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Last week The New York Times dropped a bombshell, reporting that “policy makers are working behind the scenes to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.”
This is truly huge news, with far-reaching consequences. But it shouldn’t come as a surprise if you’ve been reading my columns …
Back in July, I explained how state pension funds around the country had essentially blown their fiduciary responsibilities to retirees and their broader constituencies.
Specifically, I wrote:
“They have been consistently underestimating how much money they’ll need down the line. In essence they are pretending that inflation doesn’t exist …
“Second, despite the major losses they actually experienced in their portfolios, they are acting as if those losses haven’t completely happened yet. Instead, they are basically just figuring that things will turn around if they wait long enough …
“And interestingly enough, when these same investors were winning big a few years ago, they put off contributing more of their current earnings into their accounts … essentially letting their profits carry the day, or even borrowing money from their accounts!
“Even today, with their balances way off what they should be, they are failing to contribute to their accounts. Some are even playing ‘shell games,’ by moving money around to make it look like they’re in better shape than they really are.
“All the while, they’re creeping ever closer to their final day of reckoning.”
Then, this past September, I discussed some of the specific state pension plans at risk of imminent failure, along with arguments and steps legislators were employing to wiggle out of past promises.
Now, you’ll get no argument from me that many employee organizations expected — nay, demanded — far too much every time they went to the negotiating table. Yet I still place most of the blame for this impending crisis on career politicians.
Like coddling parents who never say “no” to their children, they were willing to promise anything to get elected and then to stay in office …
They were happy to ignore budgets and dole out money that wasn’t even in the kitty yet …
And they stubbornly put off pending problems, acting as if the piper would never show up asking for payment.
From capitol to capitol, it was just one big game of musical chairs. Now the needle has careened off the record with one last deafening screech.
Worse, the States Are Just One Facet of
This Massive National Pension Crisis!
Similar pension problems are emerging among U.S. cities, too — where local governments can already declare bankruptcy and, in some cases, hang pensioners out to dry.
And even in places where constitutions currently protect pensions, mounting problems at the state level may ultimately unravel — or at least sharply impact — retirement benefits at the local level.
Just take a look at the latest headlines and you’ll see just how widespread the problems are …
In New York City, pension costs have more than quadrupled in the past decade, from $1.5 billion in 2001 to $7 billion this year! That’s why Mayor Bloomberg recently echoed Governor Cuomo’s state-level battle to rein in pension costs, threatening huge layoffs unless unions accept drastic retirement reforms.
Meanwhile, in Cincinnati, lawmakers currently owe retirees about $1 billion more than they have socked away. And as this story explains, it’s a real mess.
Just some of the highlights:
- “[There are] policies that allow some workers to retire with pensions of up to 90 percent of their three highest years’ salary, guaranteed 3 percent annual increases, lifetime health coverage at negligible cost and other benefits far beyond those found in most private and public retirement plans.”
- “From 2000 to 2009, investment earnings failed in half of the years to meet an 8 percent [return] goal.”
- To solve the problems, “trustees are considering proposals to raise retirement ages, lower annual cost-of-living adjustments, shift a greater share of health costs to retirees and alter pension calculation formulas.”
Look, we’ve already seen this movie with corporate pension problems over the last decade. Countless plans failed … countless more were shuttered for current employees … and a whole mess of people lost important benefits there were counting on.
Plus, as I’ve noted in the past, the government’s backup insurance plan for these failed private plans is itself underfunded by many billions.
With these same issues appearing in cities and states from one coast to the other, a lot of folks have been asking if Washington will step in.
Well, if that New York Times article is any indication, the answer is yes — Washington may step in to LET state and local governments renege on at least some of the benefits they owe retirees!
It’s not like Uncle Sam really has a choice. In addition to owing private pensioners more than what’s in the kitty, there’s also that pesky issue of massive shortfalls in the Social Security program.
So What Can You Do to Protect Yourself?
It doesn’t matter if you’re a government worker or just a regular citizen … this national pension crisis is going to affect you — directly or indirectly.
It may mean a sharp decrease in your retirement benefits. Or it could reduce the public services available in your city or town. And it will almost definitely lead to higher taxes.
So I suggest you get as much information as you can on the rapidly-developing state and local debt crises striking our nation … and learn how to hedge against these problems with new investments that are now available.
I consider it absolutely critical that build up your own income-generating portfolio as quickly as possible, preferably in tax-sheltered accounts.
I’m helping my own dad do this right now, because we recognize that his state pension is no more guaranteed than anyone else’s.
As the latest headlines demonstrate, past promises to retirees are no longer sacred and benefits are no longer guaranteed. So if you’ve been putting off your personal protection plan, please make it your first priority in 2011.
Best wishes,
Nilus
{ 17 comments }
True, the pension planners had their blinders on, yet it wasn’t entirely their fault. Given the advice coming out of the Wall St. investment houses, the U.S. Government, the liars at the FED and all the wimpy, cheerleading morons of the mainstream media (Kudlow and Crammer [as in – cram this] come to mind), the folks who ran the pension plans for retirees didn’t stand a chance. The slicksters made those small time rubes who controlled A LOT of other people’s money many, many promises they knew they couldn’t keep. If someone has lost money in the financial merry-go-round, one doesn’t have to look to deeply that Wall Street’s in there somewhere.
If this happens, it is going to be the happiest day for America. In the first place it’ll teach those government goons who keep on getting our money more, and more, and more that they can be disposed as a used toilet paper. Maybe next time, when they asked to do unconstitutional things, they’ll think. Secondly, I do not believe these people deserve any pensions for slaking in a government office and taking coffee brakes every 15 minutes. Bad enough they were getting this insane salaries. Take for instance King County Washington officer to enforce affirmative actions with a salary of $91K. Not only the position as totally illegal, but the salary is insane. I thought the constitution guaranteed that all the races and ethnicities are equal, are they not any longer? No, I personally what to see the government goons loosing everything they worked for-the best lesson we could hope for.
For many years, I suspected that state and local government pensions were one great big Enron waiting to implode.
No matter what u people say, stocks market keeps going up.
Buy baby Buy!!!
The only reason the stock market is going up is because the Federal Reserve is buying its own bonds pushing cash into the market.
Buy baby buy? Stock market always goes up no matter what/
Reminds me of 1929.
What do you think will happen to the Union Pensions? Do you believe they too will fail?
Thank You, Sam
I’m glad to see these union thugs and over paid government employees finally get theirs. Notice that ALL these bankrupt states and cities have been run by democrats for more than 50 years. Congress has been run by democrats from 1933-1995…62 continuous years and 2007-201. 66 out of the last 78 years democrats have run congress where ALL spending bills originate. Is there any wonder that social security and the American government is broke? We know who is to blame for this mess….liberal democrats!!! It IS time for a change.I can’t wait for 2012.
Are you sure you know who you are referring to? This includes state teachers retirement, police, and firefighters like myself. One of the recruiting tools to these professions is the pension… because it is certainly not the pay. I am a conservative libertarian who personally has little use for the unions, but I was promised something and have remained dedicated to my chosen career in return. Some changes will need to be made in order for pension systems to sustain themselves, but pulling the carpet from under our feet is just wrong, ANY way you look at it. My contributions and my employers contributions to our pension program are far more than the social security withholding from most workers’ paychecks, and we are not part of the social security system. Bottom line, pensions are what keeps these professions from job-hopping and chasing the bigger paycheck like the rest of the nation. I don’t think anyone wants a bunch of job-hopping rookie emergency workers and teachers in our systems.
Ditto
if this looks discouraging, take a look at what congressmen wrote themselves! and I understand they exempted themselves from Obamacare. wonder why?
http://en.wikipedia.org/wiki/Congressional_pension
As a CPA for over 30 years, governmental or fund accounting does not make sense and should be revamped. The thinking behind budgets is that if you get to your year-end and you have money left over, you need to spend it so your budget won’t be cut next year. No savings, no return of unused funds, just spend it on any and everything. Couple this with unions that support their candidate with funds so the elected officials will do everything the union wants them too like puppets and you have a corrupt system. Now wonder they are in dire straits!
The stock market is near the end of it’s counter-trend move if it has not already topped . The long term bear market will resume and be aound at lest 5 years, it will be devastating and will only go lower when the muni mess and the state and local gov’t bankruptcy machines get going. Add the credit bubble of our country plus the rest of the world and you get a no way out scenario. The fed won’t be able to stop it with all the money they can throw at it and deflation will have to clear this witch’s brew of bad governing, corrupt lending and financial and rating institutions and services, and self serving politians.
i just hope Nilus Mattive’s insight on this mess does not fall on deaf ears. Get out of all muni and other bonds, stocks, real estate and commodities(in a few months after this inflation run up) and go to cash.
I have worked for the Federal Government for 26 years. Our retirement system is based on three legs, social security, pension based on the last three years of service, and a TSP account. Social security is broke, the government has no money to pay pensions, and if the stock market goes down so do our investments. That has been the plan for years, have the American people so much in debt, that they cry out for government help and there you are, a slave to the government. For a one world government to exist is to get the USA down on its knees and into a socialist state. How many countries would you like to live in at this time? I visit Brazil and it is a beautiful country, but do you know how many of them live under the poverty level? Children go to school at night so they can work during the day, they build their homes out of what ever they can find. I could keep on going….
It is interesting that since our wonderful system of Wallstreet Bankers brought us to this place, we are all avidly pointing fingers all over the economic horizon looking for people to demonize. Our capitalistic system is essentially based on certain amount of growth and that is why pension systems for example invest in equity type investments and not CD’s. When the economy is humming along we are all humming. The multipling effects of investment by everyone does its job. Now, we are pauns of the system when financial gurus who use OPM (other peoples money) make great decisions and create enormous wealth for themselves and the system we all fairly happy, but when they screw up we all pay for the backlash. Thankyou SEC and Fed Chairman… I read the stories too about the some public employees gaming the system with 11th hour overtime (and other scemes) to create inflated pension and it pisses me off too, but by and large these are not the average government employees. Most earn $30,000- $40,000 and their pension are maybe 2/3 of there final average earning not 90%. Unfortunately while we are busy kicking and screaming at our neighbors the Shites across the pond are likely laughly their asses off on how they think they started the whole thing off.
I agree Denny. And was not just bad advice, it was an assembly line of fraud, from loan origination, to the process of securitization to the ratings of agencies (pimping for Wall Street) to the point of the con-sale to pension fund managers. Stupidity or naivity (on the part of pension fund managers) is not a crime, nor is indebtedness, or even bankruptcy. Financial fraud by licensed pros is, and they should be in jail. Perhaps we couild declare the states as “banks” , recapitalize them and give them access to virually unmlimited amounts of money at 0% interest — ie, delcare them “too big to fail”. You can see by the comments on this forum, that a global banking cartel has not only been very successful at privatizing all the profits and socializing all the risks, but also managed to have the rest of us pointing the finger of blame at each other– ie, “taxpayer” against pensioner (including policemen and firemen), welfare “cheats” against everybody else, those recieving unemployment benefits against those with jobs (for now) , medicare and SS recipients against young workers, etc, etc. Wake up: most of you reading this will be more than one of these things at some some point in your life. When the sheriffs come as the armed ambassador of the bank to foreclose on your hopelessly under-the-water-mortgage home be sure to tell him what a lazy no good penison-receiving slug he is, and I am sure he will be glad to tell you what a dead-beat, debt dodging (gun toting?) irresponsible borrower you were. Is that really where we want to go?
exellent ,you said it, so obvious, but most walk in the dark can see only their hand in front of their face, or are sheeple
sue