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Wall Street loves low interest rates, and the speculative frenzy that results from repeated doses of easy money. But the era of ultra-low rates is bankrupting pensions, one basis point at a time.
That’s the conclusion of a depressing Wall Street Journal story this week. It notes that fiscal 2016 results have been dismal for many pension fund managers, with the lousy returns on fixed-income investments a key culprit.
Throw in two major recessions, and two bear markets since the turn of the century, and you get a recipe for a funding crisis.
The blue-chip Wilshire Trust Universe Comparison Service now estimates that 20-year annualized returns will slip to less than 7.5% this year. The firm has never seen returns that low in the 16 years it has been tracking the pension fund industry. It’s also a huge decline from the solid double-digit returns that pension funds enjoyed in the early 2000s.
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Low interest rates are making it difficult for cities to fund the pensions of retired policemen, teachers, firefighters and other employees. Taxpayers must make up the difference. |
One example from the Journal: Pension costs have tripled for the school system in Erie, Pennsylvania, forcing the government to close schools, fire workers and rely on stapled printouts rather than textbooks for its students.
Low rates also drive up expected liabilities for Corporate America. So unless and until the NIRP/ZIRP environment changes, companies will increasingly have to forgo certain investments or expenditures in order to pump more money into their underfunded pension plans.
The consulting firm Mercer estimated that S&P 1,500 companies had a total pension deficit of $568 billion as of June, up $164 billion just since the end of 2015.
This isn’t just a U.S. problem, either. Spend even a little time Googling the issue, and you’ll read about major pension problems in Japan, Australia, Canada, the U.K., the Netherlands and elsewhere.
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Central bankers have acknowledged the issue, but basically washed their hands of it. They say the benefits for the global economy outweigh the negative side effects of NIRP/ZIRP.
But that argument looks more and more ridiculous to me when I read stories like these, and when I factor in the “Everything Bubbles” that easy money policies have inflated.
That’s because I know an incredibly painful day of reckoning gets closer with each hour that passes, and each basis point that interest rates fall.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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These ultra-low interest rate are doing massive structural damage to our economy by suppressing the multiplier effect – money isn’t ‘working’ anymore. Instead it is going towards risky speculation. It is wealth destruction without a crash. Japan adopted these policies decades ago, and it hasn’t gotten them out of their economic rut. There is overwhelming evidence that these policies are not working, are doing damage, yet the central bankers insist on continuing them. I predict that someday, somebody will win a Nobel Prize for Economics by proving how it isn’t working in mathematical terms. Until then, what a mess we’re in!
Well written, and to the point, Justin. I totally agree.
Most Public Service pensions are unfunded in EU and the system is pay as you go ! The US will have to adopt the same system? One way of solving the problem is to have a different model to calculate pension liabilities taking into account the current low interest rates? As at least 50% of pension funds are in equities why continue to use Government bond rates as the baseline rate ?? I assume there’s some logic ??
John
The total shortfall is defined benefit pension is so large that contributions cannot make up the difference–$558 property tax increase in Chicago just for fire and police pension funds. Beneficiaries so many and so well protected by constitutional and organizations it’s virtually impossible to make any meaningful reductions in promised benefits. Our Only hope is exceptional growth in the economy. We must dump every rule and growth constricting regulation now.
Response to Mike, who says – “One example from the Journal: Pension costs have tripled for the school system in Erie, Pennsylvania, forcing the government to close schools, fire workers and rely on stapled printouts rather than textbooks for its students.”
This is a good example of “don’t believe everything you read in the newspaper (or whatever)”. The municipal gov’t of Erie PA may well be closing schools, firing teachers and other city workers and resorting to photocopying of textbooks – because that’s a choice being made by city leaders – not something they “have to do” because of the pension fund. This article is not stating the facts correctly.
The amount of money in pension funds are supposed to be kept up to a target level via yearly contributions. Under ordinary circumstances it’s not possible for pension fund cost to triple (when the number of employees being contributed for remains about the same) unless one thing happens – they just stopped paying into the fund in the past, and now they’re up against a massive shortfall in that obligation. That tripling may occur because a) they are using the insufficient amount contributed in the recent year as the base for the calculation, and/or b) because they face mandatory “make up” expenses to cover for past abuses of funding of the pension system. Those contributions are contractual obligations with employees, so if this is in fact happening it’s because of gross financial mis-management on the part of the city, not because of interest rates.
Any municipality has legal obligation for running it’s community, including responsibly for police and fire protection, road maintenance and the education of children K-12. The taxpayers of each municipality are obligated to pay for these things and the city has the authority (and the obligation) to use tax law to get the money needed to pay for these things from the tax base. But things don’t change quickly in municipalities. There are no sudden tripling in a single year of the number of children in school, or the number of police officers needed to maintain law and order. What’s happening in Erie is that an anti-tax constituency had gained control of city gov’t and they are cutting back on spending while seeking to place the blame for this on anything other than themselves. In this case the cost of pensions is a good excuse. Another popular excuse is the rising cost of health care and I’m sure there are others. But those are just smoke screens to obscure the truth – which is that the city leaders just don’t want to pay their expenses, either now, or in the past – or more than likely both.
But if you look at this closely you will see the signs of mis-management and mis-use of public funds. Schools everywhere hate to shell out the money to buy textbooks for their students – this is nothing new. But photo copying textbooks to save money on books for kids in school is illegal. It is a violation of copyright law and it’s also closely policed by the publishing companies who own those rights. School text book publication is a big business and they will not under any circumstances stand by and let a major school system like Erie PA (pop. 99,000 and with most likely 13,000 to 15,000 students enrolled – every one of whom has half a dozen books it tow each year) copy rather than buy textbooks. They can and will sue the city for this – and in the end the city will pay a lot more in legal costs as well as financial judgments against them (as they are bound to lose this in court) than it would have cost them to buy the books in the first place. Not only that it’s possible for administrators in the school system to do jail time for this. This is not a smart thing to do – although it is known that some communities will do it.
This is a case of gross financial mis-management on the part of the city of Erie. It is a choice made by city financial leaders to not live up to their legal obligations for the cost of education, and to break laws to do it. Furthermore Mike should have recognized that this has nothing to do with the growth of money in the pension fund. It has everything to do with not wanting to pay for the costs of public education (and probably other things getting cut as well).
It’s not easy for municipalities that operate pension funds to make ends meet. But whether it’s a city pension fund, or a state run fund as it is in many places – contributions to the fund need to be made to keep the dollar amounts up to the projected levels needed to meet future obligations. This is basic financial management – and in the case of pensions – it is a legal obligation. When there is robust growth to help pension funds meet those financial levels it lowers the cost to the city/state/corporation who is obliged to maintain the funds. But if there is not – those players have to shell out the cash to do the job. That is what this article is REALLY about.
John H
Beautiful. The few realistic politicians do not last more than one term as the “public” votes them out.
In other words, tax everyone more to pay for the services! As far as the textbooks are concerned, you do not copy textbooks. You share them. Kids are not allowed to take the books out of the classroom, and each group uses the same textbooks. Voila! No lawsuits. The kids love it, because there can’t be any homework that involves the books.
Respose to John H. Very well said. Thanks for doing the heavy typing. Unfortunately, many municipalties face similar circumstances. Mike simply noted that Erie, PA was among them. My son, who is a firefighter and I recently visited Detroit, MI (and we thought we had challenges in our city).
We spoke with emergency personnel, local workers and even those with no job. What they did have was hope and love for all, certainly including us who were there to spend our hard earned money, for the wonderful services they all provided. We learned a little about our beloved hockey team, a bit more about the city and its challenges, yet we learned the most about being a human being today.
Rather sobering, also disturbing that an example that Mike cited could bring us to discuss any of this this deeply. God help us all.
Talking about negative interest rates in the UK now then they say the economy is booming. Trouble is that government and private debt has increased so much now that they dare not put up interest rates because no one including government could afford the interest payment-where will it all end.
Do these bankers know what the concept of interest rates is? From the article, it appears that they do not.
Interest rates are priced based upon perceived risk. They are also related to the value of the currency units used for lending and repaying. But from the lender’s point of view (the investor), they are a measure of what he should be basing decisions upon.
I see the elephant in the room being the way our currency systems are based on debt instead of assets. Everything about “money” has become related to debt. If we earn $1 and hold that in our mattress, it’s an asset that can be converted into other useful assets when we use its purchasing power. But if we put it in a bank account, it now becomes a liability of the bank while still being our asset. When we had gold-backed money, out $1 represented a fractional interest in gold held at the bank. Now, there is nothing to support that value except a digital printing press.
We have had our monetary system turned against us by Washington, and we didn’t have a choice in the matter.
I’m afraid Kevin that you don’t really understand what happens when you deposit your money in a financial institution. The reality is that it ceases to be YOUR asset, becoming rather an asset for the bank. You may think that you have rights on this money, but the hard reality is that you DO NOT! Do some more research and discover the truth. That will sober up your opinion of banksters quickly.
Bankers have tunnel vision.They seem to live in a cloisted world.They benefit whom?.. Sure not the pension people,or the C.D.’s or M.M.F.and
Savng Accounts.
Hold the presses. Here are some GDP numbers and they are not pretty. Gold of course jumped all over them
However, the biggest declines came in both business and residential investments. Business investments dropped 2.2% last quarter, following the first quarter drop of 3.4%. At the same time housing investments fell 6.1%, almost reversing the first quarter gains of 7.1%. Dear Fed do a Rip Van Winkle.
My father’s employer went out of business 6 months before his retirement – what pension? My “pension” is investments in commercial real estate. Recycling and renovating old (read: cheap) buildings and improving the community at the same time. I’ve incubated new entrepreneurs with low starting rents to improve their odds of succeeding and reduce the number of empty storefronts downtown. Don’t trust in others – invest in yourself and your community!
Reply to DLS: It sounds like DLS’s father worked at a company that didn’t set aside pension fund money – but just left it as a “future obligation” to be paid for down the road out of the company’s regular operations. That is NOT how pensions are supposed to be financed. The money should be put aside regularly, and that money belongs to the employees – not to the company. When companies don’t set money aside they are setting up for a default on the contractual obligations of pension contributions made to employees. And if the company goes belly up there’s usually no money left for a lot of things (such as paying debts) and there winds up being nothing left and the employees who are in effect robbed of their retirement benefits that came with employment.
The company is SUPPOSED to set that money aside and keep it out of their regular accounts for the operation, even if that means turning the money over to a third party so it’s separate from the company entirely. But DLS’s father didn’t seem to have worked for a company that did this – so when the firm went out, the employees lost. It shouldn’t happen that way – but unfortunately it sometimes does.
JAPAN – there has been a lot of talk about Japan on the Weiss blog lately and with the massive QE announced by the BOJ this week that is not at all surprising. But one very big and very serious problem the Japanese have that’s not on the radar screen of the financial media very often is this. The great majority of Japanese companies do not set aside money to build a pension fund to meet obligations of payments to future retirees. They operate the way DLS’s father’s employer did – and just say “Trust us, we’ll take care of you” (meaning they’ll pay those obligations as a current business expense when the time comes). Of course when the time comes and the company is no longer in business – the employees are screwed. If the time comes and the company is still around but is in on financial condition to make those payments (which may well be the case for many Japanese companies) the employees are also screwed. If the companies get the gov’t to side with them in denying that they owe pensions to employees in the first place – well, you get the idea.
The Japanese have been stuck on this for a long time. Given the importance in Japan of “saving face” (or if you are the one on the sort end of the stick – of not criticizing in ways that disrespect those to command respect) workers have not really been able to say “No, we don’t trust you – show me the money being set aside for my future pensions as proof that you will be able to do this”. That’s what they should have done for the last 40 or more years, of course – but given the nature of authority in Japan – they didn’t – they couldn’t. Management in Japanese companies has take advantage of lower expenses due to the lack of those pension set asides to juice profits in the “here and now” because it lowers current operating costs. But as you know there haven’t been a lot of profits in Japan for some time even with this advantage. So with an aging population that’s going to see huge waves of workers pass into retirement in the coming decade I believe that there will be a major pension crisis in Japan, whose economy is been in stagnation for 25 years and is showing no signs of coming out of it.
those polices resulted in the bankruptcy of Stockton and San Bernardino. Instead of thriving cities they are now ghettos. Let this central banker-induced anarchy spread a bit further and the governments will have hell to pay with its citizenry in revolt. Greed won the battle over the middle class, but it will, and may already have, lost the war
As I indicated before, mandated low interest rates may be helpful for a short time, but when they are continued for decades, they are anything but. They erode earnings for people and institutions which rely on interest income, making those people and institutions poorer. They also induce heavier use of debt, endangering financial stability of people, companies and governments. Also, if central banks can mandate artificially low rates, what will keep them from, one day, mandating artificially high rates. Volker did it in the ’70s, and that broke the back of inflation, but also increased government and private debt obligations, and probably contributed to later economic problems.
Incidentally, I read elsewhere that American industrial production is down about 11% since QE3 ended in late 2014. The main thing holding it up is production of automobiles. Car sales are declining now, and with high inventories and sales incentives, Ford just reported a 9% drop in profits. They will soon need to reduce production, if they haven’t already. I believe Fiat-Chrysler already has done so. Auto stocks might be good shorts, especially if interest rates do rise. Here is a good example of what central bank rate meddling can cause.
Chuck,
Your comment about Paul Volcker is not quite correct…… Volcker (appointed by Carter) raised short term interest rates to stop the Nixon Inflation and it worked by greatly slowing business….. Reagan complained mightily about the slow down in business, but then was quick to try to take credit when Volcker slowly brought rates down and business took off with inflation crushed…… Sadly, it was Greenspan (appointed by Reagan) who saw “no problem” with removing the Democratic Regulation from 1933 called Glass-Steagall (by the Republican Majority Congress) which had kept the markets safe for over 60 years. Seven years later, we had 1929 all over again thanks to that ill advised removal…. Even Paul Rubin (Republican from Goldman) , who adviser Clinton to not veto, left the Treasury soon after removal to take a no show job on the Board of Citibank for a million a year…
Within
There is no excuse for the policies of the Federal Reserve since 2007. I see their massive money printing and next to zero interest rates as a case of stupidity. Plain and simple. You can see it as a case of taking care of the large government debt at the expense of the little savers who worked for years to accumulate savings only to be disappointed with low rates.
To be sure, the unfunded pension problem has reached the point of no return. The future looks bleak for workers who will not be receiving the pensions they were promised and counted on for their retirement. I would suspect that at some point the devious leaders of the companies who failed to manage their pension funding will choose one company that will go bankrupt to save the others. The chosen company will first buy up all the unfunded pension obligations and once accomplished will declare bankruptcy. The surviving companies will then be in a position to continue their pension program.
It is hard enough to invest with a limited amount of funds in an “everything bubble” environment. Consider the dilemma that pension fund managers face. Billions of contributions coming in every month, and they are limited by law to where to invest, like stocks and bonds. In Europe they are required to invest in government bonds. Otherwise, negative interest rates would not be possible there. Throughout history, governments ALWAYS default on their obligations. They have all of the power and cannot be forced to meet their obligations. It would be better to terminate the pensions and distribute the proceeds to the employees and retirees. They would buy useful things and would probably invest it better, because they are not locked in by government regulations. Under the current system, they are going to lose the maximum.
If the same party that brought 1929 had not brought 2007, we would not have this problem……. It takes time and low interest rates to recover the economy…… :(
Of course it would help if the Congress changes in November so that we can throw off Citizens United, NAFTA and GATT brought to us by the same folks above……
It should be noted that the Crushing of the Middle Class and the explosion of the Deficit began with Reagan and their “Revolution”, that in the end. ONLY made the wealthiest 3% richer and the rest of us poorer……
There are many aspects of the low interest rate strategies that have been foisted on us by Obama’s administration, but I will focus on just one aspect …. i.e. the use of low interest rates to punish savers/retirees.
The Obama administration has a number of both groups and individuals that have been targeted for special treatment. In this case the saver class, and retirees are targeted because they could very well be the last generation that can recall from their life experiences that America used to be a better place …. a much better place. Their knowledge of this one simple fact has made them a target. The objective? When people are focused on simply getting by, they don’t have the energy cycles to devote to making others aware that America was once a great place…. and could be again if people came to their senses. This is how banana republics control the behavior of groups that they don’t favor.
The Fed makes those decisions, not the Administration in Power. Rather you should ask Republicans Gramm/Leach/ Blyley for bringing the legislation to remove Glass- Steagall or Cheney/bush for taking us into Iraq!…:(
Correction: I’ve gotten richer since 1981 because, I studied American Economic History in college on the GI Bill (Thanks FDR) and knew what the “Revolution” would bring the crushing of the Middle Class, Bankers allowed to run wild again and in the end, 2007, just like 1929…..
And again, I knew what Obama, like FDR, would do once elected….. It was like shooting fish in a barrel….
Sadly, rather than studying history, many bought into the right wing B.S. and stayed out and are still out and have missed this whole huge rally since March 2009….. :(
Yes Eagle495 – and the only analyst at Weiss who was clear about March 2009 being the bottom, and hence time to get back into stocks was Larry Edelson. He may not nail it every time (nobody probably does) but Larry really nailed it that time. Give him credit for that.
Agreed….. I’ve noted Larry’s timing on 2009 before on this site…… In my opinion, Larry recognized the similarities between the Republican disasters of 1929 and 2007 and the expected Political Shift to Democrats and their Economic Rebuilds after those Crashes and Depressions in 1932 and 2009…..
Does any one, have any idea why the United States has the Best Economy in the World?
They left out that reduced inflation will also reduce future funding requirements.
Teamster retiree among the fallen.
I totally agree Mike. I am 82 and distinctly remember the ’70’s and ’80’s when we experienced runaway inflation and the consequence of up to 20% interest rates in an attempt to cure the problem. Printing more and more paper money is not going to solve our present financial problems. Personally I am taking every move I can to protect myself and gold ownership is crucial..
I’ve been wondering about how pension funds, other than governmental ones, have been doing, and this article provides some good answers.
When I post in these forums, I usually try to convey as thoughtful of a message as I can. But today, all I can say is this:
AUUUUUGGGGGHH!
Most companies are trying to get out of pension fund liabilities. What they are doing instead of “defined benefit” (that is they guarantee retirees a certain amount of money and then are responsible for obtaining that) the have been moving to “defined contribution” – which means they give you a certain amount of money and it’s up to you to grow it. Of course if you are an older employee you may be on the older system but as the latter generations have come into the workforce they don’t get the preferred “defined benefit” program.
Part of the uptake to learning about investing is to study the “three legged stool” model of finance. In this model the first leg is Social Security, which as we know is wiping out and becoming worth less and less. To the “model” stats that this leg is largely broken today and going forward – you can’t count on it. The second leg is company pensions – and they are disappearing rapidly so that leg too is largely broken today and going forward – you can’t count on it either. The last leg of the three legged stool is the ONLY ONE LEFT – and that is your own saving and investing. Since that’s the only leg of this stool that is supposedly going to hold you up in the future you’d better now mess that one up by failing to save and grow your personal assets over your working career. It’s bad enough to sit on a stool with 2 broken legs – don’ t let it get out of hand where all 3 legs are broken.
This is a standard passage in financial education for MBA students learning about how to speak to clients and to help educate them about the harsh realities of retirement on the horizon for most people today.
Central banks adopting policies that benefit the few at the expense of the many? Surely you must be joking.
Agreed!… :(
Yeah, but I’ll bet everyone of the teachers in the Erie School District will vote for Hillary
Clinton, who,only last night spouted that everything is “already great” in this country.
Mike: We the people have lost 8 Trillion dollars in interest payments on our CD’S, passbook savings accounts and money market funds since QE started. QE is nothing more than a back door bailout of wall street. We also have lost an additional 26% of our purchasing power as a result of QE. Insurance companies and pension funds have always relied on a stable bond market in order to for fill their commitments. We are in for the worst financial crisis in world history. the root cause of the problem is fiat money! We are in our third currency war which was started by this President. It must be brought to an end. Regards, Robert Calabro.
The world has yet to invent a perpetual motion machine, but the Fed has successfully invented the perpetual money printing machine. All asset prices will sky rocket over tye nect few years. Get in now otherwise risk poverty. The middle class will all but disappear…
YES – that’s so much easier to do HAH!
J.P. Morgan said it best when asked which was the most important–capital, labor or management. He replied, “Tell me which is the most important leg of a three-legged stool”. Seems times have changed since the Federal Reserve was conceived at his hunt club.
Poor Eagle495… is still living in his dream world. O”bama directed the FED to take any actions necessary to pump up the stock market. Even though it destroyed the savings of retirees. Eagle495 has obvious made a bundle hand over fist since he is in he stock market. His unearned wealth is on the backs of the working class who cannot afford to invest in the stock market. According to a recent comment from bubbles “Greenspan” we are now at the beginning of a “period of” sustained STAG INFLATION. So thanks to people like Eagle495… retirees not only are robbed of their savings, they now will suffer another hit from stag inflation. Also Eagle… WWII pulled us out of the depression NOT Roosevelt the communist. Roosevelt is also personally responsible for all the deaths from the Japanese attach at Pearl Harbor.. Check your history PLEASE……!
Tanya,Here was I thinking about today,lets bring up the highland clearance in 1640 in Scotland,King george was to blame for that as well
Roosevelt was beloved and re-elected more times than ANY President in American History. He was elected FOUR times. He also was the one that brought the changes to make 8 years the longest a President could serve…..
It appears that you are saying our Parents (The Greatest Generation) and our Grandparents were snookered…… You badly need to pull your head out of the very dark place it currently is…… We may disagree on this site on many aspects, but on the subject of FDR, I’d bet the majority of the informed readers, view him as a savior……
Incidentally the majority that called him a “communist” were the wealthiest 3% who brought the Crash of 1929 and who, had it not been for FDR and the “New Deal”, would have been the first to have gone before the firing squads when the impending revolution occurred….
Tanya,
Got any education beyond High School? You seemed to miss the part that I was a dirt poor kid (I’ve done every dirty rotten job you could imagine) who volunteered rather than be drafted….. I went into Special Operations in the Army. Very dangerous, but did it with a lot of smart other poor Democratic kids… See the rich Republican kids like Mitts, Donnie, George, Dick and Karl were all enjoying college deferments thanks to their rich parents……
Study Economic history and you might be enlightened rather than buying that right wing drivel from the screamer sites….. Look up Greenspan and you will find that he “saw no problem” with the removal of the Democratic legislation called Glass-Steagall that had kept the banks safe for over 60 years. That removal brought the stupid dangerous trading to return that brought the markets down in 1929 (the very trading that G.S. made illegal)…
The stupidity of your statements is astounding….. Try going to Wikipedia or Google or go to any College library if you want the truth……
And, incidentally, the ONLY way I dragged myself out of poverty was by scraping and clawing my way through College….. It was one heck of a lot of work, but well worth it….
Reply to Tanya – I don’t agree with some of what you’re saying here. Almost everyone can invest in the stock market – and frankly speaking, that’s the way to go rather than wasting dollars in low/no interest investments like bank CD’s, treasuries, annuities and the like. You can do it with a few thousand dollars a year set aside – and if you have the foresight to get that going early in life it’ll actually to quite well for you. The main reason people don’t save for the futures is that they want to spend the money now instead – but you can’t blame that on others. That’s something every individual can and should take charge of. And the less money one has the more important it is to set some of it aside to grow.
There are the very poor of course who can hardly get by on what the earn. That is a problem – no doubt. But if you are above the poverty line in the US you should be able to spare some money for investing. And you’d better do it because nobody else is going to do it for you.
“They say the benefits for the global economy outweigh the negative side effects of NIRP/ZIRP.” So, the Central Bankers think the global economy is that good???? Or, would their argument be the pathetic, “it would only be much worse”. If Central Bankers weren’t so dangerous, they’d just be useless.
My wife and i are pensioners in New jersey. I’m also an economist. I’ve reluctantly concluded that the pension problem is more fundamental. Defined benefit pensions are a flawed concept because investment risk is transferred from the recipient to someone else, eg shareholders or taxpayers in most cases. The issue should be equitably addressed by meeting past commitments (possibly with caps to mitigate abuses) and transitioning to defined contribution (401 k type) pensions going forward.
David,
The past crash showed the advantage of a state managed system over an individual 401-K….. While the markets fell 60% from November 2007-March 2009, our state retirement system only lost 10%….. Most individuals have not the expertise to manage something as important as a pension fund…..
Most studies show that many got out of the markets close to the bottoms and never returned, in no small part thanks to the Right Wing Attack Ads that seemed to find nothing valuable with Obama’s efforts to bring the economy back, despite the fact that he did just that and the markets are now at new highs…… Perhaps it is time to begin bringing some sort of charges against the supporters and producers of those false attack ads, aye?
My experience has been that the states which got into trouble either had inferior fund managers or had not deposited into their pension funds the amounts agreed to by their negotiates with their employee unions or associations….
My view is that the low current and future returns created by ultra low interest rates are offset by inflated asset values, having no net effect.
If interest rates were increased, current and future returns would be higher. But unless they were hiding in cash (as I am), the value of pension (and 401K) assets would plunge.
If pension plans were honest, as asset prices rose expected future returns would fall leaving no change in their net position. An asset price crash would produce the reverse.
https://larrylittlefield.wordpress.com/2013/11/29/pensions-the-nature-of-the-lie/
My dad says low interest rates are killing him, because he’s getting almost no income from his $X of retirement savings. I tell him that absent low interest rates, his retirement savings would no longer be $X.
Bottom line, a series of bubbles have allowed people to delude themselves and live larger than they should, saving less.
Mike,
You are right to bring up the public pension problem. It is a huge problem that is only getting worse. But one of the key elements of the problem has not been discussed.
For decades now, there has been a corrupt alliance between govt unions and the Democrat Party. The unions work to elect Democrat politicians and then the Democrat politicians give money hand over fist in annual benefit and salary raises to unionized govt workers….who then fund the unions with union dues.
It is a vicious, corrupt cycle. And the damage they do is immense. Unionized GOVERNMENT workers get regular raises that are totally unsustainable by the taxpayers (us). There is no way that these govt pension funds can earn the kind of money that would be needed to fund these fat benefits so taxes must be increased on the already overtaxed citizens. We really need to get the unions OUT of government. Everywhere they go, destruction follows.
The ultimate answers?…
1. First and foremost…..get the unions out of govt
2. Put ALL govt workers on Social Security AND that awful Obamacare like the rest of us schlubs (let them enjoy the huge increases in healthcare costs like we have)
3. Limit the amount of govt raises, pension increases, and benefit increases that we taxpayers have to shoulder
Some government jobs are incredibly dangerous such as soldiers, police officers and firefighters…… You want the best and brightest filling those jobs and that takes salaries relative to the job. Many in those roles are retired early because of injuries sustained on those jobs…. Many retire at 20 years to 30 years because injuries received on those jobs are such that they can not continue…. Most of those that filled those jobs die younger than the average because of physical or psychological injuries or hazardous exposures.. In most cases, the only organization that looks out for them or has their back are their Unions,,,,,, Most innovations in those jobs, comes not from management, but through actions brought by those very unions…… Don’t believe that? Go talk to a firefighter, police officer or soldier…… And then thank God that they are between you and some very, very dark forces……
If public sector pension funds are not fully funded, then cut the pensions accordingly. Why should taxpayers, the bulk of whom do not get employer-provided pensions, have to subsidize those who do? Why do public sector employees get to retire earlier than the rest of us, at almost full salary, and essentially get paid for doing nothing for the rest of their lives? This nonsense is largely due to public sector unions and the politicians they bought.
While we are at it, let’s do away with Agriculture Dept. Government Subsidized Crop Insurance, Price Supports and Crop Rotation Awards. After all, we are now producing far more than we need…… How about we also remove Agriculture Department Embargoes on Foreign Produced Crops. We’d save a LOT of money, just like we did when the government allowed manufacturing jobs to be shipped to Mexico, China and India. Why don’t we also enforce the minimum pay levels on Farm Workers, like the rest of the country? Who knows, perhaps there would be fewer farmers playing golf in Mexico and Arizona and Southern California in the Winter…..
Great discussion. I’m not as smart as many of the contributors but I thought that municipal govts derive their revenue from real estate taxes. If you have police, fire, teachers, etc, working for 25-30 years and retiring on 70% of last few years wages with full medical, how does a municipality fund these obligations without raising real estate taxes dramatically above current levels.
When you factor in the life expectancy increases guaranteeing these defined benefits don’t seem doable. By keeping interest rates low our governments, local, state, and Federal, can only exist in a low interest rate environment. We are forestalling the inevitable.
Interesting article and interesting comments. I am a financial planner based out of Perth, Western Australia and i think that our experiences over here may be interesting for those commenting on public or private pensions.
Back in the ’80’s i was superannuation manager of a large business, and watched as Australia’s super system moved from predominantly defined benefit pension based to predominantly contribution-based. As mentioned by others, this changes the company/government obligation from some made-up actuarial guess into a fixed and clearly defined contribution obligation today. The company/government has certainty over their costs, and the employee has the cash in their superannuation fund.
There are pro’s and con’s to this system but overall, it is much, much, much fairer to all involved.
In a further refinement, Australia’s regulators have mandated minimum requirements for funds to accept those super moneys, which helps reduce costs and ensure trustees use appropriate strategies. It is then up to the individual to decide whether they accept the default or if they wish to take more control of their money. This at least partially protects people from themselves while providing some freedoms for the more informed/active investors.
The move from defined benefit pensions to defined contributions was an extended effort, requiring much more member education and communication. Yet a bold start was made, and Australia’s retirement system is dramatically more stable as a result. Even the larger Federal Government pension scheme has had money seeded into a “Future Fund” to help meet a large chunk of the obligations.
Yes, it is true that low interest rates make this future funding incredibly difficult – but the defined pension system is based on a hope and a promise and there are better ways.
A $37,000 indexed lifetime federal government superannuation pension income has an actuarial cost of well over $1 million in a low interest rate environment. If you think about this, how many workers aiming at a $37,000 retirement income would have accumulated $1 million for their retirement? The answer is very, very few. So when these pension deficits are calculated, you can see how easily the liabilities can get out of hand.
If interest rates were to suddenly revert to average, these liabilities would cascade down.
Pension funds operate over multiple lifetimes. The ultra-low interest rate environment has been in existence for only 9 years and there is no reason to assume it will not eventually recede. Therefore, the pension liability calculations are overstating the obligations currently and the obligations will eventually come back into order.
But it is a good time to have a big rethink on who should wear the obligations for the future of the individual? Should it be employers, government or the individual?
Comments from a well known and respected economist.
“NAFTA and the other free trades deals were great for all the countries involved the main problem was that the benefits were UNEVENLY distributed”. Hands up if you know who really benefited. Hands up if you were NOT benefited. Another Sherlock Holmes statement.
Keep rates low and destroy the pension plans (and probably insurance companies, as well), or let them rise so that interest costs destroy the big borrowers – like many businesses and the Federal, State and Municipal governments. Either way, the Fed destroys entities that are Too Big To Fail. The Fed has no good options left.
Only $568B short in pension funds for the 1500 S&P 1500 companies–that’s a rounding error compared to the $103T for the totally Unfunded Liabilities for Social Security, Medicare, Federal Debt publicly held and Federal Employee & Veteran & Benefits. Works out to $861k for every taxpayer. See http://www.usdebtclock.org Must agree with Nels–the Fed has no good options left. Perhaps raise the price of gold to $5k+ –if we have it in our federal repositories and if we haven’t pledged it to someone else.
I have a comapny pension here in England, the government set up this scheme a few years ago. It has been said that I should be paying 23% of my income (half my age) into it and that the employer should match this. However, that is not reality; I’m only paying 5% in and my employer will only pay this in. It’s no good for me, but would be better for someone starting out in their career. That said, maybe it won’t…
When good people allowed the Federal Reserve Bank to simply print money, they betrayed thopse who were powerless to resist it, let alone understand what it was doing, and now has done, to the entire world.
Entire world?
Yes. Here in Australia, the JP Morgan “free money” – printed by the Fed, has now purchased 30% of our “Big Four” Banks, and a similar percentage of the ASX200 – our top Blue Chip Stocks and Shares. JP Morgan controls the markets everywhere.
Guess where the profits are going?
Not to Australian people, but straight back to JP Morgan.
Same thing is happening all over the world, in every market. The iniquitous policy of “Quantitative Easing” is another way of boiling the frog slowly, or enslavement by stealth.
Australia is now in an enormous housing bubble, because of this funny money. Ordinary folks are unable to purchase their own homes. Those with money are the foreigners who are cashed up and who continue to inflate our markets by out-bidding people with a legit need for a home. Instead, they are turned into tenants in their own country, and thus the destruction of the middle class continues.
Americans are gutless and they are fools. They have allowed their Federal Reserve bank to export this evil to the far corners of the earth. It is the most corrupt nation on the planet, and has despoiled every other country with which it has come into contact. It has brought wars, violence, poverty and falling living standards everywhere its tainted fingets have reached, while pretending to be the world’s policeman.
As an Australian who has raised 4 children on a single income, I curse the United States of America for their uncontrolled greed and corruption, which has ruined my nation and many, many others.
Get your house in order, America, and stop with this ridiculous pretense of being a “Christian nation.” You have no idea what the term means. Hypocritical, corrupt and clueless about what your government and your banking system is doing world-wide.
May God have mercy on you for what you have done, because I cannot.
Sow the wind … reap the whirlwind.
The concept of “retirement for the masses” is a cleverly devised fable, to get simple minded weak individuals to believe they are entitled for a cradle to grave welfare payroll. Devised by politicians eager to get elected, or re elected, knowing full well, that they would be in the grave before the bill to the taxpayer came due. And that the politician at the time would get all the blame for not fulfilling the pension promise, not the originator of the broken promise.