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Welcome To The Third World, Part 21: This Pension Thing Is About To Get Real

“The problem with police officers and firefighters isn’t a public-sector problem; it isn’t a problem with government; it’s a problem with the entire society. It’s what happened on Wall Street in the run-up to the subprime crisis. It’s a problem of people taking what they can, just because they can, without regard to the larger social consequences. It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could, without thinking about the long-term consequences.”
Michael Lewis, Boomerang: Travels in the New Third World

Though it may not be instantly clear, in the above quote Michael Lewis is talking about public sector pensions and how over the course of several decades, mayors and governors across the US have colluded with police, firefighter and teachers unions to promise outrageously-generous benefits and then failed to put aside enough money to pay for them.

As a consequence two things are happening. In dozens if not hundreds of cities and towns, services are being cut to the bone to pay for ballooning pension benefits, and – when even these cuts prove inadequate – pensions are being drastically reduced.

Which in turn means two other things. First, life isn’t nearly as easy or pleasant as it used to be in a lot of places, as library hours are cut, trash piles up and police response times lengthen. And second, hundreds of thousands of public sector workers who expected to retire comfortably are staring at major lifestyle shrinkage.

To which a reasonable person might yawn and say, sure the numbers look grim. But they’ve looked that way for a long time and outside of Chicago, American life is still pretty good by Greek, Venezuelan or Russian standards. So go away until something tangible actually happens.

Point taken. But this might be that time. Beginning with Dallas, where the city is actually taking money back from plan recipients…

Dallas Police and Fire pension members may have to pay back funds

The city has agreed to put in an additional billion dollars over 30 years, but they’re proposing a series of bitter pills to make up the rest of the nearly $4 billion shortfall.

The bitterest pill: A proposal to take back all of the interest police and firefighters earned on Deferred Option Retirement accounts, or DROP. That would amount to an additional billion dollars saved. The city is calling it an “equity adjustment.” Retirees call it an illegal “claw back.”

The city is also seeking to “equity adjustment” on cost of living increases. The city says that pension checks are about 20 percent higher than they would have been if increases had been tied to inflation.

The city’s proposing to freeze cost of living increases until it catches up to the inflation index.

…and moving on to Kentucky, where if a funding level of 16% for the state employees fund isn’t an imminent crisis, then nothing is:

Things are if anything even bleaker in the private sector:

Multiemployer Pension Plans In Crisis: Troubled Plans Need Public Resources To Survive

(Forbes) – There is an emerging financial crisis among multiemployer pension plans in America. These plans are a subset of private sector defined benefit pensions covering 10 million workers and retirees. Most critical are the projected bankruptcies of the Teamsters Central States and the United Mineworkers of America plans, making front page news for the last several months.

Multiemployer plans are insured by the US Federal Government’s Pension Benefit Guaranty Corporation (PBGC). But PBGC is itself in danger of going broke. Set up in 1974 to “encourage the continuation and maintenance of voluntary private defined benefit pension plans [and] provide timely and uninterrupted payment of pension benefits,” the plan uses the ultimate backstop to provide those guarantees: the U.S. taxpayer.

In the fiscal year 2015, PBGC paid out nearly $6 billion in benefits to participants of failed pension plans, increasing the agency’s deficit to $76 billion. The PBGC now has $164 billion in obligations and just $88 billion in assets.

When this was reported to Congress, it passed the Kline-Miller Multiemployer Pension Reform Act of 2014, allowing pension plans to ask permission to cut benefits to its plan participants. Prior to 2014 those plans weren’t allowed to do so. But actuaries looking into the PBGC reported that unless something was done, the PBFC itself would be broke in less than a decade.

The door is now open for other pension plans facing similar shortfalls to apply for permission to cut benefits to their participants. The ripple effect could be enormous: PBGC is the ultimate backstop for some 22,000 single-employer pension plans and another 1,400 multi-employer pension plans covering 40 million participants.

Some other relevant headlines:

CalPERS Cuts Pension Benefits For First Time

Ohio workers face precedent-setting pension and retiree health cuts

Teamsters’ Pension Plans Seek Massive Cuts to Retirees to Stay Solvent

Chicago’s massive unfunded pension deficit could swallow the city

And this, remember, is happening at the tail end of a 30-year bull market in bonds and a 7-year bull market in stocks, which took the main asset classes held by pension funds to record valuation levels. So the rubber truly meets the road during the next recession when stocks will, if history is a reliable guide, drop by 20% or more. The current gaps in thousands of pension funds will become gaping holes, and the experience of Teamsters and Dallas cops will be replicated across the country.

Click here for the previous posts in this series

23 thoughts on "Welcome To The Third World, Part 21: This Pension Thing Is About To Get Real"

  1. If you haven’t been prepping for the last five years you’re probably already too late.
    Still, if you start prepping now you’ll last awhile before you starve or before someone
    takes your stuff.

  2. The major problem with these pension plans is that they’re not making the employee contribute enough to their own retirement. I personally know of a mid sized city that makes the employees contribute 10% of their earnings which are then compounded at a generous 6% a year (which didn’t seem so generous when that was considered a paltry rate back when things were “good” in the late 1980’s, early 1990’s). The city contributes nothing until the employee retires where they then (supposedly) match the employees contribution “dollar for dollar” and buy an annuity that pays the employee the agreed to 60% of their highest wage with COLA’s every other year for the rest of their lives. It’s worked wonderfully (at least up to this point). As this retirement system has been around since before WWII and constantly runs their program IN THE BLACK and has never had any shortages, problems etc etc. Anyway, it seems to me the retirement programs that are in trouble are that way because the employees aren’t paying in enough to the system AND/OR they’ve (pension managers) made some horrendous investment decisions and accompanying risks not to mention the increasing risk in the US Bond markets and an inadequate return on investment dollars in that market fueling even more problems down the road.

      1. Sure, it’s Tacoma Washington and their highly regarded retirement system. Google it. My late step-father was a 30+ year employee and was in their retirement system the rest of his long life. So that’s the basis of my familiarity with it…

  3. The biggest issue with all of this is the corruption of the monetary system. The country was better off when the currency was nominally backed by silver and gold. But the elites went to a paper money regimen to benefit themselves at everyone’s expense. The other scary thing every thing we do is plugged into the stock market which has been declining in number of companies and questionable returns. Even state pensions.

  4. which means soaring taxes,soaring fees,forcing prices on everything to well …soar.official inflation rate is (lol)2%(lol),less than half pay any taxes at all,1/3 of population doesn’t work at all so deficit dept chart goes straight up vertically

  5. The ax-to-root solution is to defund Prog Ed in K-12, university, law-journalism-film-LEO-military schools; replacing the “morals are relative (tee hee, slaves! pay more taxes!)” and anti-republic pedagogy with Western Enlightenment, served neat. Government pensions were, are and will be insanely slave-making of citizens until sanity is restored in every department of the American mind. The only way to do this is to defund Prog Ed and replace it with Western Enlightenment. The greatest thing about this idea, is it saves money! Logic Ed costs less!

    Fourth of July 2016 Speech (Proposed) Lincoln-like, if you will… Lyceum, the pattern.

    1. I profited 104,000 thousand dollars last year by doing an on-line job from my house a­n­d I was able to do it by work­ing part-time f­­o­­r 3 or sometimes more h /daily. I followed work opportunity I found on-line and I am so excited that i made so much money. It’s really newbie-friendly a­n­d I’m so happy that I found out about this. Check out what I did… http://statictab.com/owgxpdb

  6. Two thought immediately came to mind as I read this. First will be the various government officials sitting before a microphone swearing that no one could have seen this coming. Second will be an official effort to blame the Russians for this mess.
    Happy New Year!

    1. I think people have been hoping things would just would work out ever since the dot com crash, and the numbers just keep getting worse.

      Because the monetary obligations are so massive, I think the only way things get better painlessly is if someone were to bioengineer a virus that kills people at the age of 62, and then let it loose upon the world. This witches brew requires massive entitlement cuts, massive debt/asset write-offs, and/or massive population cuts.

      1. Killing people with a virus wouldn’t exactly be “painless,” ey, Mike?

        None of those things will happen so there will be great pain regardless.

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