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Another Trillion Dollar Bailout?
Via Pension Pulse.
Nicole
Bullock and Hal Weitzman of the FT report, US
state pensions becoming federal issue:
Illinois
used to have a plan to pay off the gaping shortfall in the pension
funds that pay retired teachers, university employees, state workers,
judges and politicians, Dan Long recalls.
Mr Long, director of
the Commission on Government Forecasting and Accountability, the
non-partisan auditing arm of the Illinois state legislature, remembers
that, back in 1994, the state laid out a proposal that would have paid
off most of what was then a $17bn gap by 2011.
But Illinois
could not stick to the plan.
With
financial year 2011 less than six weeks away, the pension arrears of
the 1990s look quaint. Instead of a balanced system, the state faces
unfunded liabilities of about $78bn, the biggest pension hole in the
US, and contributions of more than $4bn for 2011, the largest single
element of its $13bn budget deficit.
Illinois is the poster
child of unfunded pensions in the US. But state
retirement systems could become a national concern, new research
shows.
Joshua Rauh, associate professor of finance at the Kellogg
School of Management at Northwestern University said that, without
reform, some state pensions might run out within the decade. By 2030, as
many as 31 states may not have the money to pay pensions. And, if
these funds exhaust their assets, the size of payments for the benefits
they have promised will be too large to cover through taxes, putting
pressure on the federal government for a bail-out that could
potentially cost more than $1,000bn, he says.
“It is more than a local problem,” Mr Rauh said. “The federal
government could be on the hook.”
Estimates put the unfunded
liabilities at between $1,000bn
and $3,000bn after years of states promising benefits but not
contributing enough in both good times and bad to cover them.
Many
states base their calculations on an 8 per cent annual return and use
an accounting method called smoothing, which staggers gains and losses
over several years, two factors that some observers warn could mask the
size of the shortfalls. The problem has come to the fore with the
financial crisis and recession. Pension funds, like most money managers,
suffered losses. The tax revenues that fund annual contributions to
pensions, along with essential services such as healthcare and
education, have plummeted, leaving little room to reimburse the losses.
States
have begun reforms, with some lowering return expectations and raising
employee contributions and retirement ages.
Mr Rauh said such measures were cosmetic and states needed
comprehensive, federally sponsored reform that would require closing
the systems to new members, shifting state workers to Social Security
and individual plans similar to those that are used by the private
sector in order to obtain incentives to borrow to bridge the gaps.
Mr
Rauh said subsidising pension borrowing would cost a net $75bn with
new contributions to the national Social Security programme offsetting
some of the subsidies.
By his
calculations, which assume the 8 per cent return, Illinois would run
out by 2018 followed by Connecticut, New Jersey and Indiana in 2019.
Some 20 states will have run out by 2025.
Five states would never
run out, including New York and Florida, and 17 other states have a
horizon of 2030 or beyond.
Robert Megna, New York’s budget
director, said his state had had to make “tough choices” to keep funding
its pensions despite budget shortfalls over the past few years. On
March 31, the state made a nearly $1bn payment for the last fiscal year.
“We
had to make cuts: education, healthcare, local government support and
not-for-profit providers,” Mr Megna said of the last year’s budget
process.
New York’s governor has proposed borrowing from the
pension system, which is about 94 per cent funded, as the state did
after the September 11 attacks, and repaying it with interest if low tax
collections persist, Mr Megna said.
For fiscal 2010, Illinois
sold $3.5bn of bonds to pay for its annual contribution.But in an
election year, there is no political support in Springfield, the
capital of Illinois, for another bond issue, particularly since it
requires a two-thirds majority in the state legislature.
The most
likely outcome is that the state will defer the issue to next year.
“That’ll have an impact in terms of lost investment opportunities, and
they’ll have to sell some of the portfolio to pay the pensions,” said Mr
Long.
David Graham of Newsweek's Gaggle
asks, Will
State Pension Funds Need a $1 Trillion Bailout?:
The federal government could Even if they meet "aggressive" 8 percent "This
If and when More Rauh suggests that But is anyone listening? Rauh is presenting Rauh said:
I'm not sure how easy it is to shift Here The Canadian Federation of The CFIB says hard-working lower- and You can read CFIB's I've been talking about securing the future for a long One As I watch financial oligarchs get richer and richer while pensions get poorer and
face another economic disaster and massive bailouts within a decade if
it doesn't force state pension funds to revamp their operations soon,
an economist says.
growth targets, several states will see the reserves in their pension
funds dry up by the end of 2020, with many more running out of cash
within another decade, says Joshua Rauh, an economist at Northwestern
University's Kellogg School of Management. Broke states are likely to
go begging to the federal government, which would probably have to bail
them out to the tune of more than $1 trillion, he argues
in a new paper. The funds are under legal obligation to pay out to
state employees, and they're way behind. For example, New Jersey—one
of the states in the most trouble—is chipping in only about 6 percent
of what it needs to remain solvent.
is really a problem of promises having been made that cannot be met,"
Rauh says. "It's less demographics and more just that employees have
been compensated using these promises, and these promises have not been
adequately funded. Politicians have been able to promise benefits that
don't come due until long after their political horizon, beyond their
term [in office]."
states run out of reserves, they'll have to dip into their annual
budgets to pay out benefits. But most states are required by law to
have balanced budgets, and pension benefits could equal up to half a
state's annual revenues. To reach that mark, they'd have to make cuts
as large as the
brutal measures California is taking to balance its budget.
likely, they'd ask for a bailout. Letting state governments fail just
isn't really an option for the feds. Cash from Washington is already
helping to float many states' budgets, but it's likely that state and
local governments
will be in for more pain over the next few years because their
budgets tend to be a lagging indicator. Tax revenues typically slip
more than a year after an economic shock, when property values sink and
citizens pay taxes on diminshed incomes. Furthermore, the federal
government already backs private companies' pension plans through the
Pension Benefit Guaranty Corporation, but that fund is running
large and growing deficits, and it would likely be forced to back
states, as well.
the government instead offer tax incentives for states to reform their
pensions' structures, moving from a system that promises set benefits
in the future to a model of giving employees money to invest now, and
putting public workers into Social Security. He calculates that the
government would end up spending around $75 billion—a far cry from a $1
trillion bailout.
his paper today in Washington, D.C., but the most important audience
might be his friend and former colleague Austan Goolsbee. Goolsbee is
now a
member of President Obama's Council of Economic Advisers, but both
were professors at the University of Chicago's Booth School of
Business until recently. Rauh decided to write the paper after
discussing the looming pension problem with Goolsbee.
"He [Goolsbee] said, 'State and local problem,' and I convinced him
that we do need to worry about it. So he said, 'OK, you convinced me.
So what do we need to do about it?'"
public workers into Social Security, which has it sown problems, but
it's clear that these state pensions are living on borrowed time.
in Canada, the Canadian Federation of Independent Businesses (CFIB), came out on
Tuesday saying public
service pensions are too generous:
Independent Business says the federal government is too generous in
subsidizing public service pensions. The
CFIB says federal civil servants only contribute 34 per cent of the
cost of their pensions, compared with a target of 50 per cent for many
provincial plans.
middle-class Canadians in the small business sector should not be
subsidizing the generous retirements of public servants. Besides
raising the pension contributions of federal workers, the federation
says Ottawa should be offering incentives to help improve
private-sector pensions.
statement, Unfair federal government pensions
detract from small business retirement savings, and their report Securing the
Future.
time. Pensions are not a sexy topic, but they're increasingly becoming
one as more and more people worry about securing a decent retirement.
last point I do want to make is that everything is related. We can't
talk seriously about securing the future without securing the integrity
of our capital markets, making sure that all investors - not just large
institutions - have a level playing field.
poorer, I worry that regulations have done little to protect average
workers, and ultimately they will pay a heavy price for all the nonsense
going on in our capital markets. Casino Capitalism is destroying the
integrity of our capital markets, and left unhindered, it will ultimately destroy our
pensions and economies.
»
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What are they going to do? Steal our 401K's and IRA's for the good fo the nation and create a Retirement fund. This way, everyone retires with the same thing. Even those who have put nothing into the system, evereyone will get a "fair" share. What the hel is so fair about taking what I have earned and saved and giving it to someone who has not???? It might be a stretch, but if they do this......THEY WIL DECLARE WAR on the American citizenry. Fuck Calpers and all the leechfucks in the system. Teachers on Long Island retire with $150,000 per year pensions....that is just wrong....
CALPERS should invest heavily in Biotech.
They might be able to engage in germ warfare
against their retirees.
Read Rauh's paper... he never once makes the case to justify a federal bailout of bankrupt states, just some elliptical bullshit about how state borrowing costs might rise.
Just take a quick look at a muni bond site. I see the shittiest Inland Empire California GO bonds with a 5.5% coupon. Someone would have to be mental to lend to California at those rates. They are certainly not reflective of the risk.
I don't really think you can do a state-by-state bailout, anyway. There would be capital flight. Also, how would you secure the consent of citizens in, say, Wyoming, which has its pension house in order, to contribute to Illinois? The only way this would be conceivably permissible to US citizens is if the state pension systems are nationalized.
Also, note what has happened to every bailout queen in government so far this primary season. State bailout won't happen, at least not by anyone who stands for a vote. Bailouts are all done, for a generation.
The insurance industry has a concept named "proportional insolvency" which comes into play when a receiver determines that the assets of the insurer are insufficient to pay current and future known claims.
The receiver will calculate the extent to which the company is insolvent and then scale back all claims by the percentage shortfall. this is done so that the assets will not be depleted by current claims.
Something similar must be done in public pensions, sooner rather than later or an aristocracy of sixty somethings will scoop the pot.
Heh - wake me when they get to a zillion dollars. It's just funny-money, anyway.
Retirement at 65 was a nice idea (1% of the population lived that long when it was first used as the retirment age back in the 1880's), then it became 60, then 55 for some. Considering that the average person lives to almost 80 and only starts work say at 20 (assuming no long college career), that's 40 years of work to support 20 yeras of retirement at 60. So the averge stiff has to save about 1/3 of his/her salary.
The solution is later retirement and a form of partial work while one is still able to contribute. Working one or 2 days a week, or say 3-4 months a year makes retirement much more affordable.
Double post -- slow site today!
I could have retired from the Air Force at the age of 42 with 20 years of service and full benefits (if I had stayed in...). Then I could have gone on to the Postal Service and retired from there with really NICE benefits. Then on to Municipal employment, fully employed getting 2 retirement checks and current payment by the City. Then gone back to work for the same City on full pay AGAIN (double-dipping)! I know several people in their early 70s who have done this. And they do work still, being paid in cash with no trace of the money. There is anecdotal evidence that this is going on in other parts of the country and the "employees" don't even show up for work. That's a possible scenario that is being played out throughout the country. There will be pissed off folks when this crap stops but the anger is not justified. Not for me, however. I've been self-employed all my life with only a broke Social Security to look forward to. I'll never get back what I've paid in. So it goes. Am I angry? Nope.
Belgium needs to deploy austerity measures that amount to 4800euro per person in 2010 and 2011!
Me think that's a bit much for the capital of Europe...
So someone write a policy-paper on what should be done, Leo
The states have a choice, fail or epic fail.
Perhaps they'll just change the promise ... the public unions will be a bit miffed but hey, it's 2 pit vipers in a cage death match.
What would really be pathetic is the state pensions are broke and what little paper they have left is invested in defaulted state bonds.
The irony is palpable.
bailouts were millions in the 80's ,billions in the 90's, and trillions in the 2000's..No where to go but up..
one thing the government will never run short off is ZERO's! So the sky is the limit!
I was thinking the same thing myself: They are only adding zeroes which have no value. How could that be a problem? Pretty soon the fiat dollar will have the same value -- problem solved! Simple, eh?
No more bailouts. The bureaucrats are on their own.
Default on the benefits contracts.
and conrad is in jail (baking in central FL) while the lovely Barbara awaits just a short drive away.
The least Mr. Black could have done with the pension millions he (legally) claimed from his conquests so many decades ago, was to have made something of them. But alas they were squandered.
That being said it is criminal that he was imprisoned for what was a petty crime compared to the multi billion dollar shenanigans of the Wall St banksters.
A long way of saying that there is no integrity in the system nor has there been for many years, and a lot of folks will be totally f'd in their sunset years.