For months, if not years, we’ve warned that conflicted politicians and union bosses pursue a perverse set of goals in their management of pension funds, most of which have nothing to do with the application of sound financial principles. Here’s how we summarized the situation back in the summer (see “An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion“):
Defined Benefit Pension Plans are, in many cases, a ponzi scheme. Current assets are used to pay current claims in full in spite of insufficient funding to pay future liabilities… classic Ponzi. But unlike wall street and corporate ponzi schemes no one goes to jail here because the establishment is complicit. Everyone from government officials to union bosses are incentivized to maintain the status quo…public employees get to sleep better at night thinking they have a “retirement plan,” public legislators get to be re-elected by union membership while pretending their states are solvent and union bosses get to keep their jobs while hiding the truth from employees.
Then, just a couple of weeks ago, CalPERS confirmed our fears when they chose to lower their discount rate by only 50bps to 7%, nearly a full point above their 6.2% projected annual returns over the next decade. Even more startling was the open admission from Richard Costigan, chairman of the CalPERS finance committee, that the decision was motivated by the board’s desire to maintain the ponzi, saying: “this is just a start…municipalities and other government agencies need some breathing room before they absorb the impact.” Continue reading »
The government raided the state pension fund. And now what?
When the Rajoy administration took the reins of power at the end of 2011, at the height of Spain’s debt crisis, the country’s Social Security fund had a surplus of over €65 billion, the result of a gradual accumulation of funds since the end of the 1990s. That money was supposed to serve as a nationwide nest egg to help cover the growing needs of Spain’s burgeoning ranks of pensioners. Instead, it has been used by the government to fill some of its own massive fiscal gaps, with the result that now, five years later, the total surplus has shrunk by 75%, to €15 billion.
Things have gotten so bad that in October the Spanish government was forced to admit to the European Commission that by the end of next year the surplus will have become a deficit, of around €2.6 billion. In other words, a fund that took 16 years to build up will have been plundered dry in less than half that time, at an average rate of around €11 billion a year. Continue reading »
For millions of public sector workers in the U.S., state-run pension funds are the only chance left for a comfortable retirement. In the hopes of providing a stable future for their families, an entire generation was duped into putting decades of their earnings into these supposedly ‘risk-free’ investments. Unfortunately, those who have entrusted the government to manage their life savings may end up destitute as a result.
Budgetary shortfalls that have plagued Detroit for years are now spreading to other municipalities. Since 2008, six local governments have been forced to renegotiate their debts in bankruptcy court, with many others on the same trajectory. The scale of the problem has been repeatedly understated by the media, but across the nation, a somber reality is beginning to set in. Continue reading »
This article was originally published at Birch Gold Group
Of all the troubling economic issues in the United States today, the current crisis erupting from mismanaged public pension programs stands out as a uniquely menacing threat to Americans’ financial security. Five major cities have filed bankruptcy over pension woes since 2008, and dozens more are teetering on the brink.
Faced with massive budget shortfalls, a rapidly increasing number of beneficiaries, and stagnant rates of return, federal and state pension funds around the country are near their tipping point.
It’s safe to say this pension fund will never make it, for numerous reasons. Benefit haircuts are coming.For some reason, Fort Wort escaped the scrutiny of Dallas. I suspect that will change soon.
* * *
The Dallas Police and Fire Pension plan is severely underfunded. Not even a $1.1 billion taxpayer bailout the plan officials request will make the plan whole.
Discussion of a possible freeze in lump sum payments led to a run on withdrawals. The board still has not suspended lump sum payouts. Continue reading »
For the tiny little town of Loyalton, California, with a population of only 700, a failure of city council members to understand the difference between the calculation a regular everyday pension liability and a “termination liability” has left 4 residents at risk of losing their pensions from Calpers. According to the New York Times, the town of Loyalton decided to drop out of Calpers back in 2012 in order to save some money but what they got instead was a $1.6mm bill which was more than their annual budget.
For those who aren’t familiar with pension accounting, we can shed some light on the issue faced by Loyalton. There are two different ways to calculate the present value of pension liabilities. One methodology applies to “solvent”, fully-functioning pension funds (we call this the “Ponzi Methodology”) and the other applies to pensions that are being terminated (we call this one “Reality”).
Familiar scenes returned to Athens today, when Greek police fired teargas at a demonstration of pensioners protesting over cutbacks to their benefits, part of an austerity drive dictated by the Troika (or was it Quadriga). Between 1,500 and 2,0000 pensioners attempted to march to Prime Minister Alexis Tsipras’s office, however they were blocked when riot police blocked their path, intercepting them with pepper spray and tear gas.
Greek pensioners called on the nation to rise against the government’s harsh austerity policy as they attempted to break through a cordon of police buses and special operations troops barring their way to the prime minister’s residence.
— chill (@chiIIinois) October 2, 2016
While we have often documented the dramatic underperformance by the hedge fund industry over the past decade courtesy of a centrally-planned market in which it no longer pays to “hedge”, culminating with countless hedge fund closures and substantial redemptions (mostly by now redundant Fund of Funds managers), today we learn that “vanilla” asset managers were also hurt over the past year in which the S&P went nowhere, and not just in Japan where the gargantuan, $1.4 trillion GPIF recently suffered major losses, but in the US as well.
Case in point: Calpers, the largest U.S. public pension fund which as the WSJ reports posted its lowest annual gain since the last financial crisis due to heavy losses in stocks.
The California Public Employees’ Retirement System, or Calpers, said it earned 0.6% on its investments for the fiscal year ended June 30, according to a Monday news release, barely turning a profit fro the full year. The last time Calpers lost money was during fiscal 2009 when the fund’s holdings fell 24.8%.
* * *
The pending Brexit has, not surprisingly, caused a shake-up in the investment world, particularly in the UK. Of particular note is that, recently, asset management firms in Britain began refusing their clients the right to cash out of their mutual funds. Of the £35 billion invested in such funds, just under £20 billion has been affected. Continue reading »
Benefiting hedge funds and banks that had front-run the fund.
Abenomics is facing elections on July 10 for the less powerful Upper House.
But Abenomics hasn’t fared very well. It engaged in the biggest (relative to the economy) money-printing and bond buying extravaganza the world has ever seen. The securities the Bank of Japan has bought, now at ¥426 trillion ($4.15 trillion), amount to 85% of GDP. About $8 trillion in Japanese Government Bonds sport negative yields. Even the 30-year yield is just about zero. The JGB market, once the second largest government bond market in the world, has frozen. The BOJ’s primary dealers are in revolt. Some have already pulled out. Continue reading »
When it comes to the Fed, Congress is mired in hypocrisy. The anti-regulation, de-regulation crowd on Capitol Hill shuts its mouth when it comes to the most powerful regulators of all – you and the Federal Reserve. Meanwhile, Congress goes along with the out-of-control, private government of the Fed—unaccountable to the national legislature. Moreover, your massive monetary injections scarcely led to any jobs on the ground, other than stock and bond processors.
If I had to choose one single institution and one single individual most responsible for the weak, putrid and unbelievably corrupt oligarch-controlled U.S. economy, I would choose the Federal Reserve and Ben Bernanke. Continue reading »
There are limits on what the Fed can do when this bubble bursts, as it inevitably will, as surely as night follows day.
It’s no secret that virtually every pension fund is dead man walking, doomed by central banks’ imposition of low yields on safe investments, i.e. Zero Interest Rate Policy (ZIRP).
Given that both The Economist and The Wall Street Journal have covered the impossibility of pension funds achieving their expected returns, this reality cannot be a surprise to anyone in a leadership role.
Public Pension Funds Roll Back Return Targets:Few managers count on returns of 8%-plus a year anymore; governments scramble to make up funding
Here’s problem #1 in a nutshell: the average public pension fund still expects to earn an average annual return of 7.69%, year after year, decade after decade. Continue reading »
On December 10, 2014 the city of Detroit exited bankruptcy.
It was the largest municipal bankruptcy in US history.
The bondholders were totally screwed in favor of the pensioners (not that I generally like bondholders).
Regardless, everything was supposed to be fixed. It wasn’t.
Continue reading »
407,000 private sector workers are about to lose most of their pensions.
I first wrote about this on April 21, in One of Nation’s Largest Pension Funds (Truckers) Will Reduce Benefits or Go Broke by 2025.
The Central States Pension Fund, which handles the retirement benefits for current and former Teamster union truck drivers across various states applied for reductions under that law.
Currently the plan pays out $3.46 in pension benefits for every $1 it receives from employers. That’s a drain of $2 billion annually.
The plan filed for 60% cuts in pensions. The Treasury Department has the final say. The verdict came in today: “cuts not deep enough”. Continue reading »
One of the largest educator pension funds in the U.K., the Universities Superannuation Scheme (USS) is implementing significant changes to the plan benefits as it becomes increasingly under-funded, just like its peers in the United States. The changes are drastic, and are meant to keep the fund solvent in order to at least pay some benefits rather than none over time. Additionally, the plan, which represents 330,000 members, will transition from defined benefit to defined contribution leaving members at the mercy of the performance of the money managers handling their investments.
* * *
Take the example of two union lobbyists who substitute taught for one-day in the public schools and then started collecting over $1 million of lifetime public ‘teacher’ pension payout – despite a state law expressly designed to stop them. And now take all the other 7,499 educators. The retirees in question paid so little into their own retirement (breaking even on their cost basis within the first 20 months of retirement) that taxpayers now face a $900 million bill just to keep the pension payments flowing!
* * *