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The Global War On Pensioners

Tyler Durden's picture




 

Pensioners are under attack. As we reported yesterday, ECB front running has driven yields down and with them the discount rate that companies use to determine the present value of their liabilities. This has had the rather unfortunate effect of increasing EU pension deficits by nearly a fifth in the space of just 12 months, prompting employers to consider measures such as upping the retirement age in order to mitigate the pain. 

In an even more disconcerting turn of events, we learned this week that in order to pay a €1.5 billion IOU to the IMF, Greece is borrowing from the public sector via 15-day repo. While Greece’s biggest pension fund IKA has assured everyone that this is actually standard practice and noted that characterizing the transactions as anything other than the ordinary course of business was akin to fear-mongering, following the money trail here leads us to the following rather disturbing conclusion: 

Should [the plundering on the public purse prove to be anything other than temporary, the local population will promptly exhibit very angry tendencies once it is revealed that the "radical left" government plundered Greek pensions to pay the IMF which could then immediately turn around and use the fund to pay the Kiev government, which in turn could pay Putin to keep the gas running. Where Greece will find an additional source of funds to replace this Pension "repo" was not quite clear as of this writing.

Against that backdrop, we turn to Illinois where Mike Shedlock (via UnionWatch) reminds us pension plans on the whole are some 61% underfunded. Recall from a piece we posted last November that Illinois’ problem is in fact so large that “it would take three years of a complete government shutdown, during which the entire general fund went toward pensions, just to break even. No funding for schools, no money for public safety and nothing for health care and human services.”

And that’s the good (err better) news. The bad news is that in one particularly egregious case — that of the Illinois General Assembly Retirement System (GARS) — the shortfall is more like 84%. 

Here’s more: 

The above chart shows “smoothed returns” that even out the 2007-2009 dip as well as the 2010-2014 blast higher. Illinois resorted to using “smoothed returns” to minimize the effect of the 2007-2009 dip. But now, with the rally, Illinois wants to use actual market returns.


On a non-smoothed (market) basis the numbers are slightly better. Non-smoothed, the total deficit is $105 billion instead of $111 billion.

 

Let’s be generous and assume the lower $105 billion number. The US Census Bureau shows there are 4,772,723 Illinois households.


The potential taxpayer burden to make up the deficit is $22,000 per household. 

Shedlock goes on to note that despite the exceedingly obvious trend towards permanently lower yields, pension plans simply haven’t adjusted their investment rate assumptions to conform with the new (para)normal: 

In the US, pension funds have not made 1.25% promises or even 4% promises, but rather 7.0%+ promises with the 10-year bond yielding about 2%.

 

Annuities promise 6% or so. Illinois promises range from 7.0% to 7.5%. How you get 7.5% in a 2% world? 

 

The correct answer is: you don’t.

The result is the same relentless hunt for yield that’s driven stocks and other risk assets to nosebleed valuations (or, in the Fed’s words, mission accomplished). And it means that increasingly, pension funds are taking on more risk to meet their contributions. 

Here’s WSJ:

Public-plan managers may see little option other than to double down on risk. In 2013 nearly half of state and local plan sponsors failed to make their full pension contribution. Moving from the 7.5% return currently assumed by Calpers to the roughly 5% yield on a 38%-62% stock-bond portfolio would increase annual contributions by around 50%—an additional $4 billion—making funding even more challenging.

...and from the NY Times:

...as interest rates began their long fall, pension funds faced a dilemma. Staying heavily invested in bonds would force governments either to set aside more cash upfront or to cut pension promises. So instead, pension funds radically changed their investment strategies, embracing investments that produce higher returns but also involve more risk. This shift has replaced an explicit cost with a hidden one: that lawmakers will have to divert more tax dollars into pension funds, cut back on benefits or both when stock market crashes cause pension fund asset values to decline.

The particularly unnerving part of the story is that this has been going on for years. Consider the following from an academic study penned by researchers from Notre Dame and Maastricht University: 

In the past two decades, U.S. public pension funds uniquely increased allocations to risky investments, especially as more members retired. We explain this increase by the incentives from their distinct regulation linking the liability discount rate to the expected return on assets rather than to the riskiness of their promised pension benefits. Their increased risk-taking allows them to maintain high discount rates, even as interest rates decline, underreport the underfunding and is associated with an annual underperformance of 60 basis points.

While risk-taking may be on the rise, it’s not translating into tangible results. A 2014 report from a panel commissioned by the Society of Actuaries shows funded ratios falling…

… the percentage of funds that are underfunded rising… 

 

...and investments in “alternatives” and equities increasing while the portion of funds devoted to fixed income has continually declined.. 

***

In the end, they’ll be fewer pensionable salaries in Europe as corporations cut back, Greeks will just have to hope their government finds a way to pay back the cash being plundered from public coffers, and in the US, taxpayers will ultimately be on the hook for unfunded liabilities. 

 

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Wed, 03/04/2015 - 19:34 | 5855711 Kirk2NCC1701
Kirk2NCC1701's picture

These days, when everything is being manipulated, cooked and stolen, the only sane & rational response left (to those outside the 0.1%) is to proceed independent of Trust, and to proceed on Principle. Therefore, I’m all about Mitigating* Risk and Hedging** my bets.

* Asset Allocation into Primary, Secondary and Tertiary Assets
** Assets held Domestically and Abroad

Wed, 03/04/2015 - 19:36 | 5855719 dimwitted economist
dimwitted economist's picture

Gold and Silver are Money... (you might want to have a little)

Wed, 03/04/2015 - 19:54 | 5855769 davidalan1
davidalan1's picture

True story:

 

few months ago,  I dont have the rent to pay $1350..... out of nowhere my younger brother sends me an email saying, "hey dave, 30 years ago when you were flush and i was getting married you gave me 1k for my honeymoon. Im going to send you a 1oz gold coin. Told my wife, she was like, "Soooo" I said, "uh honey a one oz Au is worth $1300 at the time. 

It came in the mail, showed it to her and she was like, "that little coin is worth $1300?  Took her to the coin shop with me, she was BLOWN away. Suffice to say the true message is "the great mystery" gets in peoples mind on are behalf. The jury is still out with me if Gold and silver will be a medium of exchange if tshtf.

Peace

Wed, 03/04/2015 - 20:10 | 5855816 Ruffmuff
Ruffmuff's picture

I realize that the middle ground in event of crash, is undefined.

Not everyone will have gold, and so the system could never work.

Most preppers, including myself have backed off and figure we can do a medium emergency and that's about it.  I've talked to neighbors and found out how useless it was to ever discuss a possible shitshow.

 

Wed, 03/04/2015 - 20:20 | 5855847 davidalan1
davidalan1's picture

OMG>.."ive talked with neighbors"--- you brave soul you....

 

Having watched this shit storm and read a plethora of comments on the potential "reset". I run through a mental picture of all things possible.

Total meltdown: Bank holiday, No ATM's, No debit card transactions etc. WTF would a gold coin do for me? NOTHING...

Semi meltdown: Might need cash, toilet paper etc.

Mini meltdown: who the fuck cares.

Most posts seem to intuit total meltdown, if that is the case all the "stoopid neighbors and merchant" we speak of will look at gold and silver as a joke.

My mind has given up and doesnt care...will play it by ear. day by day..If i need to order next day shipping of booze, food, cigs then thats the plan...

for now

Wed, 03/04/2015 - 20:39 | 5855905 847328_3527
847328_3527's picture
States In Danger As Pension Underfunding Of $4.7 Trillion Threatens Their Fiscal Health

11/19/2014

 

http://news.investors.com/ibd-editorials/111914-727280-unfunded-pensions...

Thu, 03/05/2015 - 03:07 | 5856795 old naughty
old naughty's picture

The welfare state ponzi has been meticulously planned since before the 'babyboomers' is coined.

Never intended to pay much...

It's global if anyone is looking for 'com-fort' ?

Perhaps the term 'cash surrender value' (csv) is a sign, no?

Con Sinical Very <-----.

Wed, 03/04/2015 - 22:34 | 5856328 daveO
daveO's picture

'Total meltdown: Bank holiday, No ATM's, No debit card transactions etc. WTF would a gold coin do for me? NOTHING...'

Well, I never heard about highway men in merry ol' England asking for debit cards.  Barter is just the foundation from which currency grows on a trunk of public trust. When trust goes, here's what happens; http://en.wikipedia.org/wiki/1998%E2%80%932002_Argentine_great_depressio...
Thu, 03/05/2015 - 02:01 | 5856729 malek
malek's picture

 she was like "that little coin is worth $1300?"

Should've answered:
Yeah, and quality diamonds are even more expensive! Ridiculous, isn't it?

Wed, 03/04/2015 - 23:05 | 5856446 StychoKiller
StychoKiller's picture

How many FRNs for a slip of gold-pressed latinum?

Wed, 03/04/2015 - 19:36 | 5855720 kaiserhoff
kaiserhoff's picture

I can tell you from my own investing experience,

  the worst reason to take a risk, is because you feel you have to.

Wed, 03/04/2015 - 19:36 | 5855721 F0ster
F0ster's picture

If you have a pension you should't expect to keep it.

Wed, 03/04/2015 - 21:31 | 5856102 NoPension
NoPension's picture

No worries here.

Wed, 03/04/2015 - 19:37 | 5855722 Jack Burton
Jack Burton's picture

Never let anyone else but yourself manage your retirement money. No funds, no managers, no advisors. They are all liars and crooks. Manage your own money, even if that means buying gold coin and hiding it in the back garden 5 feet under ground.

Wed, 03/04/2015 - 19:56 | 5855770 Monty Burns
Monty Burns's picture

"They are all liars and crooks"

Tell me about it. F*ckers lost 30% of my fund in 2008 and charged 2% of it it for 'handling fees'. That is, charged me for losing my money.

Wed, 03/04/2015 - 21:04 | 5855996 Oxbo Rene
Oxbo Rene's picture

I had a friend that his brother got him into stock brokering, he fastly acquired a big fancy boat and truck, probably a nice home, then, didn't see him for a couple years, finally ran into him, asked what he was doing these days, he replied "laying sod".
I presumed that his concience got to him because of making money on other people losing money (he probably wasn't too good at making money for other folks).
He was raised in a religious family ....
So, that tells me what kind of people stock brokers are etc, etc, etc.

Wed, 03/04/2015 - 20:07 | 5855806 Larry Dallas
Larry Dallas's picture

Jack

 

The problem is that most 'Murican's are so stupid they couldn't tell you the difference between a stock and a bond. But I do agree with you. Darwin will win this one.

Larry.

Wed, 03/04/2015 - 20:43 | 5855924 Armed Resistance
Armed Resistance's picture

I wish I could bury even one coin but I lost them all in a tragic boating accident!  

Wed, 03/04/2015 - 20:50 | 5855956 PoliticalRefuge...
PoliticalRefugeefromCalif.'s picture

.."lost it all in a tragic boating accident" is starting to sound as convincing as "I feared for my life"..

-plausible deniability I think they call it.

Wed, 03/04/2015 - 19:40 | 5855729 Lumberjack
Lumberjack's picture

The Enron model:

Enron Executives' Benefits Kept on Growing As Retirement Plans of Employees Were Cut

http://www.wsj.com/articles/SB1011745748757428600

Wed, 03/04/2015 - 20:43 | 5855926 847328_3527
847328_3527's picture

 

Reserve Primary Money Fund "breaks the buck"

Sep 16 2008

 

Reserve Primary Fund, the firm that basically invented the idea of a money market fund back in 1970 just saw its shares fall below $1 a share, which is about as close as money market funds get to going bust.

 

http://www.theatlantic.com/business/archive/2008/09/reserve-primary-mone...

Wed, 03/04/2015 - 19:45 | 5855745 davidalan1
davidalan1's picture

FUCK pensioners....seriously!!! fuck em - most are low, mid and high level gov workers who dont produce sheeit.. go in each day to the "JOB".

Just waiting for retirement. I couldnt think of anything better then EVERY FUCKING pensioner to lose what they have worked soooo hard for.

Fuck em.....

Signed small biz owner- last of a dying breed

Wed, 03/04/2015 - 19:52 | 5855765 mtndds
mtndds's picture

Amen brother.

Wed, 03/04/2015 - 20:03 | 5855793 XqWretch
XqWretch's picture

The NSA thanks you for your confession... hands behind your back please...

Wed, 03/04/2015 - 20:06 | 5855801 davidalan1
davidalan1's picture

And fuck them too...

 

If Im afraid of my government (which I am)  does it apply that it has become tyrannical or NOT?

Wed, 03/04/2015 - 22:06 | 5856250 Accounting101
Accounting101's picture

If you are actually a small business owner, why would you advocate for a customer base to lose all its assets? That doesn't seem like good business sense. Were you just being stupid?

Wed, 03/04/2015 - 22:51 | 5856396 NoPension
NoPension's picture

Because it's not all about the money, and there are plenty of customers who pull the cart instead of ride it.
You really are special, 101
Don't poke a guy married for 35 years, who hustles his talents every day for a paycheck. We are combat veterans tempered in shit.
Pencil pushing bean counter.

Or do you teach it? That would explain a lot.

Wed, 03/04/2015 - 19:52 | 5855758 Monty Burns
Monty Burns's picture

Illinois has no need to worry. The Feds will stump up the cash to cover the deficits.  And where will they get the cash?  From the FRB who'll simply press the printer button and the money is magicked into being.

PS: I don't have too much sympathy for public sector workers/pensioners. They're over-paid, can't be fired and get pensions that only a miniscule proportion of private sector workers could afford.

Wed, 03/04/2015 - 20:11 | 5855819 g speed
g speed's picture

and don't forget --most of them are heros---

Wed, 03/04/2015 - 21:37 | 5856133 NoPension
NoPension's picture

Hey baby, they fight what you fear! And don't fucking forget it.

I actually saw that graphically painted on the tailgate of a jacked up Toyota pickup. All plastered with FF emblems and such.

Surrounded in flames " I Fight What YOU Fear"

Wed, 03/04/2015 - 20:48 | 5855945 davidalan1
davidalan1's picture

its was almost 4 years ago. there was a domain www.ill is broke...since gone...i could believe my eyes ...holy sheeit...they owed everyone

from walgreens to local community colleges and churches...the sight is gone, go figure

 

Wed, 03/04/2015 - 20:03 | 5855794 Omen IV
Omen IV's picture

all those with underfunded plans need to make personal plans to die............ quicker

constitutional state ammendments to follow everywhere -

 

and then public education to end as well - property taxes higher than mortgage payments -

solution --- if you want to fuck - the results are your responsibility at birth and death

Wed, 03/04/2015 - 20:05 | 5855798 i_call_you_my_base
i_call_you_my_base's picture

SS's target and projection is 8% returns. Largest UST holder.

Wed, 03/04/2015 - 22:02 | 5856233 Accounting101
Accounting101's picture

Largest US Treasury holder, so what?

Wed, 03/04/2015 - 20:07 | 5855808 WTFUD
WTFUD's picture

At least the Pensioners will not be around to witness the worst of the carnage! s/c

Wed, 03/04/2015 - 20:12 | 5855824 bigrooster
bigrooster's picture

Who the fuck cares, that don't have a pension?  It was a Ponzi scheme from the beginning.  After 7 months of government service I realized that the worthless liberal scum that I worked with were just passing time for their pension.  They never did any work, the government just hired consultants to make up for them, all on the tax payers dole.  There in lies the problem of this country, half work, half don't.  Some need to dies off already.

Wed, 03/04/2015 - 20:21 | 5855849 WTFUD
WTFUD's picture

Will the Hapless Government & Genteel Retired Bankster Pensioners be AOK or will WE all be in this (SHITPILE) together,like PM Cambo says?

Bury Your Dead, MotherFuckers!!!

Wed, 03/04/2015 - 23:10 | 5856459 StychoKiller
StychoKiller's picture

"Dreams Come Due:  Government and Economics as if Freedom Mattered," by John Galt, ISBN:  0-671-61159-3, Simon * Schuster, 1986

Wed, 03/04/2015 - 20:21 | 5855850 razorthin
razorthin's picture

 How you get 7.5% in a 2% world? 

 

The correct answer is you do - right up the ass as this is the actual annual inflation rate.

Wed, 03/04/2015 - 20:23 | 5855853 Niall Of The Ni...
Niall Of The Nine Hostages's picture

I wonder how many of these parasites who are counting on retiring at 60  on a fat public pension to keep them in style while they take 35 years to die have a plan B?

Because they're about to find out that children only kiss the asses of dear old Mom and Dad if they know there's a big payday in it for them when Mom and Dad croak---and most gubmint parasites already spent their kids' inheritance and then some on themselves, counting on the pension to keep them in style for 35 years.

Hilarity will ensue.

Wed, 03/04/2015 - 21:45 | 5856161 NoPension
NoPension's picture

60?? Are you sniffing fucking glue! With the deals these cats get, their getting out in their 50's.

I have buddy who's Dad took a buyout from the post office at 51 or 52 .
He is 94 right now.

But, but... He landed on the beaches of Normandy at the ripe old age of 24.

He gets bonus points for that, but damn! He's collected longer than he worked.

Wed, 03/04/2015 - 21:59 | 5856221 Accounting101
Accounting101's picture

Bring down the dumb! My brother's wife's uncle's third cousin got a full pension paying out 130% of his three highest earning years and he retired at 42.

No pension? Fuck you! State your place of employment so all those pensioners know where not to spend their money.

Wed, 03/04/2015 - 22:44 | 5856372 NoPension
NoPension's picture

Well it's not the state. I ain't a teacher, firefighter, hero, or cop.
Would you believe it, I get up every day a work for myself. So liberating, yeah right. But after 20 years, I'm ruined for clock punching. Or taking marching orders from numbnuts.
So there you have it. And the pensioners can shove their money up their worthless asses. In the end, very few of them can point to any accomplishments. ( except for the heroes, cops and ff) But who cares, right? It's all about the buck.
Hey, when did hero become a career choice?

By the way, if I was in charge, I would make you pay to be a cop or firefighter. I'd have a waiting list. And put a dent in the deficit.

Wed, 03/04/2015 - 20:37 | 5855890 Sanity Bear
Sanity Bear's picture

If you were expecting a pension then you placed a bet on getting away with ripping some other poor sucker off. Zero sympathy.

Wed, 03/04/2015 - 21:53 | 5856204 Accounting101
Accounting101's picture

If you were expecting to make a profit off your gold, then you placed a bet on finding a greater fool to rip off. Assets and investments are funny that way.

Wed, 03/04/2015 - 22:45 | 5856377 daveO
daveO's picture

Pension schemes don't float in pro abortion, free trade, queer friendly America. All those man hating gov. employed femi-nazi's are gonna have a tough time finding their cats gainful employment. It was a lot simpler when they lived out their lives at the nunnery. 

Wed, 03/04/2015 - 20:37 | 5855893 847328_3527
847328_3527's picture

"If you don't hold it, you don't own it."

 

"Stay out of debt."

 

If some folks haven't learned that yet then let them suffer the painful consequences.

Wed, 03/04/2015 - 20:49 | 5855947 cynicalskeptic
cynicalskeptic's picture

Was listening to a local cop going on about how 'they'd better not touch MY pension'..... the guy is 50 and looking to retire in a coouple years after putting in 30.   HALF the local cops are also collecting disability on top of their usual pensions - fraud, cough, cough ....what in the hell do suburban cops have to deal with?  too many donuts?  

We took a 'once in a lifetime' vacation before our oldest left for college - one week land/one week cruise in Alaska.  Most of those on board were early retired Federal employees or first tier teachers.

The benefits paid out to government employees are insane - far more than any privste company pays AND they're GUARANTEED.   If my 401K loses value - sorry.... if a public pension fund loses value, my taxes go up to cover the shortfall.

 

Thu, 03/05/2015 - 00:01 | 5856552 flyonmywall
flyonmywall's picture

Illinois pension plans at 39% funding level. Good luck collecting on that in 10 years.

The next bailout and financial crisis will probably be the bloated public education system crashing down. Worthless asshats making 70k/year doing nothing but babysitting, administrator salaries at $125k/year paid for surfing the web and doing "evaluations"...fucking pathetic.

And your taxes will be funding it.

 

Thu, 03/05/2015 - 12:50 | 5857818 davidalan1
davidalan1's picture

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