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US Pensions Reaching a Breaking Point?
Joe Weisenthal of Business Insider reports, Bombshell Pension Vote Is About To Sink California Hundreds Of Millions Deeper Into The Red:
California
recently got its budget situation under control, but everyone figures
the state is still in serious financial trouble.
And this news won't help, though it was probably inevitable.
According to the Sacramento Bee,
CalSTRS (the big teachers retirement fund) is set to vote on Friday
whether or not it should reduce its annual investment returns estimate
from 8% to 7.5%, a move that will add hundreds of million to state debts
(since the pension is guaranteed, and public taxpayers are on the
hook).
That would be a huge decision, if they do it. 8% has been
the level set since 1995 (talk about a whole other era), and
artificially high return estimates are how the pension systems aren't
(on paper) even more insolvent than they already seem.
Michael Marois of Bloomberg reports, California Teachers' Pension Plan Weighs Lower Assumed Rate of Return:
The
California State Teachers Retirement System, the second-largest U.S.
public pension, will consider cutting its expected earnings rate on
investments to 7.5 percent, increasing the need for higher contributions
as it recovers from market losses.
The $132 billion pension
fund’s governing board will consider approving a new rate of return, now
8 percent, at its Nov. 5 meeting in Sacramento, according to its agenda.
The so- called assumed rate of return on investments is used to
calculate the size of pension contributions from employers needed to pay
retirees.
Public pension funds across the U.S. are adjusting
their assumptions following losses in the recession that within three
years may leave them $1 trillion short of the amount needed to pay
benefits, according to a National Bureau of Economic Research report.
The largest fund, the California Public Employees Retirement System,
known as Calpers, uses a 7.75 percent assumed rate of return.
“The
impact of reducing the assumed investment return and assumed inflation
rates will result in a better representation of the fiscal condition of
Calstrs benefit programs based on the current economic outlook,” the
fund’s actuary Rick Reed said in a report to be presented to the board.
Calstrs, as the teachers’ fund is known, is 78 percent funded,
meaning it is short by more than $42 billion. Reducing the assumed rate
of return would lower that funding level to 74.2 percent, according to
the report posted on the fund’s website.
Higher Contributions
The
fund, which provides benefits for 848,000 public-school and
community-college teachers, would need to ask lawmakers for an increase
of as much as 16.8 percent in the amount the state and school districts
pay toward employee retirement benefits if the board adopts the 7.5
percent assumed rate of return. Teachers are likely to be asked to pay
more from their paychecks as well.
The
teachers’ fund earned 12.3 percent in the year that ended in June,
after losing 25 percent in fiscal 2009 and 3.7 percent in 2008.Fewer
than half of the public pension funds in the U.S. had assets to cover
80 percent of promised benefits in fiscal 2009, according to data
compiled for last month’s Cities and Debt Briefing hosted by Bloomberg Link.
New
York’s $124.8 billion pension fund, the nation’s third- largest, in
September reduced its assumed rate of return to 7.5 percent from 8
percent. Calpers will review its 7.75 percent rate of return in
February.
Of course, California isn't the only state suffering from pension woes. According to Gus Lubin of Business Insider, 11 state pension funds are running out of money:
Here's a shocker: The most immediate state pension crises aren't in New York or California. They're in Middle America.
Illinois
is just 8 years away from exhausting its pension fund and creating a
yearly $14 billion hole, according to data from Kellogg professor
Joshua Rauh [PDF].
That's a projected 32 percent of the state's revenue going to fill a pension hole. Every year.
Indiana,
Louisiana, Oklahoma and Colorado are among the next pension funds to
fall. The rest of the union is just around the corner.
Reuters reports, Public pension woes haunt California, other states:
Pension Other Here are some key facts about public pension reform: CALIFORNIA'S PENSION WOES: * * CalPERS, CALSTRS and UCRS combined administer the pensions of about 2.6 million Californians. CALIFORNIA'S PROPOSED REFORMS: * * * * A San Jose ballot measure * Los Angeles Mayor OTHER U.S. STATES: * * In * Michigan in May passed a law requiring teachers to contribute 3 percent of their salaries to a new retiree health care fund. *
Finally, Australia's PSnews reports, Unfunded pension add up to billions:
reform has become a front-burner issue in California's gubernatorial
race between Democrat Jerry Brown and Republican Meg Whitman. Reform
measures are slated to appear on ballots in several California cities.
states and large cities have seen their public pension fund assets
drop dramatically in the recession and housing crisis and are
scrambling to plug funding gaps.
Three big California public pension funds, the California Public
Employees Retirement System (CalPERS), the California State Teachers'
Retirement System (CalSTRS) and the University of California Retirement
System (UCRS), face a collective shortfall of more than $500 billion
over the next 16 years, well above the funds' own estimates of $55
billion, according to an April study by the Stanford Institute for
Economic Policy Research.
Jerry Brown favors renegotiating current pension formulas to require
employees to contribute more toward their pensions and to work to a
later age for full retirement benefits.
Meg Whitman favors adopting a 401k-style defined contribution plan for
new government hires and raising the retirement age to 65 from 55 for
most state employees outside the public safety sector.
Proposition B in San Francisco would increase employee contributions
to their pensions to 9 to 10 percent from 7.5 percent to save the city
$120 million a year. It is opposed by the city's unions but supported
by some labor-friendly politicians, including former Mayor Willie
Brown.
would remove language from that city's charter that defines the rules
for the age at which city employees can retire and how much the city
must pay into their pension fund. It would apply to workers hired after
2011.
Antonio Villaraigosa last week announced what he called a "landmark
proposal" to reform pensions and retiree health benefits for newly
hired police officers and firefighters. The reform would require new
workers to contribute 11 percent toward their pensions, up from a
current 9 percent, and would pare back the size of pensions. The
measure is expected to save the city $173 million for every 1,000 new
police officers and firefighters hired.
U.S. states face a total shortfall of at least $1 trillion in their
funds for employees' pensions and retirement benefits, according to a
report released by the Pew Center on the States in February. The report
found that states did not save for the future or manage costs well, but
they also typically expect an 8 percent return on investments.
August, Illinois said its public pension funds may have to shed $960
million in assets to pay retirees because the state has not come up
with fiscal 2011 payments. In March, Illinois passed a bill to reduce
benefits for new hires and raised the state retirement age, which it
said would save $119 billion between now and 2045.
The U.S. Securities and Exchange Commission in August charged New
Jersey with securities fraud for failing to disclose to municipal bond
investors that it was underfunding its pensions. New Jersey agreed to
settle the case without admitting or denying the findings. It was not
required to pay any civil fines or penalties, but was ordered to cease
and desist from future violations.
The US State of California is facing a Public Service pensions shortfall of $US500 billion ($A512 billion).
A
long-running issue on the edge of public debate, PS pension reform has
been promoted to centre stage due to California’s fast-growing Budget
hole and a series of public payment scandals.
Chair of the group,
Californians for Health Care and Retirement Security, Dave Low said the
problem had been building up for some time.Mr Low said
California’s pension woes mirrored those of dozens of other American
States and was less of a worry than some - Illinois, for example.But
as the largest US State, California’s top pension funds, including the
Public Employees’ Retirement System and State Teachers’ Retirement
System, rank among the biggest in the world.A 1999 law that gave State workers generous pensions and pay raises is widely blamed for igniting the pension crisis.
While
politicians are pledging to plug the funding gaps through higher
retirement ages and increased worker contributions, accountants and
commentators say it could be decades before the benefits of any reform
are realised because the proposals can only apply to new employees.Pensions
expert Vladimir Kogan said this would not get to the crux of the
liability, which was the unfunded liability for current employees.It
is generally agreed however that redesigning the benefits for current
employees and retirees to save on costs was not an option.
Don't
underestimate the contagion effects of state pension meltdowns. As
state pension funds lower their return estimates, adding hundreds of
millions to state debts, legislators will scramble to plug large pension
gaps. And they will likely meet stiff opposition.
State pension
funds are just coming to grips with the fact that their rosy investment
assumptions are ridiculously optimistic. Worse still, their new
investment return estimates are still way too high. What does this tell me? The Fed better come in big with QE2, a move that might fuel demand for riskier assets.
But no matter how big QE2 is, it simply won't make a difference to US
pensions heading on collision course with fiscal destiny. They've
already reached their breaking point.
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Leo, A question, When in history have the pension funds earned 3 times the 10 year rate on a sustained basis? Never is the answer. The pension funds will not get 7.5% either. They will lose money thanks to QE.
The dumb-asses! They need to sign up with Terry's Cash House now!
http://www.terryscashhouse.com/
There is one born every minute... it looks like desperate times call for desperate scams...
But, they could just buy long-term Greek bonds:
http://www.bloomberg.com/apps/quote?ticker=GGGB10YR:IND
10.8% yield, 8% return assumption, problem solved.
Do I have to think of everything around here?
I'm just curious... is there a single piece of historical evidence to support the idea that monetizing your own debt actually works? What we saw, as Hussman points out, is that
Why do you believe this will work, and even if it does, why do you think it will matter, except to the wealthiest 1% of Americans who own 83% of risk assets?
If buying your own debt works so well, why is PIIG debt trading like crap after the ECB has bought so much of it? Can it be attributed to the pernicious rumor-mongering of e-ville shorts like George Soros?
I don't think he is advocating it as a real solution.
If you can't pay your debts, then you have two options - repudiate them entirely, or pay them back with money worth less.
Neither solution is particularly great, but politicos get in a whole lot less trouble if they choose the latter method.
Even if it pushes the economy into high inflation, the creditors get repaid, at least nominally.
The fact that their pension now buys one hamburger a week can always be blamed on 'the speculators'
Sorry Leo this is idiotic:
The Fed better come in big with QE2, a move that might fuel demand for riskier assets. But no matter how big QE2 is, it simply won't make a difference to US pensions heading on collision course with fiscal destiny. They've already reached their breaking point.
You say the Fed has to do it big, but it won't work anyway. Leo, If it is not going to work, why do it? QE will destroy your pension funds. You will have nothing to write about. Do yourself a favor, read AEP today at the Telegraph. Remember what I have said again and again. QE will destroy America. And you are rooting for it.
Sorry Bruce I've lost track of your count. I know Leo has 0, I'm just not sure how wide your lead is now.
I've stopped reading your postings Leo as it is far too painful but every once and awhile I take a look to see what nonsense you're spewing. On the brightside Leo, you're consistent.
IS he rooting for it? I thought he was just pointing out the gubmint's only likely solution to the problem.
Historically, there are 4 options for a state to increase revenues: grow, tax, print or conquer. Printing has always been the preferred refuge of banana republics throughout history. My business idea is a chain of kiosks at state borders and airports, call them GreenBox, that exchange state-issued scrip at real-time exchange rates, say, bear chits for Lincoln logs.
Leo I am amazed that you pine for massive QE2 to solve the pension problem. Pension funds allocate a large (40% or more) of their assets to fixed income. The state purpose of QE2 is to collapse interest rates. Worse if the plans have a lump sum feature low yields result in higher lump sums stripping the pension plans. If you read Hussman's weekly letter he projects that equities will at most return 5% annually over the next 10 years. Investing at the highs in markets only lowers that 5% return.
Pension funds are also limited to how speculative an overall portfolio they develop. I do not think they will be investing heavily in Chinese solar stocks.
QE2 will be more like the sailing of the Titanic for pension funds.
The expected earnings rate on investments needs to be anchored to reality. Safe bonds are currently priced to return 4 to 5 percent (their coupon rate). The S&P500, based on John Hussman's model, is currently priced to return 2 to 5 percent. Given those two benchmarks, it's not obvious how CalSTRS is going to squeeze out significantly higher returns of 7 or 8 percent, or almost twice what the markets are priced to deliver.
Isn't this what Bernie Madoff was doing, guaranteeing returns?
inflation is the answer of the FED and we will pay for this with a currency crisis. We are so fucked.
Why do people get older then 65?
What do you do with a horse that can't run the race no more?
DOGFOOD BITCHEZ!!!
GIVE BENJI A TREAT!!
At some point, the benefits will be reduced. It is simple mathmatics.
Or at some point the purchasing power of those benefits will be reduced... suddenly and drastically.
Promise something you can't deliver...
...hmmm...
...where have I heard this before...
...S.S.? Politicians in general?
...Wall Street?....
..."diversified buy and hold portfolio in high dividend blue chips..."
...Yeah, heard that one before...
This has been innevitable since the tech wreck. Private pensions will get taken over by the PBGC, which is broke now, of course, and state budgets will collapse. The insurers are gonna take a huge whack too. Good luck to anyone who thinks they have a nest egg...cuz you don't.
I would say 0% after inflation is about all they can expect.
"Redesigning benefits for current payees is not regarded as possible, etc--" Okay, that means inflation is going to take care of it. You mention QE2; QE doesn't create anything; if it's creators are lucky it will cause nominal rises in the stock market; without any corresponding increase in value. It's important to remember that the Zimbabwe stock market went up %23,000 during their party years, but this was of no use to persons invested in it. What this article is telling you is, inflation is coming; it will be engineered, so you need 100% of your savings in silver bullion; simple enough.
or gold, IQ, or gold. be fair. good points.
Yes, the public pension bubble is another big bubble. Coming our way.
They're all like the big bubble on the "Prisoner" series that is coming to absorb you as you try to escape them.
Perhaps they should buy up property at tax sales.
It may be more profitable than this program they are running:
Home Loan Program Advantages Low Cost Loans with Many OptionsWhether you are dreaming of buying a new home, lowering your existing payments, or taking cash out, the CalSTRS Home Loan Program can help by offering competitive rates on a variety of mortgage loan programs:
Far better idea:
The US Treasury MUST TAX the Federal Reserve on their transactions by a mere and very small 0.5% over open market Fed rates with forign banks. This is a very low tax and far less than US citizens pay for interest on various debt products. This added US Federal Reserve Debt Note (US Dollar) product tax on the Federal Reserve will be used to pay down the US debt and finance the country. Either that or go back to the Constitution and have the Treasury issue money and thus avoiding the Federal Reserve's demanded interest payments from the Treasury.
If the Federal Reserve wants to make the Treasury pay interest, then the Federal Reserve must pay taxes to the USA's Treasury on their transactions like those done with other off-shore central banks if they want to acquire the US-based product called the Dollar. Think of it as the Dollar simply being an export product as as such must be taxed at 0.5% as a small fee payable to the US Treasury department for the ability to acquire said US-based product.
http://ttc.lacounty.gov/Proptax/auction_generalInfo.htm
http://ttc.lacounty.gov/Proptax/auction_faq.htm
I'm wondering what cross-state liabilities the federal government will implement to alleviate the problem? Delaware paying for Montana ain't gonna go over too well! There are going to be some pissed folks if the topic even comes up.
Indeed. That's why God invented QE.
"Reaching a Breaking Point?"
Does this mean we can't just sweep all the debt and unfunded obligations under the rug,sprinkle them with QE, turn to chinese solar, and live happily ever after?
It ain't "broken" until the stampede to redemtion, start your engines, Bitches.
"Does this mean we can't just sweep all the debt and unfunded obligations under the rug,sprinkle them with QE, turn to chinese solar, and live happily ever after?" Hey, it was fun trying, wasn't it? :-)
"Hey, it was fun trying, wasn't it?"
Big Fun. http://www.youtube.com/watch?v=xhZcAVSp1n4&ob=av2e
Isn't that the same as the unemployment extensions? Tax payers in ND with only a 3.7% rate paying for Nevadas +14%.
Careful, I seem to recal looking up federal tax flows and seeing that ND was receiving something like $1.14 in federal subsidies for every $1 in taxes it paid.
We are talking pension funds -- state pension funds.