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Guest Post: That Which Is Unsustainable Will Go Away: Pensions
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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Spoken like a true financial wizzard who's neck would be important of interest to those operating the guillotines. If you made yourself wealthy through financial transactions that moved the fruits of labor from those who were productive, to your own asset accounts, you need to be as nervous as you write. If you produced nothing and spent a lot of time taking from those who produced everything, you need to be nervous.
You created this system selling real estate. You voted in all the contractors, developers, small business owners, entrepreneurs into local councils, city halls, and state legislature. Now you pay for it.
Thanks for laying out the simple reality. However, it should be noted that our entire system is unsustainable. Pensions, SS, health care, gov't at all levels.And what is unsustainable must at some point stop.
Its almost time for the big reset.
Unfortunately Keynesian economics has an annoying persistence...
Unfortunately Keynesian economics has an annoying persistence...
So long as people keep obeying politicians, Keynes will be inflicted upon them.
Public Pensions: The Next Chapter of the Financial Fairy Tale
Cough VAT tax cough...
401K: "Yes, sir you do have some money is just that you can't liquidate."
So what is keeping Israel afloat I wonder???
Oh that's right, only my tax dollars.
I also just love the Kosher Tax we all get to pay on food items. Especially as food prices go higher, this additional amount of money picked from my pocket is doubly appreciated.
I'm thinking people would be so happy and stay this quiet about a tax on food that Islamics or Buddhists foisted on all of us, right? Image that: 2% of the population LEVY-ing a tax on the other 98%.
Does this sound right to you? What's that? You didn't know you pay a Kosher Tax?
Did Wolf Blitzer maybe forget to mention that?
Don't worry, US went bankrupt keeping Germany afloat for decades. Even today, US subsides Germany to the tune of tens of billions just so Germans can drink beer and eat
weinerscnitzel.and demand bank reparations from rest of Europe.
i will gladly pay you SOME Tuesday, for a hamburger today
Sorry, but I still can't believe, people even believe in pensions that are not self financed.
Correct in principal, but author is extremely ignorant about basic financial calculations. Payouts need to be calculated as an annuity over the time span of contributions. The money has been compounding since contributions in year one and not always at 2%.
Thank god someone else caught this.
+1
you act as if this financial system will be here in 10 to 20 years. What you miss and many outisde of ZH miss, is this is ALL going to change. Pensions wont be here, some countries wont be here, its possible a billion people may not be here, big banks may not be here. The next decade is all about collapse, war, and unrest.
So when you say some shit wont be here.. no shit... Add pensions to the list of things that may not be here.. like freedom to assemble, like a free internet, like clean water, like certain fiat currencies, like some countries, like many banks, etc etc
Yes crawldaddy, a lot of things wont be here.
High on my list from 5 years ago was mobility.
Nobody believed me when calling for taking all worldwide diversification back. How to secure something on another
continent when leaving town is for the suicidal minded only?
Remember Casablanca, being struck in between exit and entry visas ?
While putting my mouth where my money was, I got beaten badly and recovered 80% in really peaceful times and being
really early.
Pensions still around is quite a funny twist, I considered
them to be called off any day 20 years ago as a superfluous
subsidy for smelly subjects stuffing up lines in public places.
"The next decade is all about collapse, war, and unrest." Typical ZeroHedge commenter. You're all so positive that a worldwide collapse is imminent that it's become a joke at this point. Just admit it to yourself already, you don't know anything, and cannot predict even a single future event with any level of certainty. Yes, things will change, as change is an inevitable consequence of the passing of time. Darwin said that its not the smartest, or the strongest, or the fastest organism that survives, but the organism that is most adept at responding to a change in their environment. And many years before Darwin, Plato said that he realized he was the smartest man in Athens, only when it became clear to him that he was the only man who was aware of the full depth of his own ignorance.
Calling for collapse is a religion. When Y2K goes by and the aforementioned "ten years to collapse" goes by and NOTHING COLLAPSES, the older quieter predictors quiet down and a new generation of zanies start cooking up their upcoming collapses.
The only thing collapsing is the price of au and it's breaking my heart.
http://www.bloomberg.com/news/2012-05-15/hollande-heads-to-berlin-in-new-plane-after-lightning-strike.html
Hollande Heads to Berlin in New Plane After Lightning Strike
I am telling you its a sign from god lol
I'm shocked at the math skill of this group and especially of this author. "Basic" math is not what you use for pension obligations, it's called "Actuarial" math. Let's start here:
"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."
You're an idiot, Smith. That doesn't even remotely resemble how that calculation works. It's not a perpetutity, it's a life contingent benefit. Dead people don't collect pensions. Here's how it actually looks (only vastly simplified because apparently this group is fucking retarded):
Using the 2008 VBT MSN 100RR table, and assuming a discount rate of 4% (nobody buys treasuries, liquidity isn't an issue for pension funds):
Sum from age of retired (let's assume 60) to 115 (table max): vinpxX with X being the annual benefit. This is a very basic actuarial present value calculation (no, it's not the same as a "present value" you learned when you took finance 101, but it's similar). This equals $1,859,569. That means, in order to fund the ENTIRE benefit for this one individual, you need to have just south of $2 million on hand.
This author is a goddamn idiot, and all of you who didn't catch this ridiculously stupid error are idiots, too. Go back to the Huffington Post where you belong.
Your post reminds me of a boss who once asked me if I would rather work with a "nice/polite" incompetent co worker or a "competent PRICK".... you MS, fall into the "competent PRICK" category....... (needless to say I choose the competent PRICK) lol
Dead people wives collect those bene's and sometimes those wives are VERY young, but not quite statutory...
Changing it from a $6mm liability per employee to a $2mm liability per employee doesn't change the result from an insolvent plan to a solvent one. Further, all of these plans are assuming a rate of return north of 8% and that is just not realistic in a ZIRP world.
I was wondering when someone would point this out. However, a 2% return against 10-20% inflation will not maintain or sustain living standards.
http://en.wikipedia.org/wiki/Herbert_Stein
Bottom line, once the suffering, overburdened taxpayers finally get away from their former misplaced compassion and figure out that these outrageously generous pensions are nothing but taxpayer ripoffs they will easily and gleefully install new politicians to rescind them. Easy enough. Entitled government employees running around screaming will actually be satisfying entertainment for most to watch on the evening news.
In just three, short, declarative sentences, you said it all. You must have learned how to read and write in a Kansas schoolhouse circa 1901.
so, what happened to all that money that was deducted from people's paychecks & was paid into those pension plans ? did their contributions just 'vaporize' too ? did it just go up to 'money heaven' ? or, was it looted by Wall St. ? someone tell me, please ?! where did my 30 years of contributions go to ? would have been great if i'd known 30 years ago that all one had to do was put their savings into gold & silver, hide it & not play this parasitic, government/bankster game . fuckers.... never ever again will i trust government & banks. this is a wonderful day to post my signature posting :
My Grandma Jo (born 1915, god rest her soul) always told us kids : Never trust the government & do not go into the stock market.
i paid her no mind, but, i'm listening now, Grandma, i'm listening now.
You can opt to get your defined benefit in one lump sum at Ford.
Did you ever wonder who paid for the yachts, jet aircraft, granite counters at the broker's office, the oppulant living style of non-producers and so forth? Your ass funded that.
not just pension funds - but every bit of retirment funds, mutal funds ... all of it. the entire "retirement finance" industry was always a giant scam. it worked - so long as the population was growing, incomes were rising, and interest rates were falling. now, we're about to find out that all those "assets" only existed temporarily in the form of an accounting mirage. at some point, the president of the united states is going to be forced to come out and explain to people that all those assets they thought they were going to retire with are "poof, gone" - Sorry folks, you got tricked fair and square and now its time to move on.
Always was a scam.
The 401k schemes are really no better with all the hidden loads
and fees.Not that anyone will every see "their" fund starting in
the next cuouple years,cortesey of rapacious Govt.'s.
I vested out on mine in 07.Best thing I have ever done.
If you can vest out,do it.Even a 30% tax charge now ,will be better
than 100% later.
Anyone born after 1982 will now have to contribute to 401k. Everyone else, sorry about your luck.
RIP Leo.
I agree with mikesswim. You have to do the actuarial math.
So the real question is: how many employees will go on retirement in let's say the next 20 years and how much money has been set aside in the pension funds ? That gives you the real picture.
My guess is that your government pensions will be substantially underfunded.
Over here in the Netherlands some pension funds already had to cut back on the payout (think 100% to 95% or 90%) or, in milder cases, leave out the annual inflation correction in order to cover losses on investments and to take account of the low returns on government notes due to the well known ECB policies. But most pension funds are still in the 95% to 140% coverage ratio territory.
Oh yes, somebody remarked that liquidity is not an issue for pension funds. I wish it were true. It is true during a buildup phase when you have a lot more people contributing than people getting pensions (as for the babyboom generation until around now). But as the babyboom generation starts getting their pensions and less new employees contribute to the pension fund, the picture become quite different and the pension funds will need substantial liquidity to pay out next month's pensions (and the month thereafter etc.).
But apart from the defined benefit system (where at least some capital is supposed to have been built up), a lot of European countries will be a lot worse off with their pay-as-you-go pension systems: a whole babyboom generation with good salaries has to be supported by a much smaller generation in their 30s to 50s.
Pensions have paid their members with market returns.
If the markets dive again and stay down, pensions won't last.
And the long term elliott wave view into the Dow does not look good.
http://bullandbearmash.com/chart/dow-jones-hourly-14-2012/
gotta feel for the public employee pig , who is 15 years into the pyramid scam......close enough to see the light but still too far away to start banking it......the 1st guy who gets the pension door shut in his face is going to go POSTAL !
Exactly, my point of my previous post. If California defaults on its citizens it's going to be a shit storm here. If you default on a 25 year old, I'd bet the outcry and violence would be less than defaulting on someone who is 55 with zero savings.
All pensions will be paid in full and adjusted to the official inflation rate of 2% p.a.
Too bad the devaluation of currency is putting unoffical inflation at 25% to 50% p.a. depending on how desperate Ben Bernanke, the greatest scholar of the Great and the Greatest Depression who ever lived is on a daily basis.
So government pensions will be gone in a decade. Well, private pensions will be gone in a couple of decades--even if Ron Paul becomes President. Or maybe especially if Ron Paul becomes President.
The smart are taking their private pensions as lump sums when offered.
o.m.g. ..... it was all a scam, an illusion ... the whole country bought into it. all i know is that my parents & grandparents never put money into anything to do with the stock market & they were just fine in retirement. they saved their own money in a savings account & were paid interest on that savings. wait til this goes down, all trust is gone.
Isn't it great that we live in a fraudulent setup that causes 2 percent. How about we focus on the cause and not the effect? Same with medicare.
We're not in a 'new normal', we're in a further state of a breakdown crisis.
Here's a hint, if you just use 'numbers' to obscure the obvious, you find out that as things continue to break down, NONE OF THE NUMBERS work.
So are we going to trash everything based on numbers? Or deal with the PRESSURE causing these numbers?
Fraud, lack of physical economic focus, abandoning of science and progress, and a regulatory framework sans Glass-Steagall.
It is useless to pontificate strategies within the framework of fraud, you must end the fraud instead. Attacking pensions, medicare, etc is useless and will achieve nothing especially with the fraud ongoing. It's the fraud that is causing ALL of this.
Of course if the fraud continues these entities will collapse, or need a 'bailout' hooking more people into the ponzi. But the correct way to go about this is to STOP THE FRAUD.
Glass-Steagall
Why does anyone believe they are entitled to get paid for not working? Any voluntary contibution to a 'retirement program' is like going boating with your ingots. It's not going to work out well.
Those that get pensions have worked. Pensions is part of the renumeration for a life of work.
yeah, yeah, yeah.....just send your money to those fucking thieves on Wall Street so they can rape you with fees and scams. You know, if it wasn't for those fucking thieves, this blog wouldn't even exist. YOU ARE NOT going to make money like your bow-legged grandpappy did in stocks. Why? Have you ever done a calculation as to what the DOW would have to be when you retire relative to what is was for him? 40 years ago the DOW was 600. You believe in DOW 100k?? That's what it will take to match grandpa. On top of that, dividends are shrinking, and boomers are going to srart taking money out of stocks en mass to fund their extravagant lifestyles. The new retirement plan is working until you drop. Get used to it.
Ah, so, capitalism cannot provide defined benefit pensions to workers. The article proved as much.
The choice is therefore clear either accept no pension and keep capitalism; or, dump capitalism and provide adequate pensions.
I choose pensions.
Wow. You got a 2 for 1 of logical fallacies in that sentence.
Capitalism is a economic system not a political one. We don't need Capitalism to give pensions. We need a political system that allows Capitalism to gernaete wealth that can be harnesed by the state to pay for commitments like child care, health, pensions and the rest.
Critical thinking isn't your strength?
Pensions cannot be based on interest rates. It is a social commitment. That high interest rates make paying for that cheaper at times in nice but not the core of it. Those in the workforce today will support those that have contributed already is the contract. As important as the commitment for those in the workforce today to take care of all the children. Over time as life expectancy changes so does the nature of the contract but the fundamental deal is the same.
The fundamental untenable position is that we can’t have a society that is equitable if we continue to allow 90% of the wealth to be held by 10% of the people.
No, it's not a contract. It's not a voluntary agreement. It's coercion at gunpoint and thievery.
Now it is fashionable to rob Peter to pay Paul, and Doug.
And Paul and Doug are here to explain all the benefits of this wonderful system.
Just like you said Thisson, the conversation is a little ~ awkward considering Paul and Doug are pointing guns in my face, during the entire (fireside) chat.
Where did this crazy idea come that you can keep everything you can get your hands on and the reast of us should just pull up with it. Property rights are a contrct between people in a society. I agree that is your house if you agree this is mine- and we will help each otehr to stop anyone else who tries to take our houses. This is all well and good so long as the contract is fair to all parties. BUT when it goes so far out of wack as it is today and was in the 20's two things can happen Option A: People rise up and take back all the wealth (See Russian cerca 1917 and almost America 1931). Option B: Markets crash do to too much wealth in hands of too few so flow stops and the weath is destroyed by market forces.
So get a feel for economics and forget greed is good bull shit. Greed is not good. Not even for the greedy. "Guns Pointing in my face" is from some bizare idea that you are apart from the society where you made the money. As a member of that society you have agreed to follow the rules you and your fellow members make and agree to by majority. So when the group makes a rule that takes some of the weath away from you as a tax it is not a robbery it is fullfilling your commitments within the group who provided you with the education, roads, markets etc without which you would not have made a red cent.
I was just offered a 401k via my employer and I completely turned it down.
Why put $25-$35 into my 401k per paycheck and let John Hancock gamble with my hard-earned cash when I can by an ounce of silver for the same amount per paycheck and know it's in my safe?
$100k pension in California? You're doing it wrong, come to Massachusetts:
http://ftpcontent.worldnow.com/wfxt/pdf/State-Pensions-Over-80000.pdf
Here, the expected ROI from pensions is 8.25%.
Old timers contribute as low as 9% and newer employees as much as 12%
One problem (well many):
http://www.mapension.com/publications/
The fund is performing just barely over 3%.
Sorry Hugh, you don't know what you're talking about. The State will just take more from us that have to pay for this Legislatively guaranteed larceny, otherwise it would cost Legislators votes.
The birth of a pension [aka a ponzi scheme]:
http://caduceusx.com/sulgnavon/?p=10
OK, CS got the math wrong, but he is correct in principle.
When CAT and IBM other successful and rich corporations terminated their defined benefit pension plans 2 years ago, that got my attention. What they did was subsititute matching contributions to 401-k plans for the defined benefit.
What these companies eliminated was the responsibility to manage the money in the 401-k. Investment decisions are made by the account holder. So, the company matches and has no further liability.
Additionally, most companies realize that many workers have no spare change to contribute to a 401-k. So, zero contribution by the worker means zero match by the employer.
You can bet that TPTB are salivating over the $4T in 401Ks and IRAs. I predict within a couple of years all these accounts will be converted to annuities- backed by worthless Treasury Bills (Bernanke will get a forced customer).
Our only hope will be to suffer a physical problem that will be sufficient to cause the OC tribunal to issue us a FREE Kevorkian kit.
is that Mal-i-boo-hoo or Mal-i-boo-yah?
We 'borrowed' 1/2 of our current Thrift Savings Plan(TSP) at a 1.6% interest rate, and then purchased physical silver and gold for safekeeping. If we do lose value in our TSP, at least we have something tangible and real left over in our hands.
On the contary - we are saved as the government(s) figure out what those nice, kind and clever Argentinians do to their own pensioners...
Take the pension money as an investment which will give a double return once its given back 100 years later...
/sarc=OFF
On the contary - we are saved as the government(s) figure out what those nice, kind and clever Argentinians do to their own pensioners...
Take the pension money as an investment which will give a double return once its given back 100 years later...
/sarc=OFF
I just want mine to be there til I quit my job next year
not counting on it :\
To all you that "think" you have a safe pension, MF Global has already proven that MUNNY in ANY account is NOT safe!
That Which Is Unsustainable Will Go Away: Globalists
Wake up America, I don't care what kind of a pension it is, well funded, successfully invested, poorly funded....etc, no math involved here just simple arithmetic, they will all implode in time due to an accelerating decreasing asset base or payout in Zimbabwe Dollars if somehow the dream of reflation that many talk about is realized which I think will implode many of them anyway due to the bonds heading towards zero at a high speed due to higher rates (pls see Greece, Italy et al for reference). .
With the ZIRP policy currently in place (please see Japan for the last 20 years), even a pidly $30K / year pension requires a minimum of $3M dollars in the pension account at retirement date which most pension plans don't meet at the moment. Given the demographics dynamics (more pensioners, less growth in the plan), it is just a question of how many years they can be sustained (ponzi style or doggie style as one of my friends suggested) with current payouts, as they will all implode in due time. Another unintended consequence of the policies the Maestro put in place and embraced by the current idiots in charge.
If however somehow rates increase and a big reflation occurs with the DOW at 1,000,000, the government debt will implode as well as every pension with a large bond component in its plan which is most of them, will also implode so even the reflation may not work for many plans and for those plans that work you'll get your $30 K a year to pay for your food for 1 month.
I would also suggest that the lucky seniors with real assets will eat their assets so to speak exacerbating asset deflation as the "reflation" occurs if it occurs. Pension Funds are doomed reflation or not for the most part........ except the few wisely invested in stocks,gold, energy, foodstuffs and no bonds in the reflation scenario.
In the deflation scenario , which we are living right they will all implode at some point in time.
We're in this system. What else can we do? I'm bothered with the fact that inflation devalues whatever our retirees will be receiving. At 2% inflation rate every year, how much compounded loss will this total to? Putting the money in the bank will do no good either; average savings account rate is just about 1%.
Best regards,
Belinda | www.Nextpay.com