn 7.5% on its $255 billion anytime soon.

The right number is probably 3%. Fixed income has negative real rates right now and will be a drag on returns. The math is not this easy, but in general, the expected return for equities is the inflation rate plus productivity improvements plus the expansion of the price/earnings multiple. For the past 30 years, an 8.5% expected return was reasonable, given +3%-4% inflation, +2% productivity, and +3% multiple expansion as interest rates plummeted. But in our new environment, inflation is +2%, productivity is +2% and given that interest rates are zero, multiple expansion should be, and I'm being generous, -1%.

So what to do? I recall a conversation from 20 years ago. I was hoping to get into the money-management business at Morgan Stanley MS 0.00%. I wanted to ramp up its venture-capital investing in Silicon Valley, but I was waved away. It was explained to me that investors wanted instead to put billions into private equity.

One of the firm's big clients, General Motors, GM -0.22%had a huge problem. Its pension shortfall rose from $14 billion in 1992 to $22.4 billion in 1993. The company had to put up assets. Instead, Morgan Stanley suggested that it only had an actuarial problem. Pension money invested for an 8% return, the going expected rate at the time, would grow 10 times over the next 30 years. But money invested in "alternative assets" like private equity (and venture capital) would see expected returns of 14%-16%. At 16%, capital would grow 85 times over 30 years. Woo-hoo: problem solved. With the stroke of a pen and no new money from corporate, the GM pension could be fully funded—actuarially anyway.

Things didn't go as planned. The fund put up $170 million in equity and borrowed another $505 million and invested in—I'm not kidding—a northern Missouri farm raising genetically engineered pigs. Meatier pork chops for all! Everything went wrong. In May 1996, the pigs defaulted on $412 million in junk debt. In a perhaps related event, General Motors entered 2012 with its global pension plans underfunded by $25.4 billion.

In other words, you can't wish this stuff away. Over time, returns are going to be subpar and the contributions demanded from cities across California and companies across America are going to go up and more dominoes are going to fall. San Bernardino and seven other California cities may also be headed to Chapter 9. The more Chapter 9 filings, the less money Calpers receives, and the more strain on the fictional expected rate of return until the boiler bursts.

In the long run, defined-contribution plans that most corporations have embraced will also be adopted by local and state governments. Meanwhile, though, all the knobs and levers that can be pulled to delay Armageddon have already been used. California, through Prop 30, has tapped the top 1% of taxpayers. State employers are facing 50% contribution increases. Private equity has shuffled all the mattress and rental-car companies it can. Buying out Dell is the most exciting thing they can come up with. Expected rates of return on pension portfolios are going down, not up. Even Facebook FB -0.96%millionaires won't make up the shortfall.

Sadly, the only thing left is to cut retiree payouts, something Judge Klein has left open. There are 12,338 retired California government workers receiving $100,000 or more in pension payments from Calpers. Michael D. Johnson, a retiree from the County of Solano, pulls in $30,920.24 per month. As more municipalities file Chapter 9, the more these kinds of retirement deals will be broken. When Wisconsin public employees protested the state government's move to rein in pensions in 2011, the demonstrations got ugly—but that was just a hint of the torches and pitchforks likely to come.

Meanwhile, it's business as usual. California Gov. Jerry Brown released a state budget suggesting a $29 million surplus for the fiscal year ending June 2013 and $1 billion in the next fiscal year. Actuarially anyway.

Or as Utah Rep. Jason Chaffetz told Vermont Gov. Peter Shumlin, upon learning at a 2011 House hearing about that state's unrealistic pension assumptions: "If someone told me they expected to get an 8% to 8.5% return, I'd say they were probably smoking those maple leaves."

Mr. Kessler, a former hedge-fund manager, is the author most recently of "Eat People" (Portfolio, 2011).
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Crafty_Dog
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« Reply #3 on: December 29, 2013, 12:18:34 PM »

http://www.nytimes.com/2013/12/28/us/police-salaries-and-pensions-push-california-city-to-brink.html?nl=todaysheadlines&emc=edit_th_20131228
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Crafty_Dog
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« Reply #4 on: April 14, 2014, 04:31:47 PM »



http://dealbook.nytimes.com/2014/04/12/thought-secure-pooled-pensions-teeter-and-fall/?_php=true&_type=blogs&_r=0

==================

Scott Grannis:

The multiemployer plans' problems do look real and serious. One common denominator jumps out: all the plans with problems have unions among the participants. Unions tend to get in bed with politicians, and both have a penchant for over-promising benefits and attaching government guarantees which encourage pension managers to do stupid things. When hard times hit, the poor management of the fund and its under-funded status collide to produce massive losses. Now they want the taxpayers to make up the losses. These problems are acute in places like Los Angeles and other municipalities where there exists an unholy alliance between unions and politicians. The losses are massive, too big for the taxpayers to swallow. From the perspective of society we need failures to be recognized. From the perspective of the individuals who will lose their promised benefits, this is of course a tragedy. No easy way out.

==================================

Lots of private plans are already protected by the government.

http://pbgc.gov/

As to your comment that all the plans that appear to be in trouble have unions involved, I would argue that  there are many non-union plans that are also ripe for failure.


========================

Friday, April 11, 2014 8:05 PM


Reader Question on the Inevitable Los Angeles Bankruptcy; What About Chicago?

In response to LA Commission Studies Pension Crisis, Recommends New Commission; Bankruptcy Inevitable reader Daniel writes ...
 Hello Mish,

Can you please explain why a home owner in a place like Los Angeles would be concerned with their city's future bankruptcy?

Will whatever happens not be short lived?

I understand that city workers will be affected and that unions and union workers will be affected as well, but how would your typical resident/homeowner be affected in such a situation?

Thanks for your wonderful blog!!

Daniel
Tax Hikes Coming

Hello Daniel

In a futile attempt to prevent the inevitable, the first thing LA politicians are likely to do is raise taxes, all kinds of taxes. They will probably invent new ones too.

Please compare LA's setup to Chicago.

Comparison to Chicago

Via email, Ted Dabrowski at the Illinois Policy Institutes writes ...

 Gov. Pat Quinn is in a bind.

He’s being asked to sign a Chicago pension bill that he knows has no real reforms and no way to pay for itself. By signing the bill, Quinn will give Mayor Rahm Emanuel his blessing to raise Chicago property taxes by $750 million over five years.

But that’s just the beginning.

If the Legislature uses the same blueprint to “fix” the city and Cook County’s other pension funds, Quinn will be blessing billions more in tax hikes.

The problem for Quinn is that he promised property tax relief to all Illinoisans in his state budget address just two weeks ago. Here’s what he said:

“My comprehensive tax reform plan starts with providing every homeowner in Illinois with a guaranteed $500 property tax refund every year.

In Illinois, more is collected in property taxes every year than in the state income tax and state sales tax combined. In fact, Illinois has one of the highest property tax burdens on homeowners in the nation – more than 20 percent above the national average. The property tax is not based on ability to pay. The property tax is a complicated, unfair tax, hitting middle-class families the hardest.

For too long, Illinois has … overburdened its property taxpayers.”

By signing a pension bill that helps Emanuel raise property taxes, Quinn will break yet another promise. The governor has already asked the Legislature to make the 2011 tax hike permanent, even though he originally promised it would be temporary.

But Quinn has a way out of his predicament. Besides the obvious political reasons to oppose the bill, Quinn has three good policy reasons not to sign it:

1. Property tax hikes won’t solve Chicago’s pension problem. Emanuel needs more taxes because his plan doesn’t reform the broken pension system. Instead, it just props up a failed system run by the same politicians who bankrupted it in the first place.

What Emanuel and supporters of his pension bill won’t tell you is that they’ll be back for even more tax hikes. Emanuel’s current plan calls for additional city contributions (above what the city pays today) to the municipal pension fund totaling $4.1 billion through 2025. But his proposed property tax hikes will raise only an additional $2.25 billion during that time period.

That means the mayor’s tax hike will be $1.9 billion short of the extra contributions needed through 2025. Without real reforms, he’ll be back for more.
 
2. People and businesses will flee. Avoiding real reforms and raising taxes is a failed strategy. People and businesses will flee Chicago, just as they’ve been doing for years. Taxpayers will leave because they’ll be paying more money for fewer services.

Each Chicago household is already on the hook for more than $61,000 in future taxes to pay down the massive long-term debt – more than $63 billion in bonds and pension shortfalls – that their city and county governments have racked up.

Tax hikes mean fewer people will stick around to pay a growing bill.

3. There is a plan to fix Chicago without tax hikes. The Illinois Policy Institute offers a reform plan that avoids tax hikes and immediately cuts Chicago’s pension shortfall in half. The core of its solution is a hybrid retirement plan for city workers that gives them a self-managed plan and fixed, monthly Social Security-like benefits at retirement.

The plan makes the tough choices necessary to bring about real retirement security for Chicago’s city workers.

Quinn and Emanuel’s goal must be to end Chicago’s pension crisis and to preserve Chicago’s status as a world-class city.

Massive property tax hikes will do just the opposite and push Chicago further in the direction of Detroit.

Ted Dabrowski
Vice President of Policy
Everyone Affected

No one should assume they are unaffected by the pension crisis, even if they do not live in troubled cities. For starters, more cities are affected than admitted.

For discussion, please see 85% of Pension Funds to Fail in Three Decades.

Secondly, and equally important, Democrat controlled states like California and Illinois are dominated by union sympathizers. Of course that is precisely why those states are in serious trouble.

So even if you live in an unaffected city, states controlled by unions are also highly likely to raise all sorts of taxes to protect union interests.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read more at http://globaleconomicanalysis.blogspot.com/2014/04/reader-question-on-inevitable-los.html#koWQzoZlBGwQLAbx.99
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G M
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« Reply #5 on: July 31, 2014, 03:27:34 AM »

http://pjmedia.com/vodkapundit/2014/07/29/the-debt-bomb-ticks-on/

But it's a very popular program!

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G M
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« Reply #6 on: August 05, 2014, 07:46:44 AM »

http://freebeacon.com/issues/report-government-accounting-hides-debt/
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Crafty_Dog
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« Reply #7 on: August 26, 2014, 02:43:13 PM »

Calpers's Play for Pay
Jerry Brown wanted to stop 'pension spiking.' So much for that.
Updated Aug. 26, 2014 3:12 p.m. ET

When one door closes, government unions crack open a window. So it was last week when the labor-controlled board of the California Public Employees' Retirement System (Calpers) approved counting 99 categories of supplemental pay toward workers' pension calculations.

One objective of the de minimis reforms Gov. Jerry Brown signed in 2012 was to curb egregious abuses such as "pension spiking." Defined-benefit pensions in California are calculated as a percentage of the average of workers' highest compensation over three years multiplied by the numbers of years worked. Many employees have goosed their pensions by loading up on overtime and cashing out vacation and other add-ons during their final working years. In one famous example, a fire chief in Northern California who made $186,000 retired after 26 years with an annual pension of more than $230,000.


Mr. Brown's reforms ostensibly closed these loopholes by defining "pensionable compensation" as "base pay" for "services rendered on a full-time basis during normal working hours." The law explicitly bars overtime as well as unused vacation and sick leave.

Calpers has now tried to end run the law by including 99 other salary boosters such as "incentive pay" for "local safety members, school security officers and California Highway Patrol officers who meet an established physical fitness criterion."

Public-safety officers can earn up to $1,600 annually for taking annual physicals. Employees earn "longevity pay" for merely sticking around for more than five years, which comes on top of "step" increases and annual raises. Workers can also boost their salaries by up to 10% if they are "required to obtain a specified degree" such as a bachelor's and for "maintaining a license required by government or regulatory agencies to perform their duties."

Some governments even award extra pay to firefighters "who are routinely and consistently assigned to administrative work" and to prison guards who are given the onerous job of "responding to questions from the public." Police are paid premiums for handing out parking tickets and patrolling streets. Librarians can earn more if they have to "provide direction or resources to library patrons." If only journalists could earn bonuses for writing.

Calpers did graciously exclude from its list pay boosts for public-safety officers who wear their uniforms and the monthly allowance they receive for keeping their clothes clean. But it's inevitable that government unions will soon find ways to exploit these 99 other pay bumps to pad their pensions. For instance, they could negotiate greater "longevity pay" or larger "physical fitness" premiums for workers over age 50.

Gov. Brown has chastised Calpers for undermining the reforms and asked his staff to "determine what actions can be taken to protect the integrity of the Public Employees' Pension Reform Act." The truth is that government unions and Calpers will always find ways to manipulate defined-benefit plans that are run by their political allies. The only way to protect taxpayers is with 401(k)-style plans that are individual property that can't be politically exploited.
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Crafty_Dog
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« Reply #8 on: October 12, 2014, 11:37:35 AM »

http://www.nytimes.com/2014/10/12/business/no-smoke-no-mirrors-the-dutch-pension-plan.html?emc=edit_th_20141012&nl=todaysheadlines&nlid=49641193&_r=0

Imagine a place where pensions were not an ever-deepening quagmire, where the numbers told the whole story and where workers could count on a decent retirement.

Imagine a place where regulators existed to make sure everyone followed the rules.

That place might just be the Netherlands. And it could provide an example for America’s troubled cities, or for states like Illinois and New Jersey that have promised more in pension benefits than they can deliver.

“The rest of the world sort of laughs at the United States — how can a great country like the United States get so many things wrong?” said Keith Ambachtsheer, a Dutch pension specialist who works at the University of Toronto — specifically at its Rotman International Center for Pension Management, a global clearinghouse of information on how successful retirement systems work.

Going Dutch, however, can be painful. Dutch pensions are scrupulously funded, unlike many United States plans, and are required to tally their liabilities with brutal honesty, using a method that is common in the financial-services industry but rejected by American public pension funds.

"Everybody wants safety and everybody wants an affordable system, and you can’t have both. It’s become a major public debate in the Netherlands,” said Keith Ambachtsheer, a Dutch pension specialist.

The Dutch system rests on the idea that each generation should pay its own costs — and that the costs must be measured accurately if that is to happen. After the financial collapse of 2008, workers and retirees in the Netherlands took the bitter medicine needed to rebuild their collective nest eggs quickly, with higher contributions from workers and benefit cuts for pensioners.

The Dutch approach bears little resemblance to the American practice of shielding the current generation of workers, retirees and taxpayers while pushing costs and risks into the future, where they can metastasize unseen. The most recent data suggest that public funds in the United States are holding just 67 cents for every dollar they owe to current and future pensioners, and in some places the strain is palpable. The Netherlands, by contrast, have no Detroits (no cities going bankrupt because pension costs grew while the population shrank), no Puerto Ricos (territories awash in debt but with no access to bankruptcy court) and nothing like an Illinois or New Jersey, where elected officials kicked the can down the road so many times that it finally hit a dead end.

About 90 percent of Dutch workers earn real pensions at their jobs. Their benefits are intended to amount to about 70 percent of their lifetime average pay, as many financial planners recommend. For this and other reasons, the Netherlands has for years been at or near the top of global pension rankings compiled by Mercer, the consulting firm, and the Australian Center for Financial Studies, among others.

Accomplishing this feat — solid workplace pensions for most citizens — isn’t easy. For one thing, it’s expensive. Dutch workers typically sock away nearly 18 percent of their pay, most of it in diversified, professionally run pension funds. That compares with 16.4 percent for American workers, but most of that is for Social Security, which is intended to provide just 40 percent of a middle-class worker’s income in retirement.


Dutch employers contribute to their system, too, but their payments are usually capped. While that may seem a counterintuitive way to make sure that pensions are well funded, it actually encourages companies to stick with pension plans. If the markets drop, Dutch employers do not receive urgent calls to pump in more money — the kind of cash calls that have prompted so many American companies to stop offering pensions. In the private sector, only 14 percent of Americans with retirement plans at work have defined-benefit pension plans — the ones that offer the most security — compared with 38 percent who had them in 1979. And if the markets rally and a Dutch pension fund earns more than it needs, the employers are not allowed to touch the surplus. In the United States, companies have found many ways to tap a pension surplus. The problem today is that there usually is no surplus left.

Dutch companies, as well as public-sector employers, typically band together by sector in big, pooled pension plans, then hire nonprofit firms to invest the money. Terms are negotiated sectorwide in talks that resemble American-style collective bargaining.

This vast collaborative process may sound too slow, too unwieldy and maybe even too socialist for American tastes. But standing guard over it is a decidedly capitalist watchdog, the Dutch central bank. More than a decade ago, after the dot-com collapse, a director of the central bank warned of a looming pension funding crisis. In response, the central bank in 2002 began to require pension funds to keep at least $1.05 on hand for every dollar they would have to pay in future benefits. If a fund fell below the line, it had just three years to recover.

American public pension funds have no such minimum requirement, and even if they did, there is no regulator to enforce it. Company pensions are bound by federal funding rules, but Congress has a tendency to soften them.

The Dutch central bank also imposed a rigorous method for measuring the current value of all pensions due in the future. Pensions are not supposed to be risky, so the Dutch measure them the same way the market prices very safe bonds, like Treasuries — that is, by discounting the future payments to today’s dollars with a very low interest rate. This method shows that a stable lifelong benefit is very valuable, and therefore very expensive to fund.

Notably, the Dutch central bank prohibited the measurement method that virtually all American states and cities use, which is based on the hope that strong market gains on pension investments will make the benefits cheaper. A significant downside to this method is that it lets pension systems take advantage of market gains today, but pushes the risk of losses into the future, for others to cope with. “We had lengthy discussions about this in the Netherlands,” said Theo Kocken, an economist who teaches at the Free University in Amsterdam and is the founder of Cardano, a risk analysis firm. “But all economists now agree. The expected-return approach is a huge economic offense, hurting younger generations.”

He explained that in the Netherlands, regulators believe that basing the cost of benefits today on possible investment gains tomorrow is the same as robbing tomorrow’s workers to pay for today’s excesses.

"The expected-return approach is a huge economic offense, hurting younger generations,” said Theo Kocken, a Dutch economist.

Most public pension officials in the United States reject this view, saying governments can wait out bear markets because governments, unlike companies, don’t go out of business.

For years, economists have been calling on American cities and states to measure pensions the Dutch way. And, in fact, California’s big state pension system, Calpers, sometimes calculates a city’s total obligation by that method. When Stockton went bankrupt, for instance, Calpers recalculated and found that the city owed it $1.6 billion. Of course, Stockton is insolvent and does not have an extra $1.6 billion, but Christopher Klein, a bankruptcy judge, has said that federal bankruptcy law permits it to walk away from the debt. Calpers disagrees, setting up a clash that seems destined for the United States Supreme Court.

But most of the time, when someone in the United States calls for Dutch-style measurements, pension officials suspect a ploy to show public pensions in the worst possible light, to make them easier to abolish.

“They want to create a false report, to create a crisis,” said Barry Kasinitz, director of government affairs for the International Association of Fire Fighters, after members of Congress introduced a bill to require the Dutch method.

The Dutch say their approach is, in fact, supposed to prevent a crisis — the crisis that will ensue if the boomer generation retires without fully funded benefits. Their $1.05 minimum is really just a minimum; pension funds are encouraged to keep an even bigger surplus, to help them weather market shocks. The Dutch sailed into the global collapse of 2008 with $1.45 for every dollar of benefits owed, far more than they appeared to need. But when the dust settled, they were down to just 90 cents. The damage was so bad that the central bank gave them a breather: They had five years to get back to the $1.05 minimum, instead of the usual three.

American public plans emerged from the crisis in worse shape, on the whole, and many allowed themselves 30 years to recover. But 30 years is so long that the boomer generation will have retired by then, and the losses will have been pushed far into the future for others to repay.

It’s a recipe for disaster if the employer happens to be a city like Detroit. The city’s pension system used a 30-year schedule to cover losses but reset it at “Year 1” every year, a tactic employed in a surprising number of places. In Detroit, it meant the city never replaced the money that the pension system lost. When Detroit finally declared bankruptcy last year, an outside review found a $3.5 billion shortfall, one of the biggest claims of the bankruptcy. Manipulating the 30-year funding schedule had helped to hide it.

“This happening in the Netherlands is totally out of the question,” Mr. Kocken said.


While the Netherlands has a stellar reputation for saving, that doesn’t mean pensions have been without controversy there; in fact, a loud, intergenerational debate is occurring about how to manage pensions. The financial crisis raised new calls for reform, Mr. Ambachtsheer said. Retirees were shocked and angry to have their pensions cut by an average of 2 percent after the crash. That had never happened before, and many had no idea that cuts were even possible. A new political party, 50Plus, sprang up to defend the interests of older citizens and won two seats in the national Parliament.

But something else happened: Dutch young people found their voice. No matter their employment sector, they could see that their pension money was commingled with retirees’ money, then invested that way by the outside asset management firms. In the wake of the financial crisis, they realized that they and the retirees had fundamentally opposing interests. The young people were eager to keep taking investment risk, to take advantage of their long time horizon. But the retirees now wanted absolute safety, which meant investing in risk-free, cashlike assets. If all the money remained pooled, young people said, the aggressive investment returns they wanted would be diluted by the pittance that cashlike assets pay.

“Now the question is, ‘How do you resolve this dilemma?’ ” Mr. Ambachtsheer said. “Everybody wants safety and everybody wants an affordable system, and you can’t have both. It’s become a major public debate in the Netherlands.”

It’s a debate that is rarely, if ever, heard in the United States.
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DougMacG
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« Reply #9 on: October 14, 2014, 03:51:17 PM »

We are in Europe now and had lunch with a young Dutch college girl who is a friend of my daughter.  She said she knows she will work until (exactly) 67.  A public system like that is not for me, but it is solvent when all the facts are out in the open and all sides keep their promises.
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« Reply #10 on: January 13, 2015, 01:05:53 PM »

The Pension Sink Is Gulping Billions in Tax Raises
Remember that ‘temporary’ tax hike for California schools? Most is now going to public worker retirements.
ENLARGE
Corbis
By
Steve Malanga
Jan. 12, 2015 6:50 p.m. ET
349 COMMENTS

California Gov. Jerry Brown sold a $6 billion tax increase to voters in 2012 by promising that nearly half of the money would go to bolster public schools. Critics argued that much of the new revenue would wind up in California’s severely underfunded teacher pension system. They were right.

Last June Mr. Brown signed legislation that will require school districts to increase funding for teachers’ pensions from less than $1 billion this year in school year 2014-15, which started in September, to $3.7 billion by 2021, gobbling up much of the new tax money. With the state’s general government pension fund, Calpers, also demanding more money, California taxpayer advocate Joel Fox recently observed that no matter what local politicians tell voters, when you see tax increases, “think pensions.”

Californians are not alone. Although fiscal experts have warned about the worsening condition of government pension systems for years, many taxpayers felt little impact from the rising debt—until now.

Decades of rising retirement benefits for workers—some of which politicians awarded to employees without setting aside adequate funding—and the 2008 financial meltdown have left American cities and states with somewhere between $1.5 trillion and $4 trillion in retirement debt. Even with the stock market’s rebound, the assets of America’s biggest government pension funds are only 1% above their peak in 2007, according to a recent study by Governing magazine.

Under growing pressure to erase some of this debt, governments have increased pension contributions to about $100 billion in 2014 from $63 billion in 2007, according to the Census Bureau’s quarterly survey of state and local pension systems. But the tab keeps growing, and now it is forcing taxes higher in many places.

A report last June by the Pennsylvania Association of School Administrators found that nearly every school district in that state anticipated higher pension costs for the new fiscal year, with three-quarters calculating their pension bills would rise by 25% or more. Subsequently, 164 school districts received state permission to raise property taxes above the 2.1% state tax cap. Every one of the districts cited rising pension costs.

Meanwhile, the deeply troubled Philadelphia school system’s pension tab increased to $159 million in the current school year, which started in 2014 and goes to mid-2015, from $55 million in 2011. To bail it out, the Pennsylvania legislature crafted a special deal to increase cigarette taxes in the city by about $60 million annually.

In West Virginia, where local governments also face big pension debts, the legislature recently expanded the state’s home rule law—which governs how municipalities can raise revenues—to allow cities to impose their own sales taxes. The state’s biggest city, Charleston, with $287 million in unfunded pension liabilities, has already instituted a $6 million-a-year local sales tax devoted solely to pensions, on top of the $10 million the city already contributes annually to its retirement system. At least five more cities applying to raise local sales taxes, including Wheeling, also cited pension costs.

In April two-dozen Illinois mayors gathered to urge the state to reform police and fire pensions, which are on average 55% funded. The effort failed, and municipalities subsequently moved to raise taxes and fees. The city of Peoria’s budget illustrates the squeeze. In the early 1990s it spent 18% of the property-tax money it collected on pensions. This year it will devote 57% of its property tax to pension costs. Reluctant to raise the property levy any more, last year the city increased fees and charges to residents by 8%, or $1.2 million, for such items as garbage collection and sewer services.

Taxpayers in Chicago saw the first of what promises to be a blizzard of new taxes. The city’s public-safety retirement plans are only about 35% funded, though pension costs already consume nearly half of Chicago’s property-tax collections. Strong opposition forced Mayor Rahm Emanuel to temporarily table a proposed a $250 million property-tax increase to help pay off pension debt. Instead, as a stopgap measure Chicago instituted a series of smaller tax and fee hikes, including a boost in cellphone taxes, to raise $62 million. But the city’s pension bill will double next year to more than $1 billion, so a massive property tax hike is still on the table.

Chicago residents also face an enormous state retirement bill. The Civic Committee of the Commercial Club of Chicago recently estimated that if the Illinois Supreme Court sustains a lower-court decision overturning 2013 pension reforms, Illinois taxpayers will pay $145 billion in higher state taxes over the next three decades.

Burdened by so much debt, taxpayers in some places are unlikely to see relief soon. When California passed its 2012 tax increases, Gov. Brown and legislators promised voters the new rates would expire in 2018. But school pension costs will keep increasing through 2021 and then remain at that elevated level for another 25 years to pay off $74 billion in unfunded teacher liabilities. Public union leaders and sympathetic legislators are already trying to figure out how to convince voters to extend the 2012 tax increases and approve “who knows what else” in new levies, says taxpayer advocate Mr. Fox. It’s a reminder that in some places the long struggle to pay off massive government pension debt is just starting.

Mr. Malanga is a senior fellow at the Manhattan Institute.
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« Reply #11 on: February 09, 2015, 03:10:15 PM »

Calpers Gets Schooled
A judge says public pensions can be impaired as part of bankruptcy.
Feb. 8, 2015 6:43 p.m. ET
51 COMMENTS

Federal judges tend to be impatient with bullies. Behold judge Christopher Klein ’s opinion last week confirming the city of Stockton’s bankruptcy exit plan, which is as incisive in its rebuke of the California Public Employees’ Retirement System (Calpers) as it is instructive about U.S. bankruptcy law.
Stockton, California's City Hall ENLARGE
Stockton, California's City Hall Photo: Reuters

Stockton declared Chapter 9 bankruptcy in 2012, and it has since rewritten labor contracts and asked creditors for writedowns. Yet after being browbeaten by Calpers, the giant public-pension fund, the city held pensions harmless. Calpers argued that the California constitution’s guarantee of contracts shielded pensions from cuts in bankruptcy. The fund also asserted sovereign immunity and police powers as an “arm of the state,” including a lien on municipal assets.

Judge Klein upheld Stockton’s bankruptcy plan but not before effectively throwing Calpers out of court. “It is doubtful that CalPERS even has standing,” he writes. “It does not bear financial risk from reductions by the City in its funding payments because state law requires CalPERS to pass along the reductions to pensioners in the form of reduced pensions.”

As the judge explains, “CalPERS has bullied its way about in this case with an iron fist.” Calpers’s arguments are “constitutionally infirm in the face of the exclusive power of Congress to enact uniform laws on the subject of bankruptcy under Article I, Section 8, of the U.S. Constitution—the essence of which laws is the impairment of contracts—and of the Supremacy Clause.”

The Supremacy Clause holds federal law superior to state statutes as long as the feds don’t violate state powers under the Constitution. The judge notes that states act merely as “gatekeepers” to Chapter 9 bankruptcy. Once states authorize municipalities to file for bankruptcy, they hand over custody to federal courts. Thus, as “a matter of law, the City’s pension administration contract with CalPERS, as well as the City-sponsored pensions themselves, may be adjusted as part of a chapter 9 plan.”

What all this means is that Calpers can’t stop cities from modifying pensions in bankruptcy. This has ramifications across the U.S. because unions are trying to make public pension benefits inviolable as a matter of constitutional law. If that view prevails, then politicians can make irresponsible deals to get elected that no future politicians can rescind even if they become unaffordable. Illinois is currently ground zero in this showdown.

Judge Klein also noted that California’s Supreme Court has recognized an “unusually inflexible ‘vested right’ in public employee pension benefits” that stands in contrast to the U.S. Supreme Court’s “less rigid view of the extent of a ‘vested right’ in retiree benefits,” as delivered in last month’s M&G Polymers v. Tackett ruling. Judge Klein adds that California courts’ interpretation of vested rights “encourages dysfunctional strategies to circumvent limitation and peculiarities in California public finance.”

You can say that again. The judge seems to be inviting a legal challenge to California’s vested-rights doctrine, and someone should take him up on it. Meantime, Calpers would do better by raising its investment returns rather than going to court to raid taxpayers.
Popular on WSJ

   

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« Reply #12 on: March 01, 2015, 02:50:37 PM »

http://nypost.com/2015/02/28/white-house-looking-to-creep-into-401ks/
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« Reply #13 on: March 02, 2015, 12:59:31 PM »

Debt-Saddled Municipal Budgets Get a Lifeline
A unanimous Supreme Court held that health benefits for retired workers can be renegotiated or reduced.
By
Robert C. Pozen And
Ronald J. Gilson
March 1, 2015 5:32 p.m. ET
37 COMMENTS

While underfunded public-employee pensions capture the headlines, health-insurance benefits for retired state and local workers are also a huge problem. But a recent ruling by the Supreme Court may help state and local governments scale back these benefits.

Unlike public pension plans, retiree health benefits aren’t funded in advance; they are typically paid out of current tax revenues, so they compete with other budget priorities like schools and police. This competition will only grow more intense, as unfunded retiree health benefits are close to $1 trillion, according to a recent study in the Journal of Health Economics.
ENLARGE
Photo: Getty Images

Several cities and states have tried to reduce the scope of retiree health-care services, or to increase the portion of the premiums paid by retired workers going forward. Public unions have frequently sued, claiming the benefits are vested for life—roughly parallel to the legal arguments the unions have made against efforts to curb future pension costs.

In late January, however, the Supreme Court issued an unanimous decision that will increase the chances of local governments winning such lawsuits. While the case involved a private business and its union, the principles should generally apply to public-sector agreements.

M&G Polymers vs. Tackett involved a collective-bargaining agreement that provided certain retirees, along with their surviving spouses and dependents, with a full company contribution toward the cost of their health-care benefits “for the duration of [the] Agreement.” The contract was subject to renegotiation after three years, but the critical legal question was whether the retirement health-care benefits continued even after the agreement expired—in effect whether the intent was to vest these benefits for life.

The union argued that the contract did vest these benefits for life and the Sixth Circuit Court of Appeals agreed. The Supreme Court reversed, noting that to prevail, the plaintiffs, in this case the union, had to supply concrete evidence—“affirmative evidentiary support”—that lifetime vesting of retiree health benefits was what both parties to the agreement intended.

Normally, the explicit terms of a contract are taken to reflect the parties’ intentions; only when a contract’s language is ambiguous does a court look to the parties’ intent. Here the Supreme Court followed a traditional rule of contract law: If a contract is ambiguous, proof requires evidence of what the parties intended, not what a court—in this case the appellate court—might infer from the ambiguous contract.

Two principles in Tackett should be especially relevant to reductions in retiree health-care benefits where the duration of these benefits is often unclear. The court, Justice Clarence Thomas wrote, supported the “traditional principle that courts should not construe ambiguous writings to create lifetime promises.” Similarly, he wrote that the court endorsed the traditional principle that “contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.”

This is where the Supreme Court’s decision is particularly significant for the public sector. There must be explicit proof that a collective-bargaining agreement intended long-term commitments to bind a city or state long past the incumbency of the public officials who signed the agreement.

Today elected officials trade generous retiree benefits in the future for current wages. By doing so, they avoid having to take responsibility for current cutbacks in state and municipal services that would accompany wage increases.

The Supreme Court’s ruling in Tackett means that lifetime benefits cannot be inferred but must be made explicit. As a result, if public officials now attempt to revise the benefits in a current or new collective agreement, unions will doubtless demand that any long-term promises be made explicit. But public officials who make these promises explicit send a strong signal that they are putting potentially enormous burdens on future taxpayers and elected officials. This makes it harder for current officials to make such promises. That is a step forward—not just in interpreting contracts but also in enhancing political accountability.

Mr. Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution. Mr. Gilson is a professor of law at Columbia and Stanford law schools.
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« Reply #14 on: May 14, 2015, 03:58:44 PM »

Illinois’s domination by public unions has the state dancing on the edge of fiscal freefall. The state Supreme Court ruled last week that Springfield can’t alter pension benefits, prompting Moody’s this week to downgrade the debt of the city, its public schools and park district all to junk status. Now the Chicago Teachers Union wants to make another contribution to the collapse.

In May the union filed an unfair labor practice complaint with the Illinois Educational Labor Relations Board, accusing the school district of failing to bargain in good faith and rejecting mediation to reach a new contract. The union’s complaint? The school district wants teachers to chip in more for their pensions. The horror.

The dispute goes back to 1981, when in lieu of larger pay raises the district agreed to pick up seven percentage points of the teachers’ contribution of 9% of their salaries to their pensions. This is on top of the district’s own contribution. Teachers have since become accustomed to paying only 2% of their salaries for pensions, about $1,496 a year on average.

Many current teachers weren’t in the school system in 1981, but they like the perk of paying a fraction of their pension cost. Who wouldn’t? The 2% contribution is far less than the 9% contributions made by many other public employees in Illinois, let alone the 6.2% payroll tax for Social Security or what private workers pay into 401(k)s.

Teachers are also comparatively well compensated. The Illinois State Board of Education says the average Chicago teacher salary is about $71,000 a year. That compares to Chicago’s median salary of $47,270 in 2009-2013, according to the Census Bureau. The average starting pension for a Chicago teacher retiring in 2011 after a public-school career was $77,496, according to the Illinois Policy Institute. The city will pay a teacher who retired in 2011 some $2.4 million during retirement, up from $1.35 million a decade earlier.

Union President Karen Lewis called the city’s proposal “reactionary and retaliatory” because the union backed incumbent Rahm Emanuel’s challenger in the recent mayoral race. The better description is inevitable. The district faces a $1.1 billion deficit in the next fiscal year, the city’s teachers pension has an unfunded liability of $9.6 billion, and the district will have to make a roughly $700 million pension payment for teachers in fiscal 2016. Maybe Ms. Lewis can get one of Chicago’s teachers to do the math for her.


 


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« Reply #15 on: May 14, 2015, 04:07:31 PM »

Chiraq will be joining Detoilet in becoming tangible lessons on democrat governance.
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« Reply #16 on: January 26, 2016, 11:40:14 AM »

http://www.city-journal.org/2016/26_1_pensions.html

Unviable.
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« Reply #17 on: March 18, 2016, 12:00:53 PM »


https://ir.citi.com/A9PruMxsx32cucD9nPyz6VOD1aXLcqQ1bFnuNFZcDqWVvkop5NYU6Q%3D%3D
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« Reply #18 on: May 19, 2016, 01:23:19 PM »

http://www.capoliticalreview.com/capoliticalnewsandviews/the-coming-public-pension-apocalypse-and-what-to-do-about-it/
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« Reply #19 on: May 20, 2016, 07:54:58 PM »


Illinois State Workers, Highest Paid in Nation, Demand 11.5 to 29% Hikes

18WednesdayMAY 2016

POSTED BY MISHGEA | May 18, 2016 6:28:10 | ECONOMICS
≈ 40 COMMENTS

Illinois state workers, are the highest paid in the nation. Yet, despite the fact that Illinois is for all practical purposes insolvent, the AFSCME union demands four-year raises ranging from 11.5 to 29 percent, overtime after 37.5 hours of work per week, five weeks of vacation and enhanced health care coverage.
AFSCME workers already get platinum healthcare benefits that would make nearly everyone in the country green with envy.

This is a guest post from Ted Dabrowski at the Illinois Policy Institute, of which I am a senior fellow.

For years, Illinois taxpayers haven’t been represented at the bargaining table between Illinois’ largest government union and the state. Illinois’ former governors cared more about appeasing the American Federation of State, County and Municipal Employees than protecting the taxpayers the governors were supposed to represent. That’s how AFSCME workers have become some the highest-compensated state workers in the nation.
 
Now the union is working overtime to remove Gov. Bruce Rauner – who actually represents taxpayers’ interests – from labor contract negotiations. The union supports House Bill 580, which would strip the governor of his ability to negotiate. AFSCME wants the current contract dealings turned over to unelected arbitrators who are likelier to decide in the union’s favor.

AFSCME wants to remove the governor from contract negotiations because union officials know Rauner will not agree to outrageous demands. Union leaders are demanding $3 billion in additional salary and benefits for union members in a new contract. They’re seeking four-year raises ranging from 11.5 to 29 percent, overtime after 37.5 hours of work per week, five weeks of vacation and enhanced health care coverage. Those additional demands would come on top of the costly benefits that AFSCME workers already receive.

Here are four facts about state-worker compensation the union doesn’t want taxpayers to know:

1. Illinois state workers are the highest-paid state workers in the country

Illinois state workers are the highest-paid state workers in the country when adjusted for cost of living. Illinois pays its state workers more than $59,000 a year, far more than its neighbors and nearly $10,000 more than the national average.  Moreover, state AFSCME workers have received salary increases not matched in Illinois’ private sector.  Median AFSCME worker salaries increased more than 40 percent from 2005 to 2014, reaching more than $62,800. During that same period, median private-sector earnings in Illinois remained virtually flat.
 
2. AFSCME workers receive Cadillac health care benefits

In addition to paying state workers the highest salaries in the nation, Illinois taxpayers also subsidize a majority of AFSCME workers’ Cadillac health care benefits.  The average AFSCME worker receives the ObamaCare equivalent of platinum-level benefits, but only pays the equivalent of bronze-level insurance premiums. That forces a vast share of AFSCME workers’ health care costs onto state taxpayers.  AFSCME workers pay for just 23 percent of their health care costs, or $4,452 a year. State taxpayers pay the remaining 77 percent, or an average of $14,880 per worker.

3. Most state workers receive free retiree health insurance

The state also subsidizes 100 percent of the health insurance costs for state retirees who spent 20 or more years working for the state. Such a benefit is almost unheard of in the private sector.  This benefit costs taxpayers $200,000 to $500,000 per state retiree. An ordinary worker in the private sector thus would need to have $200,000 to $500,000 in the bank before retirement to purchase the insurance most retired state workers get for free.
 
4. Career state retirees on average receive $1.6 million in pension benefits

Thanks to unrealistic pension rules, career state workers – meaning those who work 30 or more years – will average $1.6 million in benefits over the course of their retirements.  That’s on top of Social Security benefits, which nearly all state workers receive. In addition, over half of state workers end up retiring in their 50s.
 
It’s not fair that Illinois residents, struggling with stagnant incomes in one of the nation’s weakest economies, continue to subsidize AFSCME benefits to such an extent.  Many other unions that contract with the state have recognized that taxpayers can’t afford higher taxes to fund even greater pay and benefits for state workers. Officials from more than 17 unions, including the Teamsters, understood the depth of Illinois’ fiscal crisis and agreed to affordable contracts with the state.

AFSCME, which represents a mere 0.5 percent of Illinois’ total labor force (35,000 state workers out of a total 6.5 million workers), is putting undue pressure on the state and its finances.  The General Assembly needs to allow the governor’s veto of HB 580 to stand.  Instead of increasing benefits as AFSCME has demanded, the state should work to bring its employees’ total compensation more in line with what the private sector can afford.

Ted Dabrowski
Vice President of Policy
Question of Fairness
The AFSCME seeks “fairness”.

I wholeheartedly agree. Here is my eight-point proposal.

1.   Cut AFSCME salaries an average of 40%
2.   Make AFSCME employees contribute 50% to health care plans.
3.   Drop AFSCME retiree health benefits entirely. Put them on Medicare.
4.   Put caps on pension pay.
5.   Kill defined benefit pension plans entirely for new hires.
6.   Pass right-to-work legislation.
7.   Allow municipalities to go bankrupt.
8.   Kill all prevailing wage laws,

Mike “Mish” Shedlock
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« Reply #20 on: May 21, 2016, 01:56:52 PM »

How does 0.5% of the work force have such power over legislatures?  Because they are together lumped in with other unions as part of a union coalition in with Democrat pols?

Something is missing in the equation in this article.

The state employees alone are not mega donors.  It must be because they are part and parcel part of a bigger machine.
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« Reply #21 on: May 21, 2016, 10:40:38 PM »

When the individuals representing government negotiate with public unions they know that the unions will be supporting or opposing them in the next elections with both money and manpower.
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« Reply #22 on: May 23, 2016, 08:41:27 AM »

When the individuals representing government negotiate with public unions they know that the unions will be supporting or opposing them in the next elections with both money and manpower.


Going back a century, unions were justified in their bargaining power because one greedy capitalist in a town could have unfair and disproportionate negotiating power over all the workers in a town or an industry.  Collective bargaining equalized that advantage.  In the case of public sector unions, the alleged evil, completely unfair force is the will of the people.

Market forces apply just fine to public employee compensation.  If a city hall or county office offers too little in pay or benefits, that position would go unfilled until they make the adjustment.  Our local elementary school had one thousand applicants for every open teaching position.  Underpaid?  I don't think so.
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« Reply #23 on: May 23, 2016, 09:14:03 AM »

"Market forces apply just fine to public employee compensation"

Yup.
Exactly !

Jeb Bush did mention civil service reform as an initiative.

I don't know the details but I am not aware of any other candidate who proposed this.  But he was on the money on this point.

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« Reply #24 on: July 19, 2016, 10:52:08 AM »

http://www.capoliticalreview.com/capoliticalnewsandviews/calpers-proclaimed-rate-of-return-7-5-actual-61/
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« Reply #25 on: July 23, 2016, 10:18:53 AM »

https://www.ssa.gov/planners/maxtax.html
« Last Edit: July 30, 2016, 04:26:56 PM by Crafty_Dog » Logged
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« Reply #26 on: December 22, 2016, 09:25:27 AM »

http://www.nytimes.com/2016/12/21/business/dealbook/california-calpers-pension-fund-investment.html?emc=edit_th_20161222&nl=todaysheadlines&nlid=49641193
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« Reply #27 on: December 22, 2016, 09:55:35 AM »

http://www.city-journal.org/html/pension-collapse-big-d-14894.html

Pension Collapse in Big D
The retirement fund for Dallas’s public-safety workers is nearly ruined.
Steven Malanga
December 13, 2016 Texas
Economy, finance, and budgets

When Detroit filed for bankruptcy in 2013, the city’s emergency-financial team said that high levels of retirement debt could prevent them from rescuing the Motor City’s finances. Detroit had been in economic decline for decades, and the pension problem—including billions of dollars in bonuses handed out while the city was hurtling toward insolvency—was just one part of the depressing financial picture. Dallas, by contrast, has been one of the fastest-growing American cities in recent years. Becoming a magnet for investment and opportunity, however, hasn’t protected the Texas city from experiencing its own Detroit-style financial crisis. Dallas’s retirement system for cops and firefighters combines many of the features that have nearly sunk state and local pension plans around the country. Things got so dire over the summer that retirees began pulling their money out of the system. It’s the first run on a government pension plan in recent memory.

Dallas created the police and fire plan in 1916. The system’s trustees eventually persuaded the state legislature to allow employees and pensioners to run the plan. Not surprisingly, the members have done so for their own benefit and sent the tab for unfunded promises—now estimated at perhaps $5 billion—to taxpayers. Among the features of the system is an annual, 4 percent cost-of-living adjustment that far exceeds the actual increase in inflation since 1989, when it was instituted. A Dallas employee with a $2,000 monthly pension in 1989 would receive $3,900 today if the system’s annual increases were pegged to the consumer price index. Under the generous Dallas formula, however, that same monthly pension could be worth more than $5,000. No wonder the ship is sinking.

The system also features a lavish deferment option that lets employees collect pensions even as they continue to work and earn a salary. Moreover, the retirement money gets deposited into an account that earns guaranteed interest. Governments originally began creating these so-called DROP plans as an incentive to encourage experienced employees to keep working past retirement age, which in job categories like public safety can be as young as 50. In Dallas, the pension system gives workers in the DROP plan an 8 percent interest rate on their cash, at a time when yields on ten-year U.S. Treasury notes, a standard for guaranteed returns, are stuck at less than 2 percent. According to the city, some 500 employees working past retirement age have accumulated more than $1 million in these accounts—on top of the pensions that they will receive once they officially stop working.

To make all of this seem reasonable, the state legislature placed a cap on contributions. Under the cap, cities can budget up to 28 percent of payroll to funding pensions every year. It’s a high price, but not nearly high enough to fund Dallas’s generous plan, whose officials lately predicted that investment returns would stay above 8 percent forever. Trying to hit that crazy target, the system’s trustees began investing in increasingly risky assets. At one point, a startling 50 percent of the fund’s money was invested in private equity, real estate, and other volatile assets. Since 2010 alone, the pension system has had to write off nearly $200 million in bad bets, and the system’s funding level has slipped below the mark that experts say dooms a pension plan.

Recently, fiscal experts and city officials began mentioning the possibility of bankruptcy. What officials didn’t count on, apparently, is that participants in the system, who have the right to withdraw their savings, would actually start doing so once they heard such dire warnings. Retirees have withdrawn nearly half a billion dollars since late summer, sending the system’s funding levels plummeting to a dangerous 36 percent. The system’s liquid assets—that is, money it can draw on to pay benefits—is down to just $729 million, not much more than the $600 million it needs to keep on hand to assure that it can meet its obligations. That’s forced the system to halt withdrawals. It’s officially a run.

Fixing this mess without serious reform is almost unimaginable. Even a 40-year plan to pay off the pension debt (twice as long as the Society of Actuaries recommends) would require the city to spend the equivalent of 75 percent of its payroll on pensions alone. Finding the money to do that would require Dallas to more than double property taxes. Even so, a four-decade plan would expose the city to future market crashes that could undermine any recovery. Instead, the city is looking at a host of unpopular changes to the current pension plan, including cutting back cost-of-living adjustments and asking employees to forgo some of the interest they’ve earned on their DROP accounts. State legislators, who crafted a system they didn’t have to fund, would need to approve any changes. Things could get complicated: Republicans dominate the legislature, while Democrats control the city. Still, the prospect of an insolvent Dallas should focus some minds.

Plenty of state and municipal pension systems around the country are in the same situation, but Dallas is the only one facing an immediate drain on its funds. Plans in Chicago, Philadelphia, New Jersey, Kentucky, Illinois, and Connecticut are all less than 50 percent funded. Many have features similar to the Dallas police and fire plan. More than half of large state and local pension boards, for instance, are dominated by employees and retirees, who get to make crucial decisions that taxpayers must fund. Like Dallas’s plan, many funds are veering into risky investments in a desperate attempt to improve their finances. Also like Dallas, many of these funds saw such steep declines in their assets after the 2008 financial meltdown that even the second-longest bull-market in American history hasn’t dramatically improved their prospects.

During the last year, as the nation has been consumed by a presidential election focused on issues like immigration and trade, our government-employee pension woes have continued to fester. Though it’s developed largely out of view, this crisis threatens to undermine our fiscal future. Dallas is a reminder that no magical incantations exist that can make insane pension math suddenly rational.
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« Reply #28 on: February 10, 2017, 03:19:26 PM »

http://www.capoliticalreview.com/capoliticalnewsandviews/sand-pension-pilfery/
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« Reply #29 on: June 08, 2017, 09:16:57 AM »

"65 percent of the native Cuencan population is under 35, and many are frustrated that they must pay taxes and invest in the welfare state that foreign retiree migrants are now abusing"

http://www.breitbart.com/national-security/2017/06/08/u-s-baby-boomers-gentrifying-socialist-ecuador-threatening-stability-of-its-welfare-state/

I never knew Ecuadorians are bigots, americanaphopes, gringophobes     wink

They should welcome the foreigners with open arms .  The foreigners are good for their economy!
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« Reply #30 on: June 08, 2017, 09:26:59 AM »

"65 percent of the native Cuencan population is under 35, and many are frustrated that they must pay taxes and invest in the welfare state that foreign retiree migrants are now abusing"

http://www.breitbart.com/national-security/2017/06/08/u-s-baby-boomers-gentrifying-socialist-ecuador-threatening-stability-of-its-welfare-state/

I never knew Ecuadorians are bigots, americanaphopes, gringophobes     wink

They should welcome the foreigners with open arms .  The foreigners are good for their economy!


Racists! Xenophobes! Who knew Ecuador was so full of hate?
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« Reply #31 on: June 08, 2017, 09:54:50 AM »

And I should emphasize most of the retirees are *professors* who are in the group making the demands.

I thought professors are so tolerant of other peoples.

Most are liberals from what I read.  Don't liberals professors know what is best on how everyone else should live?

Does this mean they are arrogant Americans after all?
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Crafty_Dog
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« Reply #32 on: September 23, 2017, 07:00:02 PM »

By John Mauldin | Sep 16, 2017
Pension Storm Warning
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.

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.

Blood from Turnips

Public sector bankruptcy, up to and including state-level bankruptcy, is fundamentally different from corporate bankruptcy in ways that many people haven’t considered. The pension crisis will likely expose those differences as deadly to creditors and retirees.

Say a corporation goes bankrupt. A court will take all its assets and decide how to divvy them up. The assets are easy to identify: buildings, land, intellectual property, cash, etc. The parties may argue over their value, but everyone knows what the assets are. They won’t walk away.

Not so in a public bankruptcy. The primary asset of a city, county, or state is future tax revenue from households and businesses within its boundaries. The taxpayers can walk away. Even without moving, they can bypass sales taxes by shopping elsewhere. If property taxes are too high, they can sell and move. When they take a loss on the sale, the new owner will have established a property value that yields the city far less revenue than it used to receive.

Cities and states don’t have the ability to shed their pension liabilities. They are stuck with them, even as population and property values change.

We may soon see an example of this in Houston. Here in Texas, our property taxes are very high because we have no income tax. Your tax is a percentage of your home’s taxable value. So people argue to appraisal boards that their homes are falling apart and not worth anything like the appraised value. (Then they argue the opposite when it’s time to sell the home.)

About 200 entities in Harris County can charge taxes. That includes governments from Houston to Baytown to Hedwig Village, plus 20 independent school districts.

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.

Promises from Air

Most public pension plans are not fully funded. Earlier this year in “Disappearing Pensions” I shared this chart from my good friend Danielle DiMartino Booth:
 
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.
 
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:

 
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.
 
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.

Chicago, Lisbon, Denver, Lugano, and Hong Kong

I will be in Chicago the afternoon of August 26, meeting with clients and friends, and then I’ll speak at the Wisconsin Real Estate Alumni conference the morning of the 28th, before returning to Dallas that afternoon and flying with Shane to Lisbon the next day. My hosts are graciously giving me a few extra days to explore Lisbon, and Portugal is one of the last two Western European countries I have never been to. After this, only Luxembourg is left, so the next time I’m in Brussels or Amsterdam on a Sunday, I’m going to get on a train and go have lunch in Luxembourg.

On Wednesday morning the 27th I will be on CNBC with my friend Rick Santelli. As usual, we’ll talk about whatever’s on the top of Rick’s mind at the moment. It makes for a hellaciously fun discussion.

I return to Dallas to speak at the 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,
 
John Mauldin
subscribers@MauldinEconomics.com
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