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| People Will be Stripped Of Their Pensions |
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| Pensions Are A World Wide Problem |
By assuming they will receive a high rate of return those managing pensions are able to make plans appear better funded than they are. The reality that they will consistently earn such a high a return on a conservatively managed portfolio, as anticipated by its fund managers is both optimistic and unlikely. Lately, the markets have been hooked on monetary morphine and ignoring fundamentals. Many of the financial structures we have built are on flimsy foundations or unsustainable. If the wheels come off the financial system pension plans will take a direct hit. To those who base their future on money coming from these monthly payouts I urge caution, it is not unreasonable to suggest they be prepared to take a "haircut" or worse. Sadly, this goes beyond pensions and will probably include a slew of other promises have been piled on to give the impression our golden years will be more enjoyable.
The 25 biggest systems by assets averaged a 7.45 percent return from 2004 to 2013, close to the expected 7.65 percent rate, Moody’s said in a report released recently. The bad news from the New York-based credit rater is that pension liabilities have tripled in the eight years through 2012. Despite the robust investment returns since 2004, growth in unfunded pension liabilities has outstripped returns. Inadequate pension contributions, as well as the sheer growth of pension liabilities as benefit accruals accelerate, salary increases and additional years of service are increasing the gap. A report from State Budget Solutions found state pensions funded at 39 percent while they claimed a 73 percent rate. States with the lowest funded ratio include Illinois, Connecticut, Kentucky, Kansas, Mississippi, New Hampshire and Alaska. In addition to low funded ratios, states like Alaska, Ohio, and Illinois also have some of the largest unfunded liabilities per person weighing in at Alaska with $32,425, Ohio with $24,893, and Illinois at $22,294.
It is a fact the generation that is now beginning to retire has leveraged its size into favorable policy that it will enjoy in later life. All this must be coupled with the fact many baby boomers have little or nothing in the way of savings and will be totally dependent on the promise that government will step in and care for them in their older years if they need help. We should remember governments slashed tax rates in the 1980s to revitalize their lagging economies just as boomers approached their prime earning years. The average federal tax rate for a median American household, including income and payroll taxes, dropped from more than 18% in 1981 to just over 11% in 2011. This means less revenue for the generous benefits boomers have continued to vote themselves. Programs like a prescription-drug benefit paired with inadequate premiums have caused deficits to explode and they will dramatically worsen after 2017.
The arithmetic leaves few ways out of the approaching storm, the numbers are ugly and much of it is only now becoming visible in our soaring National Debt. Faster growth would help, but the debt left by the boomers adds to the drag of slower growth in the labor force. Carmen Reinhart and Kenneth Rogoff, two Harvard economists, estimate that public debt above 90% of GDP can reduce average growth rates by more than 1%. Meanwhile, during the boomer era, we have seen falling levels of public investment in America. Annual spending on infrastructure as a share of GDP has dropped from more than 3% in the early 1960s to roughly 1% as of 2007. Austerity is one way we might address this problem, but the consolidation needed would be large. The IMF estimates that fixing America’s fiscal imbalance would require a 35% cut in all transfer payments and a 35% rise in all taxes, far too big a pill for our creaky political system to swallow.
Fiscal imbalances rise with the share of the population over 65 and with partisan gridlock, this is troubling news for America, where the over-65 share of the voting-age population will rise from 17% now to 26% in 2030. As this voting block grows and strengthens it is unlikely they will loosen the noose. Another possibility is trying to inflate the problem away. A few years of 5% price rises could help households reduce their debts faster. Other economists, including two members of the Federal Reserve’s policymaking committee, now argue that with interest rates near zero, the Fed should tolerate a higher rate of inflation and try to speed up recovery. The generational divide makes this plan a hard sell. Younger workers are typically debtors, who benefit from inflation reducing real interest rates, older people with large savings dislike it for the same reason. A recent paper by the Federal Reserve Bank of St Louis suggests that as a country ages, its tolerance for inflation falls.
The bottom-line is that all these promises result is some rather ugly math, as things stand an American born in 1945 can expect nearly $2.2m in lifetime net transfers from the "state" far more than they pay in, and far more than any previous group. A study by the International Monetary Fund in 2011 compared the tax bills of what different age citizens pay over their lifetime with the value of the benefits that they are forecast to receive. The boomers are leaving a huge bill. Those aged 65 in 2010 may receive $333 billion more in benefits than they pay in taxes. This is an obligation to the government, 17 times larger than that likely to be left by those aged 25, this is a huge burden that the young are about to inherit.
A massive four trillion dollar underfunding in State Pension funds alone represents roughly $12,000 for every man woman and child in America. This means we should place pensions into the category of a giant Ponzi scheme or lie. The fact is both the public sector and private companies have simply promised too much to workers that are living longer at a time that business pressures are changing, but what remains unclear is who will pay to clean up the messes. Will it be the millions of retirees owed trillions of dollars in benefits that take the hit or the bondholders who lent states and cities trillions more, or local taxpayers who may have to pay more to cover the shortfalls? We are already seeing that pension liabilities are crowding out spending for services, roads, and schools. One thing is certain, regardless of how this is resolved the process will be painful and likely play out over many years.
Footnote; For more about what the young people of this Nation are facing read the post below. Other related articles may be found in my blog archive, thanks for reading and comments are encouraged,
http://brucewilds.blogspot.com/2013/01/ugly-math-made-simple.html
And that is why politicians open the flood gates to immigration despite how much their constituents don't want it. They need as many warm bodies as they can get to help fund the great retirement Ponzi scheme the Boomers are counting on. It won't work for several different reasons but the most important one being Javier isn't going to fund Old White People's retirement nor will he vote to keep the gravy train going.
ReplyDeleteThere is going to be a lot of surprised old people applying for greeter jobs at Wal-Mart.
Not just the funding. Somebody, young, will have to look after them when they can no longer wipe their own arses. Dementia, Parkinson's, Alzheimer's etc... The modern diseases of the old. I'm dreading what will happen to me. I also noticed that in Britain they are asking people to sign do not resuscitate forms after 75.
ReplyDeletehttp://www.independent.co.uk/news/uk/home-news/do-not-resuscitate-orders-doctors-have-legal-duty-to-consult-rules-court-of-appeal-9542969.html
Your point about what is happening in Britain is noted. As quickly as attitudes changed on gay marriage we may see the same happen on euthanasia when the burden on society becomes to great. Here in America the term "euthanasia" is currently blocked from some sites.
DeleteWith people living longer and technologies ability to extend a persons life well beyond where they feel it has any "real quality" the issue of the right to determine our own fate will not go away. For more on this subject see the article below.
http://brucewilds.blogspot.com/2013/12/dignified-death-after-long-life.html
Mr. Wilds, from your copy of a chart from an EWI publication I assume you are conversant with Prechter's socionomic hypothesis. Times of optimism, raised to an exponent during a once-in-three-centuries asset mania (the one that continues as I write this, despite being 20 years old and counting), led to collective policies and collective expectations which no rational observer can otherwise explain.
ReplyDeleteOurs is an existence in a castle in the sky, an artificial world where the inhabitants all think things are normal and plan accordingly.
Constructing rational plans of action in such an environment is extraordinarily difficult. What we know is that what we want to accumulate today is what our future neighbors most desire in the future when we need them to provide the stuff we cannot provide for ourselves. Today everyone is accumulating wealth in derivative forms where, to become "money," those forms must pass through a market transaction (even if it's only cashing a check at the bank.) Pensions, 401(k)'s, IRA's, and Social Security (sic) all are promises of future money.
A lifetime of continuous, compound debasement of money taught people to accumulate tradeable or "legally binding" (AKA pension) claims on money instead, like being taught to dance to the music until the moment the music stops and only THEN try to convert "dance" to "chair." People see their ownership of "IOU-chairs" and imagine the dance floor is surrounded by chairs, one for each IOU. Nothing could be further from the truth, because all those IOU-chairs are only good as long as very few are traded for actual chairs.
In our future, what we can expect is that people will want "chair," most of the claims on "chairs" will turn out to be unenforceable either in the market or legally, but sitting in a chair for the last 83 years has been crushing punishment. I strongly suspect that after 83 years, this has to be the most crowded trade in the history of Man.
Never in published history have more people assumed the existence of future wealth to which they believe themselves entitled, at a time when unbacked and (in practical terms) unenforceable claims on future wealth have risen to fill an entire galaxy of illusion.
ReplyDeleteApocalypse Future has never seemed so assured.
Where do you get 2.2 million in lifetime payout? Are you assuming a huge hospital bill before they die. Cause if you retire at 65 with an average SSI payment of $15,000 per year and live 20 years that comes to $300,000.
ReplyDeleteYou are a great writer Mr. Wilds; you write so plainly and clearly. You hit the nails on the head at least %95 of the time. I look forward to reading your posts.
ReplyDelete