A look at Pensions

[imoldernu]

Hopefully a look at pensions, starting with public pensions, which may not seem important for those with careers in the private sector, but affects all of us in terms of public debt. Putting the current government shutdown aside for the moment, the longer view of National and Local pensions is worrisome.

Let's start by looking ar just one pension plan. The Chicago Teacher Pension Plan. Currently measured at more than 11 Billion Dollars, the plan is incurring an annual interest rate charge of @230million dollars, just to cover current obligations.

That is for just one city.
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The genesis for this comes indirectly from long term plans for a sustaining insurance policy for public service, and was created at a time when interest rates were in the double digits. Unfortunately, as time changed the investment returns, the local government did not address the construct of the pension plan, and projections were made at a too optimistic rate.

Oversimple, but essentially the basis for today's nightmare.

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If this were an anomaly, we could overlook it, and tend to our own business.
The trouble is, the problem exists in hundreds, possibly thousands of public entities. Cities, towns, counties and state tax enabled constructs.

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Private pensions are not exempt, but should be discussed on a separate thread. More food for thought and discussion, but not here. Public pensions affect all of us... in taxes, and in public services.

Our county is generally considered safe, and well managed. That is, until we look at long term pension obligations. Young police officers are looking at pensions in the $60K+ range. The numbers just don't work out.

A subject that is commonly overlooked in meetings and public elections, but a major factor in the future of our nation and our personal taxes.

Do you know how pensions obligations affect your future?

[Midpack]

Definitely a problem that affects us all, but we’ve been hearing about it for 20 years. You mentioned “investment returns” as an issue, and while true, I thought I’d read many states/cities also curtailed or even altogether skipped annual contributions some/many years. Voters have been complicit, it’s not just politicians acting in a vacuum.

And it’s not the same from state to state. I thought everyone knew IL, KY and NJ were among the worst. I assume there will be a snowball effect when some states have to face up to their pension liability, increasing taxes and fees will induce an exodus of taxpayers exacerbating the $ problem. IL and Chicago have been losing population for years.

We plan to relocate this year, and how well public pensions are funded was a factor we condsidered in deciding where to relocate to. Needless to say we’re not moving to a state with an obviously troublesome pension liability.

[Jerry1]

When one looks at this (public pensions) along with our total debt ($20+ trillion). I think it’s fair to say we’re a country that kicks financial problems down the road. I worry how much longer this can continue before something happens. Personally, I think we’re past the point where some smaller changes now will lessen the impact later. Unfortunately, I think it will be a catastrophic situation and my personal belief is that we’re going to experience hyper inflation. Of course I certainly hope not, but that’s my belief given that I don’t ever see a politician (running or in office) talking about the hard decisions that we’d need to avert some of the worse scenarios.

[Tadpole]

Quote:

Originally Posted by Jerry1 When one looks at this (public pensions) along with our total debt ($20+ trillion). I think it’s fair to say we’re a country that kicks financial problems down the road. I worry how much longer this can continue before something happens. Personally, I think we’re past the point where some smaller changes now will lessen the impact later. Unfortunately, I think it will be a catastrophic situation and my personal belief is that we’re going to experience hyper inflation. Of course I certainly hope not, but that’s my belief given that I don’t ever see a politician (running or in office) talking about the hard decisions that we’d need to avert some of the worse scenarios.

Is there a good example of where hyperinflation has solved a debt problem or is it just a way to help people throw up their arms in despair as everyone gets a worse result than necessary.

[Jerry1]

Quote:

Originally Posted by Tadpole Is there a good example of where hyperinflation has solved a debt problem or is it just a way to help people throw up their arms in despair as everyone gets a worse result than necessary.

I wasn’t thinking it would work, I just think the path of least resistance from a political point of view is to crank up the printing presses. I sure hope there’s a better solution found, one that actually would work. Of course the states can’t print money, so they will be left without that option and likely have to raise taxes significantly. And as we’ve seen in Detroit, it gets to the point where those that are left can’t sustain the tax burden.

[Rianne]

I'm from and currently live in Illinois. Our fiscal health for 2018 was #50 in the country. My SIL is a retired teacher. She retired at 55 with 60K/year + health insurance for life. Our new governor, JB Pritzker has a fiscal mess on his hands, with the pension system draining our state. I imagine our taxes will skyrocket. We already pay $5600/year in property taxes for a small ranch house.

[Midpack]

Quote:

Originally Posted by Jerry1 When one looks at this (public pensions) along with our total debt ($20+ trillion). I think it’s fair to say we’re a country that kicks financial problems down the road. I worry how much longer this can continue before something happens. Personally, I think we’re past the point where some smaller changes now will lessen the impact later. Unfortunately, I think it will be a catastrophic situation and my personal belief is that we’re going to experience hyper inflation. Of course I certainly hope not, but that’s my belief given that I don’t ever see a politician (running or in office) talking about the hard decisions that we’d need to avert some of the worse scenarios.

Without devolving into a political debate as it's across all parties, there have been candidates who've said they'd address unfunded public pension liabilities or debt in general, but they're almost never elected. More often than not the electorate votes for candidates that give them the most without asking them to pay for it (we'll make rich people/corporations pay - without doing the math to show how), and hold them to it once in office. That's why I said voters are complicit. You can't summarily blame "politicians" IMO. We get what we (collectively) deserve.

[Jerry1]

Quote:

Originally Posted by Midpack Without devolving into a political debate as it's across all parties, there have been candidates who've said they'd address unfunded public pension liabilities or debt in general, but they're almost never elected. More often than not the electorate votes for candidates that give them the most without asking them to pay for it (we'll make rich people/corporations pay - without doing the math to show how), and hold them to it once in office. That's why I said voters are complicit. You can't summarily blame "politicians" IMO. We get what we (collectively) deserve.

Fair enough, but it seems like a lot less run on that platform. I assume that, as you point out, is because they understand that it’s not a winning strategy. I totally agree that voters are complicit. I guess by extension, they are actually, fully to blame.

[Jerry1]

Of course, this leads to another question. So what are some portfolio considerations that could be / should be employed to mitigate the risk? Staying with the public pension issue, it seems best to be very careful or even stay away from municipal bonds.

[Rianne]

Quote:

Originally Posted by Jerry1 Fair enough, but it seems like a lot less run on that platform. I assume that, as you point out, is because they understand that it’s not a winning strategy. I totally agree that voters are complicit. I guess by extension, they are actually, fully to blame.

Here's the problem. Do you vote for a gifted financial genius, a down to earth middle class person who's had to budget all his life, a successful business person, a CPA/constitutional lawyer...what qualifications does one need? Rather than listen to attack ads and promises, we need to analyze the actual experience and successes that person had in life. I never see a resume when someone runs for office. I only hear criticism and empty speeches. How can we follow up on actual life experience and success?

As voters and politicians we have to sacrifice somewhere. No one can agree on what to sacrifice.

[jollystomper]

Quote:

Originally Posted by Rianne As voters and politicians we have to sacrifice somewhere. No one can agree on what to sacrifice.

Actually, we do agree on what to sacrifice... we agree to sacrifice anything as long as it does not impact us personally.

[samclem]

Quote:

Originally Posted by Jerry1 Of course, this leads to another question. So what are some portfolio considerations that could be / should be employed to mitigate the risk? Staying with the public pension issue, it seems best to be very careful or even stay away from municipal bonds.

The first step would be to recognize that any changes in investments in response to the risk of a public pension crisis would be active management/market timing. All this information about underfunded public (and private) pensions is well known, and has presumably been priced into existing investments.
But, if we want to acknowledge that and press ahead, assuming we know more than the market:
- Yes, avoiding municipal bonds. If we know more than the market, it would eventually make sense to actively bet against them (options), if we can find an appropriate vehicle.
- If we think a big currency devaluation/inflation is coming, it is great to have a long-term fixed interest mortgage. Every month you pay the mortgage with money that is worth less and less, and you've presumably got more of your nest egg invesed in a place where it is keeping uo with/gaining against inflation. And, if things get really bad, having resources at hand can be very useful. At today's rates, a long-term fixed-rate mortgage is (IMO) cheap insurance.
- Traditional inflation hedges have been real estate, gold and other precious metals. In general, equities do okay in periods of moderate inflation, it's only when it gets high enough to disrupt capital availability and normal spending patterns that it hurts equities.

- If a person now is receiving a public pension and truly believes it might be at risk inthe future, it would make sense to discount its future value. That might result in reducing expenditures now so that more can be put into investments that could take the place of lost pension income. It might mean taking more investment risk now--if you believe the pension haircut will come in 15-20 years, there is time to weather the volatility in equity prices expected of "riskier" assets in order to get the gains needed to meet spending requirements in later years.
- If a person is now receiving a public pension, they might consider selling it today to a private company and receive a lump sum, thus sticking somebody else in the sinking boat. I think this would likely be a really bad idea, since you'd be very unlikely to get a good deal, especially with today's low interest rates.

- Are other countries in better shape? Do we have reason to believe their economies will be sufficiently insulated from ours so they will do relatively better? Maybe buy stocks of companies based there, and denominated in their currencies.



These are things that occur to me, I'm sure there are other, better ideas. But the opening proviso stands--is there really reason to think we know better than the market? I think it may make sense to take steps if you're at particularly high risk, or if "insurance" can be had at very low cost.

[jollystomper]

Quote:

Originally Posted by Jerry1 Of course, this leads to another question. So what are some portfolio considerations that could be / should be employed to mitigate the risk? Staying with the public pension issue, it seems best to be very careful or even stay away from municipal bonds.

I agree, but I think municipal bonds funds are still safe, or at least safer than individual bonds, as the risk is more spread out and an individual state or bond issue will have less of an impact.

[ripper1]

Quote:

Originally Posted by Jerry1 I wasn’t thinking it would work, I just think the path of least resistance from a political point of view is to crank up the printing presses. I sure hope there’s a better solution found, one that actually would work. Of course the states can’t print money, so they will be left without that option and likely have to raise taxes significantly. And as we’ve seen in Detroit, it gets to the point where those that are left can’t sustain the tax burden.

Interesting to note that Detroit pensioneers took a small hit of 5% or so while bond holders got hammered.

[ripper1]

Quote:

Originally Posted by Rianne I'm from and currently live in Illinois. Our fiscal health for 2018 was #50 in the country. My SIL is a retired teacher. She retired at 55 with 60K/year + health insurance for life. Our new governor, JB Pritzker has a fiscal mess on his hands, with the pension system draining our state. I imagine our taxes will skyrocket. We already pay $5600/year in property taxes for a small ranch house.

Not sure about city of Chicago teachers but most retired city of Chicago employees no longer get retiree health care. But they were offering a generous bc/bs package of 3600 a month for annuitant plus family.

[ripper1]

For years and years Illinois had an artificially low tax rate of a flat 3% across all incomes because the legislators weren't making annual contributions to the pensions. Some people think public service is free.

[pb4uski]

Quote:

Originally Posted by Rianne I'm from and currently live in Illinois. Our fiscal health for 2018 was #50 in the country. My SIL is a retired teacher. She retired at 55 with 60K/year + health insurance for life. Our new governor, JB Pritzker has a fiscal mess on his hands, with the pension system draining our state. I imagine our taxes will skyrocket. We already pay $5600/year in property taxes for a small ranch house.

My sister and BIL still own a house in Illinois... they moved to Texas about 4 years ago and have kept the house... their two sons live there. I can see property values in Illinois cratering at some point... I'm surprised that they haven't sold to eliminate their exposure.

[Bir48die]

Not to put a damper on an already scary proposition.....just wait for a major correction/recession. Then you'll see unfunded liabilities jump up.

[ripper1]

Quote:

Originally Posted by Bir48die Not to put a damper on an already scary proposition.....just wait for a major correction/recession. Then you'll see unfunded liabilities jump up.

Agreed.....but during this 10 year bull run why didn't these funds sky rocket.

[ERD50]

Quote:

Originally Posted by ripper1 For years and years Illinois had an artificially low tax rate of a flat 3% across all incomes ..... Some people think public service is free.

Seven states have no personal income tax:

Wyoming.
Washington.
Texas.
South Dakota.
Nevada.
Florida.
Alaska.

Quote:

Originally Posted by ripper1 For years and years Illinois had an artificially low tax rate of a flat 3% across all incomes because the legislators weren't making annual contributions to the pensions. ....

Separate issue.

And I suspect if the legislatures did make all the contributions they were supposed to, that they would have had to raise taxes at that time. Hmmm, maybe that would have drawn more attention to the pension issue? Hmmmm, now who would not want that attention? Maybe those in line for those pensions?

AFAIK, the unions at the time did not make a big stink about skipping the contributions (correct me, with references, if I'm uninformed on that). Maybe they didn't want the attention? Maybe they decided to rely on the IL State constitutional guarantee?

-ERD50