Pensioners bent over in RI

[Chuckanut]

As for SS, what a mess. I have my expectation racheted down to 50% of what they say I'll get and I don't actually think I'll get anything. Well, probably something since old people vote. But my savings will be enough that I expect to be means-tested out.

But the real irony of SS is that it could be fixed with a 2% payroll tax increase. I'd gladly pay that if it meant we could have a safety net and avoid all the BS fighting that goes no now. Heck, I'd pay 2% just to not have to listen to all these dysfunctional idiots in Washington act like children.

The estimate I have heard is a cut in SS to 75% if nothing is done. What could be done is to gradually raise the retirment age to 68 over a period of a decade or two. That would solve the SS problem. Of course, they will also have to strengthen the age discriminsation laws. Age discrimination is rampant as we have seen. It would also help to give older workers a way to phase out of the job market by going part-time for their last few years. This could be done if we had the political will to do it and the elected leaders able to do it. Alas, we have the best government money can buy.

 

[ERD50]

And don't be so quick to blame the employees.

I'm not so quick to blame the employees. I do blame the Union leaders, and politicians, and the employees for not checking up on the Union leaders and politicians (it is their pension - they should be looking into how it is funded), but in the pecking order of responsibility, I put taxpayers last. The taxpayers were furthest from the situation, I don't think they should be first in line to make up the difference.

Why would a taxpayer be expected to know more about the funding of a public pension than the public employee who was going to receive that pension? Makes no sense to me. I've never seen a public employee worry about the funding level of my private pension. And as far as I know, public employees have never come to the rescue when private pensioners have been stripped of their promises (UAL pilots). But when the tables are turned, it's all different?

As with everything else, we all will -taxpayers. There is no one else. Taxes must go up. Spending must be cut deeply. And governments need to LBYM for the next couple of decades. I think that is the only solution but it will be painful to all.

Hmmm, you seemed to miss one party?

-ERD50

 

[Mulligan]

The estimate I have heard is a cut in SS to 75% if nothing is done. What could be done is to gradually raise the retirment age to 68 over a period of a decade or two. That would solve the SS problem. Of course, they will also have to strengthen the age discriminsation laws. Age discrimination is rampant as we have seen. It would also help to give older workers a way to phase out of the job market by going part-time for their last few years. This could be done if we had the political will to do it and the elected leaders able to do it. Alas, we have the best government money can buy.

The 75% figure is what I have read, too. But that was before the contribution rate from employees were reduced last year and appears is heading that way again this year. If this continues, better whack a few more percentage points off the payout figure down the road to be safe since revenues will be less!

 

[Chuckanut]

The 75% figure is what I have read, too. But that was before the contribution rate from employees were reduced last year and appears is heading that way again this year. If this continues, better whack a few more percentage points off the payout figure down the road to be safe since revenues will be less!

Yes, even though all tax funds now go into the same pot (SS is not separate from other tax income anymore) I fear that politicans will use this as an excuse to lower SS payouts later.

In some way lowering the SS tax makes sense. Most people who get the extra money have a high propensity to spend and will put it right back into the economy. While tax breaks for the rich often do not go as far since the rich have a lower propensity to spend. And they won't invest in more plants, equipment etc., if the demand isn't there to support the investment.

But, politically, I can see some politican telling me my SS is going down because for two of the 45 years I worked, it was a bit lower than the normal rate.

 

[pb4uski]

I think that the unfortunate reality is that the solution to public pensions will be shared between taxpayers and pensioners. The pensioners will be punished for their unions pressing their employers for pension benefits that were unrealistic and that they knew (or should have known) that the employers could not afford. The taxpayers will be punished for electing politicians and other elected officials who didn't have the backbone to say no and agreed to promises that they knew or should have know they could not afford.

The same thing happened in the private sector with the automakers, airlines, etc. with the same result (pensioners and shareholders paid the price).

In both cases, it was the press of unions for rich benefits and lack of backbone by managements. And yes, hindsight is 20/20.

 

[donheff]

Why would a taxpayer be expected to know more about the funding of a public pension than the public employee who was going to receive that pension? Makes no sense to me. I've never seen a public employee worry about the funding level of my private pension. And as far as I know, public employees have never come to the rescue when private pensioners have been stripped of their promises (UAL pilots). But when the tables are turned, it's all different?

Why separate pensions out from all the other profligacy of public spending? Why not take the position that governments should just default on payments due to private corporations for work done? After all, why would a taxpayer be expected to know more about the funding of a public contract than the corporation that was going to receive payment under that contract? . Taxpayers needn't pay attention - we can just stick it to the corporations - they are people after all.

PS: only speaking of already earned benefits here. I have no problem with revising benefit programs going forward (although I might take issue with approaches to doing so).

 

[DoingHomework]

Why would a taxpayer be expected to know more about the funding of a public pension than the public

Taxpayers elect the legislators/governors/presidents/congressfolk/ etc that created the problem. The job of those leaders is/was to know the situation and vote to run the country sustainably. When taxpayers began accepting leaders that were more interested in next week, getting re-elected, and lining their own pockets, that's when the taxpayers became responsible for eventually making up the shortfall.

Hmmm, you seemed to miss one party?

Which party did I miss?

BTW, I don't think UAL or any other company should be off the hook for pension promises either. I think future obligations should be accounted for and segregated along the way. I'd rather see a company go bankrupt and take out a few thousand investors than reneg on obligations to employees. I quite seriously think execs whose decisions lead to that kind of loss ought to go to prison as happens in some other civilized, developed countries.

 

[DoingHomework]

I think that the unfortunate reality is that the solution to public pensions will be shared between taxpayers and pensioners. The pensioners will be punished for their unions pressing their employers for pension benefits that were unrealistic and that they knew (or should have known) that the employers could not afford. The taxpayers will be punished for electing politicians and other elected officials who didn't have the backbone to say no and agreed to promises that they knew or should have know they could not afford.

The same thing happened in the private sector with the automakers, airlines, etc. with the same result (pensioners and shareholders paid the price).

In both cases, it was the press of unions for rich benefits and lack of backbone by managements. And yes, hindsight is 20/20.

I suspect you are right. And I'm not a fan of unions, at least not for the last 50 years or so. But blaming unions in every case is just plain wrong. The pension system in Arizona has many of the same funding issues as elsewhere, just not to the same degree. And there has never been anything but a very weak public employee union here. They had essentially nothing to do with the pension problem. You could certainly argue that the fact ours is relatively health is for the lack of a union, and I'd agree. But our state has other severe budget problems.

The problem in (almost) every case was a failure in the past to set aside money for the future. Sure, there might have been a few actuarial/demographic mistakes but those are relatively minor, even with SS. If management/governments had actually calculated the cost of the promises made and set aside that money at the time of the promise, there would be no serious problem. We can't go back in time now of course. But we can bite the bullet and honor the promises even if it means raising taxes and cutting other programs. I think that would be a good lesson for future generations...and a recipe for revolution unfortunately!

 

[ERD50]

RE, ERD50's comment : Why would a taxpayer be expected to know more about the funding of a public pension than the public employee who was going to receive that pension?

Why separate pensions out from all the other profligacy of public spending? Why not take the position that governments should just default on payments due to private corporations for work done? After all, why would a taxpayer be expected to know more about the funding of a public contract than the corporation that was going to receive payment under that contract? . Taxpayers needn't pay attention - we can just stick it to the corporations - they are people after all.

Well, let's make it more apples-apples. Let's say a corporation decided to provide products/services today, with half of the charges for those services to be paid today, and half to be paid 30 years in future, and the Corp used monopoly-like powers to negotiate above market rates for that service. And it was agreed that the govt should fund an escrow account for those future payments, and the annual funding would use a formula that was expecting 8.5% market returns. Then the company never bothered to verify that the money was actually put into escrow, and never asked for adjustments when those market returns were not achieved. And the Corp was all buddy-buddy with the politicians in charge, made big campaign contributions, and was able to promise them lots of votes for those current above-market-rate payments. And 30 years later, there is only half as much money in that escrow account as there should be.

I say let the Corp eat it. They were asleep at the wheel, and/or complicit in the 'game'.

edit/add: And if a news story hit today along those lines, I seriously doubt that donheff would be posting in favor of raising his taxes to pay the Corp 100%!

Taxpayers elect the legislators/governors/presidents/congressfolk/ etc that created the problem. The job of those leaders is/was to know the situation and vote to run the country sustainably. When taxpayers began accepting leaders that were more interested in next week, getting re-elected, and lining their own pockets, that's when the taxpayers became responsible for eventually making up the shortfall.

Between this and the IL pension thread, I've explained several times that I see the taxpayers as last in line in responsibility. I won't repeat it further. I think it is a valid view.

Which party did I miss?

BTW, I don't think UAL or any other company should be off the hook for pension promises either. I think future obligations should be accounted for and segregated along the way. I'd rather see a company go bankrupt and take out a few thousand investors than reneg on obligations to employees. I quite seriously think execs whose decisions lead to that kind of loss ought to go to prison as happens in some other civilized, developed countries.

I agree that the pension funds should be separated, and that is generally the case in the private sector, as the PBGC looks after it. UAL did go bankrupt, and shareholders lost everything, creditors and suppliers also lost. Only the high $ pensions were cut (>$45,000). Remember, these pensions paid for insurance and some level of regulation (PBGC). If public pensions paid for insurance, the insurers would not have let them get this far behind, or at minimum would have warned everyone far ahead of time so there would be no surprises.


UAL's United Files Bankruptcy Plan; Shareholders to Get Nothing - Bloomberg

UAL's United Files Bankruptcy Plan; Shareholders to Get Nothing

By Lynne Marek - September 7, 2005 10:40 EDT

Sept. 7 (Bloomberg) -- UAL Corp.'s United Airlines filed a reorganization plan today providing a 4 percent to 7 percent return on the dollar for unsecured creditors. The proposal came 33 months after it sought Chapter 11 bankruptcy protection.

Court approves termination of United Airlines pension plans

The Pension Benefit Guaranty Corporation will take over the plans, but federal regulations limit the amount of pension payments it can make to a maximum of about $45,000 a year.

On another point, I don't think any 'market return' formula should be used at all (esp for COLA'd pensions). Markets can actually drop relative to inflation for long periods. Wages can increase faster than market returns. Let them fully fund the pension in today's $.

-ERD50

 

[Texas Proud]

I agree. The conditions that were in place 20 years ago when it made sense to offer a good pension to government workers - low salary - are no longer in place. I think the way to look at it is total cost of an employee and total benefit to the employee. Job security allows an employer to pay less. A pension allows an employer to pay less in salary but should carry the obligation to actually put that money away. That's where the mistake was.

This seems to be the problem with the Illinois system.... they just did not fund it.... I will agree that if the state or local gvmt did not fund what they were supposed to fund, the citizens should be taxed more to pay for it....

Kind of like what will happen to us to pay off the huge federal debt... we did not 'fund' our spending...

 

[Chuckanut]

Why separate pensions out from all the other profligacy of public spending? Why not take the position that governments should just default on payments due to private corporations for work done? After all, why would a taxpayer be expected to know more about the funding of a public contract than the corporation that was going to receive payment under that contract? . Taxpayers needn't pay attention - we can just stick it to the corporations - they are people after all.

PS: only speaking of already earned benefits here. I have no problem with revising benefit programs going forward (although I might take issue with approaches to doing so).

You have nailed it! The taxpayers are VICTIMS of the people they voted for!! How terrible!!

Why not take it a step further? A state can sell bonds to finance all sorts of things - road, bridges, parks, public art, etc. Sell most of the bonds to people outside the state. Then announce that the victims (ie. taxpayers) should not be required to pay back the money since they had no real knowledge of public financing. What a plan!!

 

[Chuckanut]

On a more serious note, I hope that we all learn from the current financial problems. We need to keep a sharp watch on our elected representatives, especially at the Federal level, where, IMHO, we have yet to see any reform of the bad habits and special interest politics. My 2 cents.

Also, lets not forget those who caused this recession that has led to this financial difficulty - greedy investment bankers, mortgage brokers gone wild, rating companies that told us mortgage backed securities were AAA, legislators who dismantled protections such as Glass-Steagal, etc. They seem to have slipped off the hook and been replaced by people just trying to earn a living.

 

[ERD50]

On a more serious note,

I couldn't have been more serious.

I hope that we all learn form the current financial problems. We need to keep a sharp watch on our elected representatives, especially at the Federal level, where, IMHO, we have yet to see any reform of the bad habits and special interest politics. My 2 cents.

Agreed, but what to do? The choice in the voting booth is often a Morton's fork (I was going to say Hobson's Choice, but wiki say that's not correct).

Morton's fork - Wikipedia, the free encyclopedia

Also, lets not forget those who caused this recession that has led to this financial difficulty - greedy investment bankers, mortgage brokers gone wild, rating companies that told us mortgage backed securities were AAA, etc. They seem to have slipped off the hook and been replaced by people just trying to earn a living.

That's a rather selective list. There seems to be common thread among the missing parties Excuse me, your bias is showing


-ERD50

 

[DoingHomework]

On another point, I don't think any 'market return' formula should be used at all (esp for COLA'd pensions). Markets can actually drop relative to inflation for long periods. Wages can increase faster than market returns. Let them fully fund the pension in today's $.

I agree. There are futures markets and zero coupon bonds that can deal with this. Obviously there is default risk then...but I see no reason why the promise of a $1000 payment 30 years hence can't be fully paid for today by the purchase of a ZC treasury bond.

Ok, I do know the reason - it eliminates all possibility of accounting games to inflate profits by using unrealistic return expectations in pension fund accounting.

 

[donheff]

Agreed, but what to do? The choice in the voting booth is often a Morton's fork (I was going to say Hobson's Choice, but wiki say that's not correct).

Morton's fork - Wikipedia, the free encyclopedia

Wow, I would have made the same (Hobson's) mistake. The problem is that without the cites few would understand what you are talking about by Morton's Fork. But we can safely use it around here now.

 

[youbet]

In both cases, it was the press of unions for rich benefits and lack of backbone by managements. And yes, hindsight is 20/20.

This is like saying that it's the woman's fault she was raped........ "she lacked the backbone to prevent it!" Or the shop owner who was robbed and beaten brought it upon herself by not being properly armed and trained in self-defense.

 

[youbet]

I agree. There are futures markets and zero coupon bonds that can deal with this. Obviously there is default risk then...but I see no reason why the promise of a $1000 payment 30 years hence can't be fully paid for today by the purchase of a ZC treasury bond.

I always look at money as (1) a medium of exchange and (2) a means to store wealth. Number (1) works pretty well but we're seeing that number (2) is fraught with difficulities. Since "stored money" is nothing more than journal entries documenting promises to deliver goods and/or services sometime down the road, the guarantee of being able to deliver "the goods" in the future becomes key. I don't share your confidence. Not only do I doubt the ability of pension funds (gov't and private) to deliver new cars, food, energy, lumber, minerals, etc., etc., when the entitled recipients demand them many years from now, I'm even starting to doubt whether those journal entries in my brokerage acount I looked at this morning will really be convertible into "stuff" many years from now.........

Funding pensions real time with journal entries, despite this "wealth storage" issue, is certainly better than not. I agree that buying a zero coupon bond today that funds a future pension promise tomorrow is better than not doing the funding. But it still leaves the issue of whether the promises implied by the journal entries will be deliverable in actual goods and services in the distant future.

 

[Texas Proud]

You have nailed it! The taxpayers are VICTIMS of the people they voted for!! How terrible!!

Why not take it a step further? A state can sell bonds to finance all sorts of things - road, bridges, parks, public art, etc. Sell most of the bonds to people outside the state. Then announce that the victims (ie. taxpayers) should not be required to pay back the money since they had no real knowledge of public financing. What a plan!!

Not quite the same as the taxpayers vote for bonds (at least here they do).... So, a small number of people can make you pay a debt that you do not want to pay...

Also, bonds are sold with information on taxes etc. and how the payments are going to be funded... lots of disclosure... and I can tell you that large bondholders actually follow the finances of the payor... I was a trustee on some and got calls on a regular basis asking about balances that I had...


But in the end, if there is no money.... guess what The bondholder does not get paid... muni bond defaults happen....

 

[Chuckanut]

Not quite the same as the taxpayers vote for bonds (at least here they do).... So, a small number of people can make you pay a debt that you do not want to pay...

Also, bonds are sold with information on taxes etc. and how the payments are going to be funded... lots of disclosure... and I can tell you that large bondholders actually follow the finances of the payor... I was a trustee on some and got calls on a regular basis asking about balances that I had...


But in the end, if there is no money.... guess what The bondholder does not get paid... muni bond defaults happen....

Well, I guess I should say that I was kidding about this. I actually believe that contracts and agreements should be honored. i think capitalism is based upon that.

 

[DoingHomework]

Funding pensions real time with journal entries, despite this "wealth storage" issue, is certainly better than not. I agree that buying a zero coupon bond today that funds a future pension promise tomorrow is better than not doing the funding. But it still leaves the issue of whether the promises implied by the journal entries will be deliverable in actual goods and services in the distant future.

I think there are two issues - inflation and default. I don't believe anyone can predict inflation out 30 years. I believe the best estimate is that made by the market which currently predicts US inflation to be about 2.5%-3% over 30 years based on the TIP/TB spread. I tend to trust that, though not rely on it.

I am satisfied that there is no real risk of default with US government issues. We're in a deep hole now but I have to believe in the long term future of this country. If we start defaulting I believe the consequences would be too dire.

But either way, the ZC buys a promised payment is dollar terms. Whether those dollars are worth anything and whether that promise is honored is a separate issue.

 

[DoingHomework]

But in the end, if there is no money.... guess what The bondholder does not get paid... muni bond defaults happen....

That's why you only buy GO's and only from states. They can't file for bankruptcy, at least not under current law. They can be ordered to raise taxes or cut spending elsewhere to meet their bond obligations.

 

[Texas Proud]

That's why you only buy GO's and only from states. They can't file for bankruptcy, at least not under current law. They can be ordered to raise taxes or cut spending elsewhere to meet their bond obligations.

Agree with your comment.... but as you say, under current law....


This was from a LONG time ago, and I am sure I am going to butcher it badly.... but Citi had lent a lot of money to different countries... and when investors asked the CEO about the loans his comment was something like 'countries can not go bankrupt'....

We have learned that is not true... and even if they do not, look at what is being proposed for Greece.... a 50% haircut to the bond holders without it being considered a 'default'....


And in this case, the people are losing part of their pension without the city going into bankruptcy (IIRC)....

 

[DoingHomework]

Agree with your comment.... but as you say, under current law....

I know there is talk of changing the law to allow state bankruptcies. I guess I am neutral on that. But if BK is allowed it will definitely drive up borrowing costs for states. And many states have a lot of assets including massive amounts of land, highways, etc. It would be interesting to see creditors attach forests, state parks, and even the governor's mansion. Heck, that might be worth the price of admission!

That was a pretty stupid statement for Citi to make. Countries have nationalized assets forever and there is no reason that they couldn't cancel debt. If you look at the strict definition of nationalization you could argue that our own takeover of GM and several financial institutions was nationalization.

 

[pb4uski]

This is like saying that it's the woman's fault she was raped........ "she lacked the backbone to prevent it!" Or the shop owner who was robbed and beaten brought it upon herself by not being properly armed and trained in self-defense.

I really don't get your analogy. Are you suggesting that managements' had no choice?

 

[ERD50]

In both cases, it was the press of unions for rich benefits and lack of backbone by managements.

This is like saying that it's the woman's fault she was raped........ "she lacked the backbone to prevent it!" Or the shop owner who was robbed and beaten brought it upon herself by not being properly armed and trained in self-defense.

I really don't get your analogy. Are you suggesting that managements' had no choice?

Ill take a stab at it -

Picture yourself as the CEO of an auto company. Auto mfg is an extremely capital intensive business. If your plant is sitting idle, you still have many, many HUGE bills to pay, and no money coming in. During the time you are not producing cars, some of your customers will go to the competition, and many of them might just stick with them once they switch ( there is a certain amount of plain old inertia in buying decisions like these).

The short term and long term consequences are HUGE.

So, the union comes and asks for 5% more of whatever you thought you could offer. And they threaten to strike if you don't give it to them.

So, take a hit for 5% labor costs or see your plants shut down? It's a regular Morton's Fork (heh-heh - see "Hobson's Choice"), but you decide to go with the demands. And you get them next contract time too, and the next.... Rarely seems to be worth shutting down the plant, but they all add up.

What would you and your backbone do?

PS: Not to say auto management didn't make mistakes that led to problems for the industry, but that's another discussion.

-ERD50