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Thread: That Which Is Unsustainable Will Go Away: Pensions -Tyler Durden

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    That Which Is Unsustainable Will Go Away: Pensions -Tyler Durden

    [QUOTE]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.[/QUOTE]

    [url]http://www.zerohedge.com/news/guest-post-which-unsustainable-will-go-away-pensions[/url]

  2. #2
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    Great post. I have been saying this for years.

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    The Mass State Pension fund made over 22 percent, last fiscal year.

    a gain of 9 billion.


    what's this 2 percent crap?

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    What's with the Tyler Durden thing?

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    [QUOTE=FF2;4469424]The Mass State Pension fund made over 22 percent, last fiscal year.

    a gain of 9 billion.


    what's this 2 percent crap?[/QUOTE]

    Wall street loses out if pensions are stopped, no?

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    [QUOTE=FF2;4469424]The Mass State Pension fund made over 22 percent, last fiscal year.

    a gain of 9 billion.


    what's this 2 percent crap?[/QUOTE]

    Re-read the article. Then go back and look at the past 12 years return on the stock market. The calculation for public pensions is based on an expected annual return of 8%. That was the conservative allocation traditional return in US stocks since 1950. When we go 12-15 years at 0-2% returns it throws everything off. The math that the pension system was built on was incorrect. The days of 8% annual returns are long behind us. The system today is underfunded to the tune of tens of trillions. Thats just local governments. Add in the federal government and the picture gets much worse.

    I posted in another thread last week about how the stock market itself is the primary vehicle for wealth in America for all. Not just fat cat 1%ers. Everyone is effected. The prolonged slump in stocks will continue because of the wealth already lost in the markets. It is a self fulfilling prophecy. This is why you have people like Scott Walker looking to correct the system. The math they used was wrong.

    Defined benefit pensions are on their way to extinction. There is no way to project the true cost. They must all eventually change to defined contribution.

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    [QUOTE=FF2;4469424]The Mass State Pension fund made over 22 percent, last fiscal year.

    a gain of 9 billion.


    what's this 2 percent crap?[/QUOTE]

    If corporate taxes are reduced and the regulatory environment becomes more favarable the funds will do even better.

    Growth and investment creates a much better enviroment for the demagraphic changes that are facing us than a massive attack on corporate profits by government.

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    [QUOTE=Winstonbiggs;4469573]If corporate taxes are reduced and the regulatory environment becomes more favarable the funds will do even better.

    Growth and investment creates a much better enviroment for the demagraphic changes that are facing us than a massive attack on corporate profits by government.[/QUOTE]

    You cant let the 22% comment go without pointing out that 2 years before the market was down over 50%. It takes a 100% rise just to get back to even. This type of post distracts from reality. We are still not back to year 2000 levels on the stock market and its been 12 years. How is the Fing pension system that relies on 8% annual returns supposed to be solvent when we have had 12 years with a 0-1% average annual return?

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    [QUOTE=chiefst2000;4469321]Great post. I have been saying this for years.[/QUOTE]

    Glad you saw this thing too Chief. No one thought that I was credible years ago.

    A business partner of mine hipped me to this data about pensions then. The math does not lie, people do

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    [QUOTE=Jetdawgg;4470005]Glad you saw this thing too Chief. No one thought that I was credible years ago.

    A business partner of mine hipped me to this data about pensions then. The math does not lie, people do[/QUOTE]

    This database is very revealing. A quick query shows 1,956 police and firemen with pensions above $100,000.

    It shows over 3,000 retired teachers and administrators with pensions over $100,000

    I wonder how many NON civil servants have pensions above $55,000.

    [url]http://seethroughny.net/index.php?cID=202[/url]

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    [QUOTE=southparkcpa;4470047]This database is very revealing. A quick query shows 1,956 police and firemen with pensions above $100,000.

    It shows over 3,000 retired teachers and administrators with pensions over $100,000

    I wonder how many NON civil servants have pensions above $55,000.

    [url]http://seethroughny.net/index.php?cID=202[/url][/QUOTE]

    With people clamoring constantly for low and lower taxes, it is unsustainable for pensions to exist. The math does not lie. States and Munis have been going broke for the past few years. Look at California

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    [QUOTE=Jetdawgg;4470005]Glad you saw this thing too Chief. No one thought that I was credible years ago.

    A business partner of mine hipped me to this data about pensions then. The math does not lie, people do[/QUOTE]

    Most people particularly those benefitting from those outrageous pensions don't even begin to think about how much they cost. Listen to the way Democrats talk about government workers. They call them middle class working Americans. A county clerk retires with 100K a year in pension plus healthcare. A private sector worker would need 3Million plus to enjoy the same income.

    How much more would a private sector person need to earn in salary to accumulate 3Mill in the bank at retirement? Over 30 years the private exquivilent would need to earn approximately $100,000 more per year to equal the public worker on a pension.

    I say defined benefit pensions should be reserved for occupations where workers put their lives on the line to protect citizens. Soldiers, Police and firefighters should be given a special classification in our society and should have the pensions. The rest should get defined contribution retirement plans like the rest of the Country.

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    [QUOTE=Jetdawgg;4470109]With people clamoring constantly for low and lower taxes, it is unsustainable for pensions to exist. The math does not lie. States and Munis have been going broke for the past few years. Look at California[/QUOTE]

    This has nothing to do with taxes. There isn't enough money in this country to pay for the pension system. It is already bankrupt across the country. They are essentially living off "principal" for a few years but the damage has already been done.

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    [QUOTE=chiefst2000;4469626]You cant let the 22% comment go without pointing out that 2 years before the market was down over 50%. It takes a 100% rise just to get back to even. This type of post distracts from reality. We are still not back to year 2000 levels on the stock market and its been 12 years. How is the Fing pension system that relies on 8% annual returns supposed to be solvent when we have had 12 years with a 0-1% average annual return?[/QUOTE]

    Average return for the S&P since 1950 is over 8%. We are talking about pension benifits earned over decades.

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    [QUOTE=Winstonbiggs;4470161]Average return for the S&P since 1950 is over 8%. We are talking about pension benifits earned over decades.[/QUOTE]

    And you are saying that the United States is growing today or has the potential to grow in the current environment at the same rates as we did between 1950 and 2000 when globalization was non-existent and we didn't have the burden of entitlements and unfunded pensions and the massive social programs of today? Would you agree or disagree with the following statement:

    Past performance is not indicative of future results.

    The 1970's featured massive inflation. Some years inflation was as much as 13%. The only way we get out of our crises is through mass inflation. It is as inevitable as the sun rising in the East. Mark my words when I say it will happen.

    The question for smart folks is not whether or not massive inflation/devaluation of the dollar is coming. That is a given. The question is how to protect oneself or hopefully profit from it. That is the million dollar question.
    Last edited by chiefst2000; 05-16-2012 at 02:45 PM.

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    [QUOTE=chiefst2000;4470168]And you are saying that the United States is growing today or has the potential to grow in the current environment at the same rates as we did between 1950 and 2000 when globalization was non-existent and we didn't have the burden of entitlements and unfunded pensions and the massive social programs of today? Would you agree or disagree with the following statement:

    Past performance is not indicative of future results.

    The 1970's featured massive inflation. Some years inflation was as much as 13%. The only way we get out of our crises is through mass inflation. It is as inevitable as the sun rising in the East. Mark my words when I say it will happen.

    The question for smart folks is not whether or not massive inflation/devaluation of the dollar is coming. That is a given. The question is how to protect oneself or hopefully profit from it. That is the million dollar question.[/QUOTE]

    The way we get out of crisis is through pulling together. Invention that makes us more productive which allows us to produce more wealth. Don't underestimate our ability to build a fantastic wealthy future. This country and countries around the world have a capacity to grow at fantastic rates that none of us can even dream of. Look at the information that is available today in the hands of 100's of millions.

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    [QUOTE=Jetdawgg;4470109]With people clamoring constantly for low and lower taxes, it is unsustainable for pensions to exist. The math does not lie. States and Munis have been going broke for the past few years. Look at California[/QUOTE]

    You do realize who you are talking to no?;)

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    [QUOTE=Winstonbiggs;4470201]The way we get out of crisis is through pulling together. Invention that makes us more productive which allows us to produce more wealth. Don't underestimate our ability to build a fantastic wealthy future. This country and countries around the world have a capacity to grow at fantastic rates that none of us can even dream of. Look at the information that is available today in the hands of 100's of millions.[/QUOTE]

    How do we reduce spending when any thought of a small cut in duplication and waste brings a wave of newspaper editorials and tv ads calling the cuts draconian and racist. Inflicting pain on (insert group losing the handouts here).

    It wont happen.

    How do inventors and entrepreneurs succeed in today America where regulations and litigation wait around every corner. Er.. a friend of mine was sued for sending his customer a fax. Did you know that you can get sued for sending a customer a fax? My er friend is in the hole for $10,000 in legal fees so far defending a lawsuit with no merit.

    Even with whatever innovation trickles through the massive regulatory burden it wont be close to enough to solve the systemic debt crisis. Much like the automakers the math used to calculate pension fund returns was wrong. There has been no effort to correct the math. The actuaries in this case were as mistaken as they were when they calculated the risk losses in sub prime instruments.

    Within a few years, definitely less then 10 years massive inflation will be here. It is inevitable because the way our currency system is set up there is no other recourse. We will print the money necessary to pay our interest and as a result inflation will explode in to double digits.

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    [QUOTE=chiefst2000;4470317]How do we reduce spending when any thought of a small cut in duplication and waste brings a wave of newspaper editorials and tv ads calling the cuts draconian and racist. Inflicting pain on (insert group losing the handouts here).

    It wont happen.

    How do inventors and entrepreneurs succeed in today America where regulations and litigation wait around every corner. Er.. a friend of mine was sued for sending his customer a fax. Did you know that you can get sued for sending a customer a fax? My er friend is in the hole for $10,000 in legal fees so far defending a lawsuit with no merit.

    Even with whatever innovation trickles through the massive regulatory burden it wont be close to enough to solve the systemic debt crisis. Much like the automakers the math used to calculate pension fund returns was wrong. There has been no effort to correct the math. The actuaries in this case were as mistaken as they were when they calculated the risk losses in sub prime instruments.

    Within a few years, definitely less then 10 years massive inflation will be here. It is inevitable because the way our currency system is set up there is no other recourse. We will print the money necessary to pay our interest and as a result inflation will explode in to double digits.[/QUOTE]

    and those we rely on to fix it dont care because they are all receiving HUGE pensions with inflation protection.

    Google NJ pensions and see all the double dipping happening. Police officers with pensions of 70K to 100K THEN taking a 2nd civil job. The AG's office has lawayers getting paid a pension AND a salary for the same job.

    Yet we have thousands of young lawyers unemployed.... government doesnt care about the people, it cares about keeping its people employed and growing.

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    [QUOTE=chiefst2000;4470317]How do we reduce spending when any thought of a small cut in duplication and waste brings a wave of newspaper editorials and tv ads calling the cuts draconian and racist. Inflicting pain on (insert group losing the handouts here).

    It wont happen.

    How do inventors and entrepreneurs succeed in today America where regulations and litigation wait around every corner. Er.. a friend of mine was sued for sending his customer a fax. Did you know that you can get sued for sending a customer a fax? My er friend is in the hole for $10,000 in legal fees so far defending a lawsuit with no merit.

    Even with whatever innovation trickles through the massive regulatory burden it wont be close to enough to solve the systemic debt crisis. Much like the automakers the math used to calculate pension fund returns was wrong. There has been no effort to correct the math. The actuaries in this case were as mistaken as they were when they calculated the risk losses in sub prime instruments.

    Within a few years, definitely less then 10 years massive inflation will be here. It is inevitable because the way our currency system is set up there is no other recourse. We will print the money necessary to pay our interest and as a result inflation will explode in to double digits.[/QUOTE]

    If you had told me we would have the lowest energy prices in the world because of new natural gas finds and drilling techniques 10 years ago I would have told you no way. Oil from sand in Canada or from shale in the US? If back in 1975 you told me we would be importing deflation from China while having full employment for 10 plus years I would have said crazy talk.

    Apple is going to be the biggest company in the world, lunacy.

    In 10 years we may not need a drop of the oil we store in the strategic oil reserve for all any of us know. Todays unsustainable budget may look reasonable in 10 years if our economy goes through a massive growth cycle.
    Facebook is going public tomorrow. People are inventing, doing research, changing the world while we speak.

    Worry about the land mines in front of you not the ones that are planted on a road you might not travel.

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