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Retirement, pensions, social security, and related matters
Topic: Retirement, pensions, social security, and related matters (Read 1135 times)
Retirement, pensions, social security, and related matters
September 16, 2012, 10:44:43 AM »
Kicking this thread off with, of all things, an editorial from Pravda on the Hudson
The Road to Retirement
Published: September 15, 2012 120 Comments
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.
BO going after retirement accounts?
Reply #1 on:
April 06, 2013, 08:14:22 AM »
Kessler: The ROR Fantasy
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).
CA city on brink of bankruptcy due to pensions
Reply #3 on:
December 29, 2013, 12:18:34 PM »
POTH: Pensions are fuct
Reply #4 on:
April 14, 2014, 04:31:47 PM »
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.
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 ...
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!!
Tax Hikes Coming
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.
Vice President of Policy
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
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