Telling the truth has never been popular with politicians. They believe that it would prevent them from getting elected. Making new promises that will never be kept, and covering up the unaffordability of old promises…is how politicians get elected. The pattern is well worn and predictable: they use promises to ‘bribe’ people to vote for them, then they fail to deliver, then they blame someone else, then they change the subject…rinse and repeat…meanwhile the really important stuff get’s brushed under the carpet or kicked down the road…choose your own metaphor.
There are few greater examples of this than the approaching crisis in pensions: A tale that has been decades in the telling, the climax will be a calamity that the corporate media doesn't want to look at, and politicians never mention or acknowledge. Short of being strapped to a metal chair and entertained with an electrical massage they never will…which is a nice thought but regrettably still illegal, at least on the mainland.
But of course, eventually the truth will out. Here are a few specifics that neither our elected officials, nor their ‘licensed’ academics, nor their pet scribblers in media outlets like the NYT, the WaPo, or the FT have been terribly keen on admitting:
1. At the Federal level:
From the Social Security and Medicare Board of Trustees combined summary for 2016:
a) Social Security:
“After 2019, interest income and redemption of trust fund asset reserves from the General Fund of the Treasury will provide the resources needed to offset Social Security’s annual deficits until 2034, when the reserves will be depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2090. The ratio of reserves to one year’s projected cost (the combined trust fund ratio) peaked in 2008, declined through 2015, and is expected to decline steadily until the trust funds are depleted in 2034”
“Notwithstanding the assumption of a substantial slowdown of per capita health expenditure growth, the projections indicate that Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation. Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers”
c) From the Conclusion:
“Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare. Lawmakers should address these financial challenges as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare”
Translation – they’re going bust – when President Trump says he’s not touching entitlements he’s either a) lying or b) leaving the problem for the next schlub, almost certainly the latter.
2. At the state and municipal level:
a) From the ‘Madison Record’, re Illinois:
‘The state’s mountain of retirement-related debt is $267 billion, up from $203 billion in 2010, according to new analysis from the Illinois Policy Institute.
Researchers for the institute found that if broken down per household, the debt owed would amount to $56,000 per family – what could essentially amount to a year’s net income for future taxes just to pay off old state and local retirement debts…
“If this problem is not addressed municipalities in Illinois will likely go bankrupt and put the state itself at risk,” Michael Lucci, vice president of policy for the institute, told the Record…
The state’s pension debt has been growing in recent years, having gotten profoundly worse during last decade’s recession. “The state makes payments on the debt every year, but it’s less than the interest, which grows the debt,” Lucci said. “Even if there was no recession of 2007, we would not be as far behind, but we would still be in trouble.”’
b) From Bloomberg re California:
“California cities and counties will see their required contributions to the largest U.S. pension fund almost double in five years, according to an analysis by the California Policy Center…
In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023…
Barring any changes to pensions, “several California cities and counties will find themselves forced to slash other spending,” the group wrote in its report. “The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system.”
c) See…the Dallas Fire Department who have started cashing-in en masse to avoid being ‘disappointed’ later, see the Teamsters, see a growing number of other cases, which all send a clear message to anyone not brain-dead or in ‘denial’…we are heading for a municipal pensions crisis…which will be so contagious it’ll make bird flu look like a runny nose.
3. At the corporate level
From a report by 'Pensions & Investments' on 17th April 2017, entitled 'Low discount rates take toll on largest corporate DB plans'
“The aggregate funding deficit for P&I's universe rose to $258 billion as of Dec. 31, up 5.3% from a deficit of $245 billion the previous year…
“The big story on DB plan funding is how little it's recovered from the big downturn in the recession,” said Alan Glickstein, Dallas-based senior retirement consultant at Willis Towers Watson PLC.
The average funding ratio for P&I's universe was 108.6% at the end of 2007, which plunged to 79.1% at the end of 2008 at the peak of the financial crisis…” (MarkGB: it was 84.5% in 2016, down from 85.1% in 2014)
The top performer is NextEra Energy at 147.6% funded; JP Morgan is fourth at 116.8%. The bottom five should give you pause for thought: 96 – General Electric at 64.2%, 97 – Exxon Mobil at 64.1%, 98 – United Continental Holdings at 63.9%, 99 – American Airlines at 58.1%, 100 – Delta Airlines at 49.4%
Translation – after 8 years of so-called ‘recovery’ the aggregate is still 15% short of par, and falling. Some of the worst performers are systemically crucial: E.G. Exxon Mobil is amongst the 10 largest companies in the world by revenue and market cap, and employs 75,000 people.
So what happens next?
“Compound interest is the eighth wonder of the world. He who understands it, earns it ...he who doesn't ... pays it.” - Albert Einstein
The crisis we are heading for is not a ‘theoretical’ possibility or a ‘bee in someone’s bonnet’. It’s a matter of arithmetic. You might be forgiven for thinking that politicians cannot add, subtract, multiply or divide…you’d be wrong. Here is Treasury Secretary, Steve Mnuchin being interviewed by the FT a few days ago on 17th April, using compounding as a means to ‘spin a line’. When asked where he was going to get his trillion dollars from to pay for tax cuts now that Obamacare reform is off the table, he said this:
“Economic growth is our number one priority. The difference between 1.8 per cent GDP and 3 per cent GDP compounding is staggering”
How much more staggering then, is the difference between the standard pension fund assumption of 8% return, and the far more ‘conservative’ expectation of 5%?
Let’s assume for one moment, by some miracle, that the system doesn’t collapse but somehow muddles through. On that basis, let’s do some simple math that would undoubtedly make sense to Janet Yellen, even although the idea to act on it clearly wouldn’t:
A pension pot of $10 billion dollars compounded at 8% for 8 years is $18.5 billion, growth of 85%. The same pot, compounded at 5% produces a fund of $14.8 billion, growth of 48%.
To put this into ‘personal’ terms that Senators, Congressmen and Central Bankers wouldn’t care to acknowledge…since their pensions are government guaranteed and totally gold plated…someone expecting to have amassed a pension of pot of $1.85m at their retirement in 8 years time, would instead have achieved $1.48m, a shortfall of 20% on what they had been led to expect when they signed on. Have you ever had a 20% pay cut on top of an already reduced income? Even if these folks are paragons of sanguinity, they are not going to be rushing out to do their bit for ‘aggregate demand’, are they?
You may be wondering why I chose 8 years for my example. It’s because this type of dynamic has already been in effect for the past 8 years. As we’ve already discussed, these funds are already under-weight, or in the case of places like Illinois, cadaverous.
For more on this I recommend you visit Grant Williams and Raoul Pal’s new podcast: ‘Adventures in Finance’, which is freely available on iTunes. Episode 11: ‘Broken Promises’ includes analysis from both of the guys as well as clips from an interview they did with Danielle DiMartino Booth. None of these folks have a problem telling the truth, and as is the case with pretty much everything that Grant Williams does, the entire set-up is very informative and high quality stuff.
Despite the dark pleasure it would give me to label our political and economic elites: ‘as thick as two short planks’…the truth is that many of them are not. It’s far worse than that I’m afraid. They are ‘liars’. The politicians, central bankers, economists and journalists who understand the situation we face, but do nothing to address it, are discrediting the positions of responsibility that they hold…by lying through omission, by obfuscation, through denial, by issuing false and/or misleading information, and via the good old fashioned ‘art’ of bull$hitting straight to camera.
Finally, and on a slightly lighter note, for anyone reading this who has been brainwashed with the idea that any theory or observation that can’t be reduced to an equation, is not real ‘economics’…here is an equation for you (but don’t expect your professor to like it):
(P + G) – M = I
Where ‘P’ is pensions, ‘G’ is ‘government intervention’, ‘M’ is media oversight, and ‘I’ is insolvency. Throughout recorded history, this equation has never failed to balance eventually…ask any legionnaire.