Guest Post: That Which Is Unsustainable Will Go Away: Pensions

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

That Which Is Unsustainable Will Go Away: Pensions

Publicly funded pensions and Medicare are two examples of unsustainable systems that will go away in the decade ahead. Today we look at pensions, tomorrow we examine Medicare.

One of the few things we know with certainty is that which is unsustainable will go away and be replaced by another more sustainable arrangement. Whether we like it or not, or are willing to accept reality or not, unsustainable public pensions will go away.

What makes "defined benefit" pensions unsustainable? 1) Promised cash/benefits packages that are not aligned with the fiscal realities of what can be contributed annually to the pension funds 2) New Normal low yields on low-risk investments and 3) skyrocketing costs of healthcare benefits.

This is easily illustrated with basic math. Recall that defined pensions are not "pay as you go" plans like Social Security, where the taxes paid by today's workers fund the benefits distributed to today's retirees; "defined benefit" pensions are supposed to be paid out of a pension fund which generates returns sufficient to pay the retirees' benefits.

In a typical small coastal city (112,000 residents) in California, senior police officers receive annual pensions in excess of $100,000. Generous benefits (healthcare coverage, etc.) for life add another $20,000 or so a year, so the annual payout is roughly $120,000 a year per retiree.

Less senior city employees receive pensions and medical benefits around half that amount, or $60,000 a year.

These pensions are not out of line with what other cities on the Left and Right coasts have promised their employees.

The city has 1,637 full-time employees and 518 part-time employees. The average full-time wage (not including benefits and pension contributions) is $85,726. The estimated median household income for the city is $60,625.

Assuming the pension funds are managed conservatively, how much money would have to be set aside to fund a single pension/benefits payout of $120,000 a year and one of $60,000?

The yield on 10-year Treasury bonds is less than 2%, about in line with the average dividend on stocks.

That means that a conservatively managed portfolio of stocks and bonds now yields around 2%. At this rate, a pension fund would need $6 million in cash to fund the $120,000/year cash/benefit payout--$6 M X .02 = $120,000. The fund would need $3 million in cash to fund the $60,000/year cash/benefit payout.

If the senior police officer worked 30 years, then the city would need to contribute about $200,000 a year to assemble the $6 million in cash. That's $16,700 per month for 30 years. The $60,000/year cash/benefit pension would require "only" $8,350 to be contributed every month for 30 years.

(Yes, the interest earned on the early years of contributions would reduce the total contributions needed to reach the $6 million total, but in the real world cities stopped contributing to their pension funds during the "good years" of high returns, and pension funds assets decline in market downturns, wiping out years of gains in a few months. Assumptions and projections do not track reality.)

To fund 100 senior retirees and 200 less-senior retirees, the city pension fund would need $1.2 billion, roughly equal to 10 years of the city's entire general-fund annual budget. To fund 600 retirees, the fund would need $2.4 billion.

Recall that the Federal Reserve has implicitly promised to hold interest rates to near-zero indefinitely. The 2% annual yield is not an aberration, it is the New Normal.

Those pension funds that attempt to increase their yield by gambling on stocks, derivatives, real estate, etc. will blow up when these risky markets decline/implode, as all risky markets do over time.

Please "do the math" on your own city, county and state's pension promises, the skyrocketing cost of the promised medical/healthcare benefits, the yield pension funds can safely earn in the real world, and the total assets currently in the pension funds. There is no way to make the math work such that the pensions and benefits promised can be paid in the real world.

Wishing the math were different does not make it different. We can play around with yields and payouts, but adjusting the margins doesn't change the basic reality that the promised pensions are structurally underfunded in a 2% yield world.

Tomorrow we examine the unsustainability of Medicare.

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Turin Turambar's picture

It's rather obvious that you have no clue about gubbiment maf. ;-)

vmromk's picture

Bernanke's FUCKED UP policies are unsustainable, will both he and his policies go away ?

cranky-old-geezer's picture



Thanks to Bernanke's fucked up policies, even the best funded pension is gonna be paid out in very devalued dollars.

You might get the amount you hope for each month, but it won't buy half what you hope for.

This is how Bernanke is looting pension funds right now.   By debasing the currency.  The silent way of stealing wealth from everybody.

Getting a pension plan fully funded is an empty victory when benefits are paid out in very debased currency.

Even if your plan is well funded, you're still gonna lose.  The dollars you get out of that plan might be worth 1/3 or 1/4 of the dollars that went into it.

If those dollars that went into it were yours, you lose bigtime.  That's why smart people are cashing out their 401k, paying the tax penalty, and putting it in gold or silver or something else Bernanke can't debase with his printing press.  

Lose 10% now or lose 50% - 75% later.  It's an easy choice for smart people.

Then there's the other possibility, 401ks getting confiscated and replaced with a "government guaranteed annuity". 

And yes that's a strong possibility, almost guaranteed, as government debt approaches unsustainable levels.  They'll grab the assets in 401ks which will buy them a year or so, just more can kicking, but your 401k will be gone. 

And that "government guaranteed annuity"?  Wait till congress gets done jerking around with the benefit side of it.  You won't get squat.

...and what little you do get will be dollars worth 1/3 to 1/4 of what they are now.

greyghost's picture

this ass clown knows nothing about pensions. first says typical coastal town and then uses berkeley calif. hey ass wipe everyone in california knows that berkeley is nothing more than moscow on the bay and is in no way typical. you see my wife works for a goverment agency and will retire at aprox. $30,000 a year or $2,500 a month. now that she has filed the forms for retirement, the thing that jumps out at us is the fact that "HER" contributions are segregated from her "empoyers" contributions. it appears that she will be recieving first her contributions for what will be until about age 72. now, asswipe, what is the average lifespan of the female in the u.s.?  now, asswipe, should she die on the exact day that "her" contributions run out, remember no one has used or seen the employers money yet, what happens to all the monies that her employer paid in? think about this, just how large of a slush fund do these public agencies have if half the retired die before even touching the agencies contribution. oh, i think your are right about a ponzi scheme going on...your just completely clueless as to where to look. if you have not even looked at a certified annual financial report for any goverment agency you are just wasting everyone's time. you remind of the shits that talk all day about gutting soc. sec. and medicare when all they have to do is look at what soc. sec. pays per month to see just barely housing, food and fuel barely covered!!!! since my wife won't collect soc. sec. how does her retirement rate against soc. sec. payments? one last note much more will her employers' contributions grow while she drawns down her contributions? just more asshole talk about a problem but no solutions...just cut gut slash screw f@&k and butcher away!!!!!

fonzannoon's picture

Greygthost you seem to have your numbers in order regarding your wife's pension. I live in the Northeast and around me the pensions are ballpark TRIPLE your numbers. Oh and THE EMPLOYEESS DID NOT CONTRIBUTE. Oh and THEIR HEALTHCARE WAS AND IS FREE WHILE I PAY $1,500/MO. But her I am sure it will work out.

But hey let's just go with your example as the basis for everything.

greyghost's picture

well we know that some of the pensions are nothing more that complete ponzi scheme. however here in calif every goverment agency has their own seperate pension system, with most managed by calpers. what i take isuue with is that an idiot like this author comes along and takes a system like calpers which has hundreds and i mean hundreds of different pension plans and treats them as all the same. he has no clue as to what he is taking about. my wife and i are aware that some gov. agencies pay all retirement contributions, however my wife has paid 7.5% a year for thirty years and her employer has paid amost double that [again that is alot of bread that the employer has paid into the fund]. the ponzi is "what the hell happens to all the employer contributions should my wife die before collecting any of that"? we have fools come on here spouting nonsense in play ground is almost the complete reversal of obama's class the rich to death all the while the other side talks gut the hell out of everything...morons all. my wife and i know exactly how much we have paid in and how much that has grown over the years.....but but but when we think about the amount her employer has paid in...well it just wants to make your brain explode. should my wife live the average lifespan i want the taxpayers in calif to know that amount of funds not used is very very very large.....shhh do look to see where it goes!!!!!!

LetThemEatRand's picture

Tough shit.  Jamie Dimon needed your wife's pension.  Tighten your belt.

insanelysane's picture

Everyone pays into social security too but there is no money there, just an iou.  You will find out that it has been vaporized.

LetThemEatRand's picture

By "vaporized" you mean given to the .1%, like the MFGlobal money was "vaporized," right?

Jack Burton's picture

"Vaporized?" President Johnson all those years ago tapped the social security surplus to pay for years of war in Vietnam. Reagan tapped into the social security fund to spend a trillion extra on military build ups.

The Bush's used social security money to pound the shit out of Iraq.

People who work and payed into social security fully funded their pension's payouts and then some, the fuck'n money was stolen by politicians to rule the world!

Research it, it is a fact and Nobody, I mean nobody, can deny it, if they do their are liars! The facts are there, SS is a stack of IOU's for wars and weapons.

knightowl77's picture

My CalPers pension...for the first 10 years on the job, I contributed 9% of my base salary and my employer contributed 21%....About 10 years in, the city I worked for, offered to make our 9% employee contribution in lieu of a pay raise...So our net went up and since CalPers was making so much in the markets, they did not require the employers to make their contributions either...

Seemed like a win-win at the time...

Frequently, my employer would offer us pension upgrades in lieu of increasing our pay....All of these contracts were discussed and voted on at the city council meetings...

These pensions were promised in lieu of other pay or benefits. I would've left early in my career were it not for the pension

greyghost's picture knightowl you know that this author is trying to lump your retirement plan with my wifes' retirement is totally bogus...can't be trying to unify europe with so many cultures. with all these upgrade to your retirement the funds should be huge to fund it...calpers is required to see that all funds are paid in. so your employer has funded these huge amounts....THAT MAY OR MAY NOT BE PAID OUT! that is what i am getting at, how much of these funds are never used due to death of the employee? how many hundreds of millions of dollars are never paid out, especialy in my wifes case where her contributions are paid out first, before ever touching the employers' funds. we have been watching the agency she works for since her union and employer have this incest type relationship....people leave her employer and go to work for the union and vice versa all day long and the worker bees get screwed by the top boys all day long. well good people of california you listen to this troll author all the while hundreds of millions are slushing around, where they go no knows.

LetThemEatRand's picture

The narrative that is gaining more and more traction is that pensions cannot be paid because they are underfunded, yet no one is responsible for this other than the workers themselves for being stupid enough to believe what they were told.  These are two lies in one.  First, some pensions are well funded or at least well enough funded that they can pay out for decades.  Those will be sucked into the vortex along with those that are not.  Second, if a pension is underfunded it is probably because those at the top either misallocated resources in the first instance (public pensions) or skimmed from the top (private pensions) and made millions in salary and bonus while promising lowly workers that they would get theirs some day, knowing all the while they the extra money was coming to them and would never go to the workers.  Also, the 401K concept is a big part of the problem.  The idea that most people can save enough to plan to live to 100 and have medical problems is absurd.  You need to pool resources to do this.  But we were all sold a bill of goods, weren't we.

It is generally true that many people are fucked due to poor decisions over the last two generations or so.  What is sad is that few will connect the dots about why, and chances are that no one -- least of all the top .1% who have enriched themselves on this scam -- will be held accountable.

greyghost's picture

letthemeatrand...well said. yes i worry that my wifes funds may get vortexed because of other agencies not paying up. however, i not sure how seperate the funds are within calpers..between the hundreds of agencies they manage funds for. however my wifes paperwork clearly says her funds are x and will last until x. no mention about how much her employers funds are. howeversince they pay double what she pays we can get real close. since the down turn in 2007 i do have to say that calpers appears to be more upfront with the figures who monies belong to whom and clearly state that the employer paid funds belomg to the employer. than again these funds are available should she out live her funds.

greyghost's picture

well just junk away fools.... i have given you a look into the real pension system and the true ponzi scheme of gigantic slush funds in retirement systems here in california. go ahead and read this nonsense bantering around mindless figures to spin his story for his own ends. no skin off my nose...i just feel that if this is the way her pension is ain't the only one in this country. hundreds and hundreds of millions of dollars in enormous slush funds...while he paints a picture of doom? hell now that i think of it...does he work for goverment/pension funds....oh lookie over there...all the while millions upon millions go sloshing around to be used for what and by whom.....hmm? just sayin

IcarusOnFire's picture


YOU are the problem because you refuse to confront reality.  We've all been promised the moon and NONE of us are going to collect.  That's the bottom line. You can debate all the nitnoids of your particular situation and explain why YOU are different......but in the final analysis you are not!  YOU have been lied to, cheated and stolen from.  The money is no longer there, it's been MFGlobaled.  And it never will be there under ZIRP.  That is the reality.  All the bitching in the world ain't going to change reality.  The money ain't there.  Get used to it.



(Lost my private pension of $120,000 a year in 2006)

greyghost's picture

icarusonfire, first off sorry about your lost pension and second thank you for response. my intent here is to show that this author is wasting time splitting hairs and is nonsense, as you say it is all mfglobaled. so you agree than that this whole article was a waste of time...yes. i am using my wifes' pension to show just how much crap this clown has written. he knows not what he has written about. he comes on as some sort of expert on pensions, yet is clueless about how they are managed how many seperate enties are involved.  now in the bigger picture, yes we are all screwed...yet you pick my discussion apart but leave his useless dribble alone???? really? the discussion is about weather this fool knows what he is talking about is it not. has he brought any solutions with him, other than to rape plunder pillage some other citizens pension without any thought about the pain it would cause? no he has not. his next useless article will be about gutting soc. sec. and medicare, just like all his mindless kind can talk about over drinks. we need to keep discussing these problems to help find solutions to the mfglobalers.

Vlad Tepid's picture

Drivel..not dribble.  Pointing that out is my superpower around here...

malek's picture

another one who believes if he can provide a single counter example, then the whole story is proven utterly wrong

swamp's picture

Her employer paid into the pension plan you state. 

Her employer is the government. So you are saying the government not only pays the pensions, but they pay into the pension of those still working.

And taxpayers pay for ALL of this.

END IT NOW. Implode the system!

StychoKiller's picture

Projected Ca. deficit:  $8Billion, actual:  $16Billion!

Methinks you and yer missus are gonna be mighty upset in the future.

Papasmurf's picture

Surely you don't think it matters what you or your employer paid into Calpers.  Wall Street has egged this out from the inside a long time ago.  The only thing that remains is printed statements of what you "should receive".  Good luck on that.

Buck Johnson's picture

Bingo for my area also.  Oh if you want to see what will happen check  out Pritchard Alabama, there pension was just stopped because the county had no money.

JamesBond's picture

greyghost -

your a fucking idiot.

your math errors are typical of a 1st-grader

kinetik's picture

Jamesbond: you're the idiot here. Please use proper grammar and spelling and maybe people will stop automatically laughing at you.

GreyGhost, keep telling the truth, people like Janesbond,, who is obviously at the lower end of the education spectrum shouldn't bother you or prevent you from typing out the truth.. Don't let them, they think their memories of reading "Atlas Wept" at 15 yr old prepares them for the realities of life. Hahah, it's no wonder that the vast majority of Randites haven't put any more thought into reality than they did at 15 when they read that piece of pulp fiction. I weep for them an their wild west fantasies.

greyghost's picture

do you or do you not know what a CERTIFIED ANNUAL FINANCIAL REPORT is? if you do not you are completely clueless about the hundreds of billions of dollars that all goverment agencies are sitting on all across the u.s. aprox. ten years ago california was sitting on about $600 billion in investments...stocks and bonds, etc. this was from their certified annual financial report....PLEASE DO NOT CONFUSE THIS WITH THEIR ANNUAL BUDGET!!!!! calif has a dept that does nothing but invest huge amounts of monies every year...year in and year out. i thinking that these funds are probably about half that amount now. you can be sure that california is not the only state that has this. cities, counties and any goverment agency does this. one person did this with new jersey several years ago when they were broke, back in the day. he found the mind blowing new jersey turnpike authority has something along the lines of $6 billion of debt but was sitting on about $14 cash collected over the years. just here in calif our beloved gov. moonbeam was gov. in the 1970's also. now his daddy was gov. of calif in the 1960's and had helped set up a massive trust fund for the calif dept of transportation. this baby was set for the next thirty years...until moonbeam got hold of the funds and gutted it for every free give away he could think of. the point being is that you have clowns like this author running around spewing rehashed reworked  figures we have seen endlessly since i can remember. oh hell lets go back 40 years and the story hasn't changed.....nothing new here only the figures[math] has changed. how many gov. agencies can you think of off the top of hat that are self run and the turnpike mention earlier? sucking up endless monies year after year...why would anyone think that the ponzi doesn't encompass pensions. NOW GET THIS CLOWN: CALIF HAS HUNDREDS OF BILLIONS IN INVESTMENTS BUT ALL YOU HEAR  IS THE 17 BILLION "BUDGET" SHORT FALL!!!!!! panic in the streets RAISE THE TAXES TAX THE GIRL SCOUT COOKIES TAX THE TAX ON THE TAX. this author is clueless and so are you.

BooMushroom's picture

You are 100% correct, it is certified, and therefore correct. It is also online, and searchable. Here:

Anyone can see that the money is there. And safe! Because it is invested in Apple, Bank of America, FNMA, JPM, MFG, Deutsche Telkom and Deutsche Bank, Wells Fargo, and Washington Mutual.

Unless CALPERS manages to dodge the droppings from every black swan, it doesn't matter how much you paid in. The CALPERS people don't, and won't, just put the FRNs under a giant mattress. And if they had, Bernanke has printed trillions more just like them.

Why do you think they offered you pension money instead of real money, anyway??? Because, for whatever reason, they felt a 5% raise toward your pension would cost them less than 5% toward your paycheck. Spin any of the other facts however you like, you can't deny that one.

malek's picture

Thanks, Boo, but I don't think grey can take that much reality...

jekyll island's picture

Turin is right, these projections are assuming "normal" economics.  One of the future QE's (yes, there will be more after QE3) will be to bail out the states.  California needs $400 billion?  The Bernank will print it and boom, no pension shortfall.  Your pension dollar will probably buy 10% of it's current value, but hey, everyone will get their checks. 

Mr Lennon Hendrix's picture

Pensions = IOUs

IOUs are for suckers

Cursive's picture

@Mr Lennon Hendrix

Can you imagine the freak show we are about to witness when these mostly female "teachers" realize they bought a Ponzi?  Hell hath no fury like a school marm scorned.

Paul Atreides's picture

@Cursive you have no idea how right you are. I have retired female teachers in my family and I assure you every one of them would unleash their full wrath upon all responsible.

Gully Foyle's picture

Paul Atreides

And what will they do? Lead an armed insurrection? Write some nasty letters? Become disgruntled speakers at OWS tent cities?

Do you really think anyone cares if a bunch of teachers bitch and moan? Three quarters of the people here hate teachers and the Educational institutional system that brainwashes the young.

I would start stocking up on cases of Vodka so they can numb the pain and frustration when they finally realize exactly how powerless and ineffective they truly are.

Paul Atreides's picture

Dividing us with sexist and stereotypical remarcs will get us NOWHERE. It is time for humanity to unify and solidify. I stand by my educators and the rest of civil middle class society, Teachers are given a curriculum to follow and if they deviate they lose their job. You have no idea how good teachers are at mobilizing, I have seen it with my own eyes. If one of them can organize and run a class of 25 bratty kids for a 30 year plus career beacuse they have to for a living one can only imagine how effective 100,000 pissed off school teachers could be at mobilizing a society who are ALL about to lose their pensions.

We cook your meals, we haul your trash, we connect your calls, we drive your ambulances, we teach your kids, we guard you while you sleep. Do not fuck with us!


A Nanny Moose's picture

Couple of teachers exploiting students on the local new is all you need to rouse the rabble. After all, it's fo the chitlins. At least that's we roll in LA, at the mere mention of Pink Slips.

None of that emotion gets us around having NO money.

mt paul's picture

haul my own trash to the public dumpsters

use an atomated cell phone 

don't need an ambulance 

no kids to be taught

my dog guards me while i sleep

don't need any thing to do with you entitled muppets..

if you were any good at what you do

you would be running your own shop...

you bought into the game 

deal with it...

Paul Atreides's picture

ME ME ME, these people paid into and are therefore entitled to their pensions,  show some compassion you selfish dick!

Talleyrand's picture

These entitled people paid into their "public" pensions with funds that were extorted from the non-entitled, the tax slaves. Same is true of the "employers'" contributions - all of it stolen by a gang of thieves writ large. This shit will end - one way or another.

Paul Atreides's picture

Pension dues come right off their is that extorting from the non entitled tax slaves? Please explain I would really like to know....

Talleyrand's picture

We're talking about "public" pensions, government (at some level - city, county, school district, state, etc.) pensions, right?  Think it through. 

Governments have no money other than what they can extract from productive people who just happen to live within their self-proclaimed jurisdictions (jurisdiction = monopoly on violence within a prescribed geographic area). The government employee's salary is a transfer of wealth - at gun point - from producers to the governing/bureaucratic class.

This is usually done under the pretext of providing some sort of government "service" that the individual may not need or want - may never have imagined needing or wanting. At gun point, too! Don't believe me? Just try not paying that portion of your taxes that goes toward an especially repugnant and corrupt government program and see what happens. First, they'll come to take your property. If you defend your property, they'll try to take your liberty (put you in a cage). If you try to defend your liberty, they'll take your life. So, under duress, we pay the taxes that transfer the fruits of our labor to the local, state, federal bureaucrats and elected (not by me!) officials.

So, the government revenue that is the source of both the government employee's salary and his employer's contribution is stolen. This theft is, largely, through taxation, but there is also outright confiscation, debt, and, at the fed level, inflation.

BooMushroom's picture

So you march on Washington! 100,000 schoolteachers, leading three million citizens, the biggest rally in the USA ever! You say "We worked from age 25 to age 55, and it's 30 and OUT! The government MUST pay us to live from 55 to 85, when we do 30 years and out AGAIN!"
And the politicians point out that you didn't contribute 50% of your pay, even combined with the employer contribution, so how could you expect 30 years of work to pay for 30 years of retirement?
And the politicians point out that your healthcare ALONE for 30 years of care is more than your contribution was, never mind the cash payouts.
And the politicians point out that inflation for the last 30 years was 137%(, so your actual contribution, on average, was much less than you think.
And the politicians point out that they cannot bail out the entire generation, cannot bail out the entire country.
"Fuck 'em" say the three million, and burn the shit down. They lead the revolution, and become the new 1%. Of the United States of Zimbabwe. Congratulations.

Thisson's picture

So what?  Nobody cares when a woman gets mad except her husband/boyfriend.

Paul Atreides's picture

We are all husbands, boyfriends, brothers and fathers and we all stand to lose our pensions, wake up.

Calmyourself's picture

Let  them get organized, let them get pissed, let them march..  The key is where do they march?  They can tramp around the magic money tree for al lthe good it will do the money is gone Paul.  Please explain the insurrection these lefties will foment I need a good laugh today..

Paul Atreides's picture

They could easily march on Washington along with the millions of other americans with a lost pension...and what does this have to do with dividing people into political left and right? NOTHING a pension is a pension that divisional tactic may work on MSM but not here.

Bunch of heartless trolls...

fattail's picture

What are they waiting for??  The fiscal and Monetary authorities are stealing their purchasing power they have in their pensions.   Jesus what does it take for these people to get pissed off.  I would prefer to do something to protect my property while I still have it.  once it is gone all you have is an IOU.

Paul Atreides's picture

It's unfortunate most of them are still watching american idol, it is also unfortunate that I am getting so many downvotes for trying to defend the pensions of the working class. At least some of the more compassionate readers on ZH will know where I stand and that is on the front lines protecting the working middle class of which most of my family and friends are.

Vlad Tepid's picture

I think I'm with you here a bit, Paul.  These pensions are benefits of employment.  People who wanted pensions (ie security) looked for places that paid them.  Many private companies had pensions but as fewer companies did that those who were looking at getting pensions found that gov't work was the most secure place to get one.  I find it very difficult to get mad at people who signed a contract, did a job according to that contract, which stipulated X kind of pension, and then have that pension dissolve in front of their eyes (for whatever reason). 

As an aside, most state teacher pensions will let you withdraw early with a "massive" tax penalty.  I suggest taking it out, doing something something with it, and then going for a long rowboat ride across a deep lake.  The tax hit will be far less substantial that the whole fund blowing away.  As someone earlier quoted Jeremy Irons:  "The first person out the door isn't panicking."

prole's picture

ALL pensions are expendable except for police pensions; those will never be touched. Wonder why not?

And PS Paul, I see you are comfortable with the practice of robbing Peter to pay Paul non?

As far as the persons "keeping me safe at night" I would be much safer if they would all quit their job yesterday.

Paul Atreides's picture

Where did I say I am comfortable robbing one pension to pay another? Please quote me I am dying to know...