by Michael Myers on December 6, 2009
Daniel Amerman describes the how deflation and inflation combine to reduce the purchasing power of the dollar. Devaluing the dollar bails out governments and companies who have underfunded pension plans. Unfortunately, it transfers money from savers to debtors in the process. Excerpts below.
Link: “Surviving The Cure For Asset Deflation” by Daniel R. Amerman, FSU Editorial 12/03/2009
Many people would say that the true lesson of the early 2000s in the United States is the demonstration what an extraordinarily loose credit policy can do in terms of asset prices. Low cost and easily obtainable mortgages led to a real estate bubble, even as easy and loose corporate bond markets led to a booming private equity market, with leveraged buyouts being an important factor in maintaining an overvalued stock market.
The problem is that Wall Street, the government, and much of America has effectively bet everything they have on these asset bubbles not only staying inflated, but continuing to expand. Pensions long ago became “the tail that wags the dog”, for state governments, local governments and most major corporations. Almost every state and local government in the US that has full time employees has entered into promises for future benefits, which it anticipates being unable to cover from ongoing tax revenues. Some of these promises are unfunded, others are fully “funded” (meaning they have adequate current portfolios given the investment return assumptions), but the mechanism all comes down to the same thing. Via the mechanism of the markets, vast sums of money and resources will flow from the outside economy into the local economies for all the states and cities, and will pay for the legally binding promises that would otherwise be unaffordable from current revenues. In other words – the asset bubbles have to not only be maintained, but must continue to inflate, or else the pension obligations bankrupt every level of state and local government.
Governments aren’t the only ones relying on asset bubbles, so are most of the major corporations. Oh, the defined benefit plans are disappearing fast in terms of the ability of workers today to participate, but there are still tens of millions of workers covered, and many trillions of dollars of pension and health care benefits that will have to be paid. Future benefits that would destroy corporate profitability, and drive many corporations into bankruptcy. [click to continue…]
by Michael Myers on October 13, 2009
Retirees dependent on pension systems for income to maintain their standard of living may be disappointed, according to an analysis by Pricewaterhouse Coopers reported in the Washington Post. The trade-offs of high investment returns with high risk are discussed. Excerpts below.
Individuals whose employer pension is based on a defined benefit plan may want to plan to supplement their retirement income from other sources. The choice of how to save and invest is more complex than ever. These are challenging times for investors and future retirees.
Link: Steep Losses Pose Crisis for Pensions – Washington Post
The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.
The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.
Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade. [click to continue…]
by Michael Myers on October 11, 2009
Many employers with defined benefit plans will be unable to make the required contributions to their pension plans, according to a consulting firm analysis. The employers are asking for funding relief from government regulators to help them lower funding requirements. Excerpts below.
If your employer contributes to a defined benefit plan for your retirement, you may not get what you expect. You might need to consider an alternate plan for saving for retirement.
Link: U.S. Employers Face Huge Pension Funding Tabs Without Relief, Watson Wyatt Analysis Finds
Despite recent increases in asset values and regulatory relief from the Internal Revenue Service (IRS), U.S. employers will be required to contribute $89 billion into their defined benefit (DB) plans in 2010 and more than $146 billion in 2011 unless they receive funding relief from the federal government, according to an analysis by Watson Wyatt, a leading global consulting firm.
“The combination of a deep recession and new pension law has landed employers in extraordinary circumstances, and they need temporary funding relief to lessen the enormous pension contributions required in the next few years,” said Mark Warshawsky, director of retirement research at Watson Wyatt, who testified on these points at an October 1 House Ways and Means Committee hearing. [click to continue…]
by Michael Myers on June 5, 2009
Leo Kolivakis at Pension Pulse writes:
The global pension crisis is really a crisis of modern day capitalism. If we don’t figure out a long-term solution to this crisis, we risk having a new class of elderly poor who were cheated out of their pensions.
Global pension tension will not vanish. We are better off holding a summit to look into pensions and think of ways of bolstering retirement plans for future generations. Waiting for the ‘markets’ to rectify this crisis is like waiting to win the lottery. You might be lucky but who wants to gamble away the retirement dreams of millions of workers?
He offers an excellent review of global pension tension. Excerpts below.
Link: Pension Pulse [click to continue…]
by Michael Myers on April 21, 2009
Unsustainable pension agreements can mean no pensions at all if the provider declares bankruptcy.
If your pension provider is in financial trouble, you may not have the retirement income you had planned on.
Both private and public decision makers who pass the buck to future decision makers have created a legal and financial nightmare for all concerned.
This is an example of how the financial crisis has expanded the retirement crisis.
Link: CNNMoney, Fat Pensions Spell Doom For Many Cities
For years, politicians have been playing what amounts to a multi-trillion-dollar shell game with state and local pensions. They’ve doled out lush retiree benefits to their heavily unionized workforces, knowing that they could shove the cost for those benefits onto future generations of taxpayers.
But a recent financial bombshell dropped by a San Francisco suburb shows why that shell game is now starting to unravel in a nasty way. And it’s a cautionary tale that you can’t afford to ignore.
Here’s the skinny: In late May, Vallejo, Calif., became the largest city in California history to declare bankruptcy. Its financial demise was brought about partly by the real estate crash, which decimated home prices in the area and put a major dent in the city’s tax revenues.
… The final budget-crusher was the city’s pension plan. Thanks to retroactive benefit enhancements approved by the city council in 2000, police officers and firefighters can now retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to help keep pace with inflation. The old plan had given the workers a pension equal to 60% of their final pay at age 50.
So a Vallejo police sergeant making $150,000 a year can now retire at age 50 and receive an annual pension of $135,000, increased each year for inflation. To put that amount in context, you would need to amass a retirement nest egg equal to about $3.5 million to produce a similar retirement income on your own.
It wasn’t just police and firefighters who benefited from the city’s largess. The annual pensions for rank-and-file city employees were jacked up from 60% of final pay at age 55 (after a 30-year career) to a whopping 80% of pay, increased each year for inflation.