In his Wednesday column this week Rich Rifkin did a brilliant job of laying out the exact problem that I have been harping on for a couple of years now, and that is the entire city model of impacts of pensions has been too optimistic because the assumptions that they are based on – the rate of return – as laid out by CalPERS (California Public Employees’ Retirement System) is too optimistic.
Mr. Rifkin does a good job of showing what happens when the assumption of 7.75% ARR (Annual Rate of Return) is reduced by just a quarter of a percentage point to 7.5%.
“To know what a realistic return rate is, I studied the historic returns of the major broad market stock indexes. What I found is that 7.25 percent is far more likely than 7.75 percent,” he writes.
He continues, “Considering that 7.25 percent seems to be a reasonable assumption over the long run, a fair question is why did CalPERS think it could earn 7.75 percent per year?”
“There are two possible answers: One is hubris, thinking they could outsmart the market. Unless you have the skills of a Bernie Madoff, no stock pickers ever beat the market by very much over the long run,” he suggests. “The second explanation is CalPERS didn’t look far enough back in history. For example, the average 10-year return on the S&P 500 from January 1962 to January 2005 was 7.83 percent. The 20-year return average was 8.21 percent and the 30-year return was 7.76 percent.”
I think there is a third explanation that Mr. Rifkin doesn’t make, and that is that they are simply going to continue their more risky investment plans which have produced a much higher yield over the years, but make them vulnerable to the kind of losses they suffered in 2008.
Moreover, while Mr. Rifkin focuses on stocks, he doesn’t focus on their more heavy investments, which are property and other more risky ventures.
And indeed, they have made up some of their losses during the recovery by showing 9 to 10 percent annual rates of returns. This may lead some to suggest that this was a temporary problem, but others have suggested that by relaxing their assumptions, it will in the long term relieve pressure on the cities and other local governments now taxed under a huge burden.
How big a burden are we talking about?
Sue Greenwald cited the number of $7 million when rate increases are calculated with the correct 7.25% ARR.
Mr. Rifkin did a great job of laying out the problem, particularly since the Davis Enterprise, for reasons completely unbeknownst to us, failed to cover one of the most important policy discussions that will ever take place in this community.
But he does not have space to go to the next step. And the next step is to determine just where in the hell we will find $7 million in the next few years, when revenues are stalled along with the economy.
If you look through the answers to questions 3 and 4 that we posed the prospective council candidates, I think we capture a huge problem and I do not want to single them out, but rather use them as an example of where the general public is on this.
Walter Bunter actually knows the math here, as he writes, “Council members have lost confidence in CalPERS. Councilmember Sue Greenwald estimated that using a more realistic 7.25% ARR means that the City’s costs would increase by $7 million.”
He adds, “This situation makes our budgeting process very difficult.”
Kerry Daane Loux adds, “I think it’s safe to say that every city in the state is facing similar problems of budget shortfalls and unfunded liabilities created by policies adopted in ‘fat’ years, just as most private citizens have had to tighten belts in this difficult economic downturn. The harsh reality is that sacrifices must be made across the board. While none of the options available to address this untenable situation is attractive—instituting a two-tiered pension system, layoffs or furloughs, hiring freezes or salary reductions—concessions must be made.”
Dan Wolk may have a slightly deeper understanding, “Under current estimates (which may actually undervalue the problem because of the CalPERS rate of return), we are looking at a nearly $100 million liability between retiree health benefits (OPEB [Other Post-Employment Benefits]) and pensions (CalPERS). And this does not include capital projects, such as improvements to the wastewater treatment plant or transportation infrastructure, which also should be considered ‘unfunded liabilities.’ “
He adds, “All this translates into millions more per year that would have to come out of our already-squeezed budget.”
And he’s right, but even he does not go into the next step – how do we eliminate $7 million from our books?
This is the sad part that I think we need to come to accept – we are likely looking at huge cuts in city services. If you look at the budget for the city, you realize quickly where cuts are going to have to come from. A huge portion of the general fund goes to public safety. Another huge chunk goes to parks and rec.
Public safety compensation is indeed a huge chunk of this problem. No one wants to talk about this, but the Vanguard has spent many a column and article talking about fire compensation, the rate of increase last decade and their pensions which are literally crippling this city’s budget not only 3% at 50, but 3% at a base salary of $100,000.
Mr. Rifkin puts math to this problem. Under the current rate of return assumption, “the percentage of salaries for public safety would increase from 22.85 percent this year to 30.3 percent in 2013-14. In other words, for a firefighter making a $100,000 base salary, the taxpayers will have to pay $30,300 every year on top of that to fund his pension, an annual increase of $7,450.”
However, despite criticism of the fire department and less so of the police department’s compensation, council is likely to fear any perception of cuts to “public safety.” And yes, I have laid out in stark terms the fact that our inability to fund basic road maintenance represents a huge threat to public safety – far more than a reduction of public safety salaries and pensions.
I believe if we are going to cut back on services, we will start with another huge chunk of the general fund – parks and rec. That means closing parks. It means the browning of green belts. It means the end of recreation for our children.
This is where city services and the loss of services will really hit home with the public. Everything else is nebulous and abstract. When the parents cannot send their kids to play soccer and get swimming lessons, then you will see the impact of cuts.
But the real problem is that the public really does not recognize that this is coming. They have been told that this is affecting every community and we are better off than most. They have been shown numbers that are relatively small and manageable.
The people applying for the council certainly are not prepared for the fact that in six months they will be sitting in a packed house, hotter than anything inside and out, with a bunch of screaming parents wondering how it came to cutting the city’s funding for recreation.
They ought to talk with school board members who faced this music in 2008 with proposed cuts to programs, closures of schools and layoffs of teachers. That is what we are facing at the city level now. That is what $7 million means. To the pain.
—David M. Greenwald reporting
Many thanks to both the Vanguard and Rich Rifkin for pounding away at this critical issue…
The bond market is no longer the safe haven it used to be. I wonder how much of the supposed 7.25 % is attributed to the bond market?
[i]”I think there is a third explanation that Mr. Rifkin doesn’t make, and that is that they are simply going to continue their more risky investment plans which have produced a much higher yield over the years, but make them vulnerable to the kind of losses they suffered in 2008.
“Moreover, while Mr. Rifkin focuses on stocks, he doesn’t focus on their more heavy investments, which are property and other more risky ventures.”[/i]
This is a good point. I didn’t get into investment returns other than with publicly traded stocks. And it needs to be said: A pension fund must–for cash-flow purposes–keep some of its funds in cash, short-term bonds and other very liquid assets. The reason I didn’t get into non-stock asset returns was A) I wanted to keep it as simple as possible and B) I only have so much space in a column.
However, I have a different understanding than you have about likely returns on investment with regard to “more risky investment plans which have produced a much higher yield over the years.” I question the notion of higher risk producing higher yield ‘over the years.’ The evidence suggests otherwise ([url]http://www.signaltrend.com/InvTips/DoSmallStocksOutperformLargeStocks.html[/url]). In short periods, you might have much higher gains by concentrating on small caps or a hot sector, such as tech stocks or pharmaceuticals or whatever. But if you look at a longer-run picture, adding risk (by reducing diversity) does not produce better returns. What it does is it produces higher portfolio volatility, meaning higher highs and lower lows.
As to real estate–notwithstanding the current slump–it is generally a safer* (lower Beta) investment than stocks, but [i]with a lower yield[/i]. The income growth from a real estate holding tends to inflate roughly at the rate of income growth in our economy as a whole (or more precisely, it will grow at the income growth rate of the metro area in which it is physically located). By contrast, corporate profits tend to inflate at a much higher clip than the economy as a whole.
This raises a couple of questions: 1) Why would a pension fund invest in real estate if it produces a lower yield in the long run?; and 2) If real estate is less profitable than stock investing, how is it that fat-cats like Donald Trump make so much money in real estate?
The answer to the first part is that, normally, pension funds put only a small percentage of their portfolio in real estate. (CalPERS might have been excessive in that regard.) The reason for a fund to buy office buildings, shopping centers and so on is because they tend to produce steady streams of cash. Funds need cash to keep paying their pensioners every month. A lot of stocks pay no dividend, or if they pay a dividend, most of the ROI is in appreciation, not cash. Therefore, in order to “cash out” stocks, the fund has to keep selling them as they appreciate, and that process can raise risk, because you will often end up selling at inopportune times.
(I should note here that funds also buy bonds for the same reason–even moreso–that they invest in real estate. They need the cash flow, even though bonds pay less in the long run than stocks do.)
The second question regards the huge profits of the Donald Trumps and Walter Shorensteins. The bulk of their long-term income is not made from leasing units. They make their money in development: turning an empty lot into an office building, and profiting from the great increase in the price of land; or essentially doing the same thing by buying an obsolete property and recreating it as something new and better which buyers or leasers prefer. (As Davis residents know, a lot of money can be made simply by getting a change in a property’s zoning.) What distinguishes the Trumps and Shorensteins and so on from other developers has been their keen ability to read what the local market wants, to manage the production of that under-supplied asset, and to raise enough capital and debt to get these tough projects built. (It also helps that they tend to have a lot of well-greased friends in government.)
A fair question with CalPERS is can they act as a Trump? The answer is simple: No. Even if CalPERS invests in raw land or the construction of a new housing subdivision or a new shopping mall or land for an office tower, pension funds ultimately have no ability to “develop.” What they do in these cases is buy in early and hold on for a normal, long-term return. They might luck into a few good land deals. But they will luck out of just as many. In the long-run, pension funds have shown no success in real estate investing beyond the normal returns expected in buying mature assets. However, because a fund like PERS is so freaking large, they can diversify their development deals enough (in the long run) that the risks of their buying raw land and the like should not be too great (unless this class of assets is overrepresented in their portfolio).
*Safer means the income stream is more consistent with less peaks and valleys.
With what we are experiencing in the public sector, it is clear to me that government – fed, state and local – as designed, is incapable of prudent long-term fiscal management. Thanks to people like Rich and David, more people are beginning to understand the scope of pending financial disaster at our local level. Why does it take this herculean effort to stop the bus from crashing into the wall that should be clearly visible?
The long-term solution, I think, is for government to start divesting itself from the employment business. Outsource everything possible. Let private for-profit business employ all the resources, and the government can perform the job of contract administrator. Expertly written contracts and performance clauses and incentives will ensure that adequate service levels are achieved (I would expect better service for most things the government currently attempts to provide). Competition for contracts will drive down costs. Private-sector management best practices will pay labor for performance, and not seniority. Labor/talent will be priced at market rates. The inside risk to this working is the PEU; the outside risk is the potential formation of private-sector unions. We need new legislation to strengthen right to work laws, and also strengthen the laws and penalties against unions for strikes and other methods of wage extortion.
FDR started the ball rolling cementing the mindset that American government was a capable employer. It was a lie then and it probably would have been discovered had not WWII happened. As a result, it has taken us the better part of a century to run out of the credit needed to perpetuate that lie.
[i]”The second question regards the huge profits of the Donald Trumps and Walter Shorensteins. The bulk of their long-term income is not made from leasing units.”[/i]
So why do they own and manage buildings? The answer: taxes. (And to a lesser extent “management fees” which they charge their investors.)
By refinancing and holding, a “devloper” can sort of sell a building off and continue to own it without paying any taxes on the money he took out of the building.
Take a hypothetical brand new Trump office building. Say it has 100,000 square feet of continually leased space and the net rents he gets are $20/s.f./month. That means its net income per month is $2 million and per year is $24 million ($20 x 100,000 x 12). If the building has a discount rate* of 7.5%, then it is worth $320 million ($24/0.75).
Say Trump spent $180 million to buy the land, pay all City fees, construct the building, pay leasing agents and so on. And say he used $50 million of his own capital** and got a loan of $130 million.
So at this point, he has a paper profit of $140 million. If he sold the building to CalPERS, after repaying his loan, Trump would have that cash in his pockets, but he would have to pay federal, state and local captial gains taxes on that $140 million in profit.
But instead, Trump can refinance his project. Say he can get an interest-only loan for $320 million at 7.5% per year. On that, Trump would owe $2 million per month to his lender–exactly the amount of income his building produces. Thus, because interest payments are tax deductible, the building would produce no taxable income at all.
Trump would then have $140 million in his pocket tax free: $320 – $130 – $50. He could either spend that money to support his lifestyle. Or more likely, he would use that money as capital in new projects.
The great problem with this strategy–one Donald Trump and most other big-time developers have run into–is that when a market gets overbuilt or when the economy slumps, that $2 million per month income he needs to pay his lender might not completely be there. If he could not restructure his loan or make the payments out of his pocket, the project might become insolvent; and that then makes it tougher the next time he wants to refinance.
To reduce that risk, lenders will generally limit the debt:equity ratio on a building. In this hypothetical example I used 1:1. But more likely, lenders will limit their exposure closer to 70% or 75% debt:equity.
*The higher the discount rate means the higher the risk and hence the less valuable the asset. Appraisers determine these rates based on the class of a building within its market. Old, run down commercial buildings will have a higher discount rate than a new Class-A office building.
**It’s not uncommon for a guy like Trump to put up no more than 5-10% of the capital in a development project. The rest he will raise from his limited partner investors. Trump will then substantial make fees from the partnership as a “general partner.” And when his agents lease space in his building, he will charge the partnership fees for that, as well as more fees for managing the property.
[quote]Robert Shiller was on CNBC New Year’s Eve to make his forecast for the S&P 500 index in 2020. His best guess is a 1430 level which works out to 14% price appreciation over the next ten years or 1.3% annually. [/quote]
Shiller is an Econ Prof at Yale who saw the housing crisis coming. His methodology uses historical (lagged) earnings rather than current earnings. Jeremy Grantham and John Hussman use similar methods and get similar results. You can also look at price/sales, Tobin’s Q and get the same basic result–stock returns will be low. The US stock market is still over valued.
Also pension funds do not typically have 100% of assets in stocks. In the old days it was 60/40 stocks/bonds; but things have changed.
7.25% is better than 7.75% but still totally unrealistic.
[i]”His best guess is a 1430 level which works out to 14% price appreciation over the next ten years or 1.3% annually.”[/i]
10-year returns on the S&P can be volatile. I don’t have a guess as to what the S&P will sell for 10 years from now. All I know is that the average 10-year return from 1950-present is 7.27% per year.
The worst 10-year performance of that index is -5.08% per year. If you had bought the S&P 500 on Feb 1, 1999 (when it closed for 1238.33) and sold it on Feb 2, 2009 (when it closed for 735.09), not counting any dividends, your annual ROI would have been -5.08%.
The best 10-year performance of the S&P 500 was from August 1, 1990 to August 1, 2000. The index sold for 322.56 at the close on 8-1-90. 10 years later it sold for 1517.68. (On January 3, 2011 it closed at 1276.34.)
[i]”Tobin’s Q and get the same basic result–stock returns will be low. The US stock market is still over valued.”[/i]
When an analyst says the market is “overvalued,” generally he is saying one of two things or a combination of them.
1. That the current price to earnings ratio for the market is too high; or
2. That the future earnings of the companies in question will fall from where they are today.
The current PE Ratio (2-4-11) stands at 23.97 to 1 for the S&P 500. That is higher than the average PE Ratio from January 1, 1950 to the present.
On the other hand, PE Ratios for all stocks have tended to run higher almost always for the last 19 years. (I am not sure why.) It’s possible that something changed in 1992; or it’s possible that the market has been overvalued almost continually for nearly 20 years.
From 1992-present, the S&P 500’s PE Ratio has averaged 26.5:1. From 1950-1991, the PE Ratio averaged 14.95:1.
While I don’t have a specific guess as to where the S&P 500 will be in 10 years, I would say this: If someone tells you it will grow at much less than 7.25% per year, I would bet the over.
P.S. Take the points. The Steelers will cover. My prediction: Pittsburgh 27-Green Bay 20.
Rich
it’s even worse.
Right now corporate profits are extremely high. By averaging over time, shiller, grantham and hussman get a more realistic picture. They are the smart money, not the wall street analysts who use current earnings or earnings forecasts that academic studies have shown are far too high.
This year will probably be good for stocks as third year of presidential term. After that caveat emptor.
As Mark Twain said “Lies, damn lies and statistics.” It seems that if lowering the return on investment you need to put up more money all of you anti-pension people would want a higher roi assumption not a lower one. I did find Rifkin’s article of interest because he admits that if he used a different starting point he would get a different conclusion. In fact if he used 1949 instead of 1950 he would get a really big difference.
in 1949, Sir John Templeton, made a fortune by buying 100 shares of every listed New York Stock Exchange company selling for under a dollar a share. So what a difference a year would make. In fact last year the sp500 returned 13% and the two year return is over 50%. Sadly the 3 year return is -4%. So you can see that it all depends on your time frame.
Second guessing the pension funds assumptions is not easy and it doesn’t matter anyway since future returns can’t be predicted. Building a scenario where you essentially pick a number and change everything is a dangerous game, one, I believe, best left to the trustees of the pension funds who can afford the best financial advise. By choosing a number that differs from the one used by the funds you can make any kind of argument you want but when you have responsibility for thousands of workers pensions it is a much different responsibility than being a blogger with no responsibility beyond your own fantasies.
Good stuff. Very helpful.
The bond market was never safe and stocks, as already pointed out, are essentially a gamble. Forgive my lack of deep understanding (I anticipate the criticism; experience is the best teacher) but, in my opinion, the present conundrum is the result from the feeling, always present during boom periods, that the good times will never end. A few years ago a still current member of the California Assembly told me not to worry about how to pay for a bill he was promoting. “There will always be enough money,” he said, and meant it.
[i]”It seems that if lowering the return on investment you need to put up more money all of you anti-pension people would want a higher roi assumption not a lower one.”[/i]
Ultimately, it does not matter so much what the assumption is, but what the actual returns are. The assumption is only important for planning a few years out.
Moreover, you should note that CalPERS is the body which has said it no longer believes that 7.75% is sustainable. The opinion of bloggers did not change CalPERS’s view. I think reality did.
[i]”I did find Rifkin’s article of interest because he admits that if he used a different starting point he would get a different conclusion.”[/i]
Not just a different starting point, but a different ending point, too. To avoid this problem, I used a much longer period than necessary (more than 60 years), using all of the market data available for the S&P 500.
[i]”In fact if he used 1949 instead of 1950 he would get a really big difference.”[/i]
This is completely untrue. I should note two things: one, I started with January, 1950 because that was the earliest date in the data set for the S&P 500. (The index itself goes back only to 1957, but from 1950-57 there is recreated data on Yahoo Finance.) And two, it would make no real difference in ROI to make the change you suggest.
Using the DJIA for 20-year periods from January 3, 1949-January 3, 2011, you get an annual ROI of 6.75%; using the DJIA for 20-year periods from January 3, 1950-January 3, 2011, you get an annual ROI of 6.72%.
It is true that 1949 was a good year for the stock market. But over the long-run that one year is balanced out by all others.
[i]”Building a scenario where you essentially pick a number and change everything is a dangerous game, one, I believe, best left to the trustees of the pension funds who can afford the best financial advice.”[/i]
Again, you are focusing your anger in the wrong direction. It is CalPERS which has said 7.75% is no longer sustainable. You seem to be attacking me for agreeing with them.
[i]”By choosing a number that differs from the one used by the funds you can make any kind of argument you want but when you have responsibility for thousands of workers pensions it is a much different responsibility than being a blogger with no responsibility beyond your own fantasies.”[/i]
One more time: It is CalPERS which has said they no longer believe 7.75% is achievable. I think their new number, 7.25%, is realistic. Others (like Dr. Wu) think 7.25% is too high an assumption.
But to repeat myself: what ultimately matters is their actual ROI, not their assumed ROI. The assumption’s importance is for member agencies, like the City of Davis, so the members can plan for the next few years.
[i]”The bond market was never safe and stocks, as already pointed out, are essentially a gamble.”[/i]
Nonsense and nonsense.
The bond market is a safe place to invest, as long as you are diversified. In fact, there never has been a safer place to invest than U.S. T-bills, which are bonds. (They now have T-bills with inflation protection built in, making those even safer.)
That is not to say you cannot get risky bonds and ultimately lose money with those risks. Corporate bonds which are junk grade–made famous by Michael Milkin–are much riskier than AAA corporate bonds.
But even a basket of AAA corporate bonds can be too risky if they are not diversified. A wise investor protects himself in this regard by buying a broad basket of AAA bonds; U.S. treasury bonds; and some solid and very diverse municipal bonds.
Another aspect of bond risk is buying and selling them. If you are highly diversified, default risk is extremely low. However, if you are trading bonds–that is, selling them before they mature–you are adding undue risk. That is gambling.
You say that stock investing is “gambling.” It can be if you don’t understand diversification and you don’t hold for the long term (20 years or more). But there is no reason to think stock-investing is “gambling” in any sense of that word if you have a divers stock portfolio and you are a long term investor and you hold a stock portfolio which is appropriate for your age group. (Younger investors should hold more stocks; older less.)
[i]”Forgive my lack of deep understanding (I anticipate the criticism; experience is the best teacher) but, in my opinion, the present conundrum is the result from the feeling, always present during boom periods, that the good times will never end.”[/i]
I think that is spot on.
It’s ultimately the same at the local and state level. Instead of capping spending growth at a sustainable rate–around 3.5% per year–the state increased spending at triple that during the bubble years. From 2003-2007, state spending increased 10.32% per year on a compounded basis.
[img]http://gregor.us/wp-content/uploads/2011/01/California-Budget-2000-2010-plus-2011-Proposed.jpg[/img]
Had the state capped spending growth and set aside its excess revenues, we would have had enough money to either have no cutbacks during the recession or at least have much less severe cutbacks.
The fault for this method is mostly the Democrats and the CTA which insisted on spending like drunken sailors. But it’s also largely the voters who passed some irresponsible initiatives and voted down other responsible initiatives. And lastly it’s partly the Republicans who some years back insisted that when there are excess revenues the state must give the money back to the taxpayers in a rebate.
The City of Davis went through the same drunken spending free. But overspending in the short run is not our biggest problem, now. Our great crisis is the liabilities to workers which we have built up, those coming from unrealistic and unaffordable promises our City Council has made to them.
CORRECTION: “… the same drunken spending spree.”
[i]”It’s ultimately the same at the local and state level. Instead of capping spending growth at a sustainable rate–around 3.5% per year–the state increased spending at triple that during the bubble years.”[/i]
I just checked my math on this and 3.5% spending growth may be too high. If you start in 2002, when the state spent $98.90 billion (according to that graph above) and you had inflated spending 2.85% per year (compounded), 9 years later (in 2011) we would spend $127.40 billion (just what the graph says we are spending this year).
In other words, we never would have had a single year of state spending cuts (on UC, K-12 education or any other areas of the budget) had we simply saved any tax revenues above 2.85% for the rainy day which came in 2008-09.
“The fault for this method is mostly the Democrats and the CTA which insisted on spending like drunken sailors. But it’s also largely the voters who passed some irresponsible initiatives and voted down other responsible initiatives. And lastly it’s partly the Republicans who some years back insisted that when there are excess revenues the state must give the money back to the taxpayers in a rebate. “
Actually the last Governor was a Republican and he spent every cent in the treasury in 2005-2006 trying to get re-elected. In doing so he gave raises that were not sustainable and busted the budget.
Why not put pensions on the ballot? Let the voters determine the pension packages that city workers receive. For that matter, let the voters have a say in pay raises. It would be an interesting twist on union negotiations!
The answer, of course, is a return to the gold standard. If elected, I will be a never-tiring champion of the return to the gold standard. I will end every speech with “we must return the gold standard.”
[i]”Actually the last Governor was a Republican and he spent every cent in the treasury in 2005-2006 trying to get re-elected. In doing so he gave raises that were not sustainable and busted the budget.”[/i]
After the failure of Prop 76 ([url]http://ballotpedia.org/wiki/index.php/California_Proposition_76_(2005)[/url])–which would have restricted spending growth in a manner similar to the one I suggest above–Gov. Schwarzenegger essentially governed like a liberal Democrat. He was not beholden to the unions. But he never bucked them again.
The unions, especially the CTA, deserve a lot of credit* for defeating a rational spending plan, like Prop 76. But again, the ultimate blame must go for the voters of California. They rejected that effort by Schwarzenegger to rein in spending, and now they blame everyone but themselves for the out of control spending by the Democrats.
*”Campaign spending on Proposition 76 was lopsided with $26 million spent to defeat it. The California Teachers Association contributed over $13 million to the campaign against Proposition 76.”
[i]”Why not put pensions on the ballot? Let the voters determine the pension packages that city workers receive.”[/i]
I suspect that is where we are going. I tend to think that Jerry Brown is rational, and thus will attempt to moderate the overly expensive public pension problems. But I don’t think he wants to unnecessarily get in a fight with the unions, especially the prison guards and the firefighters. So if he does not stand up to them, one of the various pension reform initiatives will get on our ballot. And as long as it is not batsh!t crazy, I think the voters will probably approve a reform referendum. One of them ([url]http://www.californiapensionreform.com/pension-reform-proposals/alternative-b/[/url]), which is gathering signatures now, calls for a change in state law which would reduce the pension formulas of all existing state employees down to 1.25% at 65 for miscellaneous and 1.6% at 55 for CHP and prison guards; and it would allow local governments to do likewise.
[i]The answer, of course, is a return to the gold standard. If elected, I will be a never-tiring champion of the return to the gold standard. I will end every speech with “we must return the gold standard.” [/i]
One of the most interesting elections we ever had: 1896, William Jennings Bryan (a horrible person, by the way) and the Cross of Gold.
Perhaps the most enduring legacy of that campaign was the parable novel (and later film) depicting William McKinley as “The Wizard of Oz ([url]http://prosperityuk.com/2001/01/a-wonderful-wizard-of-oz-a-monetary-reform-parable/[/url]).” By the way, until I read that link, I did not realize that the place was called Oz, because Oz. stands for ounce, as in an ounce of gold or silver.
One important distinction to keep in mind is the difference between real and inflation adjusted rates of return.
It will not be hard to meet a 7.75% return projection if inflation is running at 10% to 15%, or more.
This is essentially the plan being put in place by the Obama administration. Inflation will destroy pension plan promises and eliminate underwater mortgages.
Unfortunately it will also lead to radical economic dislocations and inefficiencies, and a lowering of our standard of living. But that’s more or less inevitable now.
Bryan I knew about. Oz I did not. Very cool.
“Why not put pensions on the ballot? Let the voters determine the pension packages that city workers receive.”
One problem with that is the point I was making in this article, the public really doesn’t understand this issue that well. The assumption that a lot of people make is that the public is ready for pension reform, but I don’t see the public as driving this debate right now. Instead it’s the local cities driving the debate because they are about to go belly up. Put it on the ballot and suddenly the people with the most money and most people can mobilize and win.
“After the failure of Prop 76–which would have restricted spending growth in a manner similar to the one I suggest above–Gov. Schwarzenegger essentially governed like a liberal Democrat. He was not beholden to the unions. But he never bucked them again.”
This is through the looking glass stuff. The first thing Arnold did was to cut the car tax blowing a hole in the budget so big that the state had a hard time recovering. When it did briefly he blew another hole in the budget by failing to create a reserve of any meaning and gave everybody big raises while expanding the size of government. A Republican who is fiscally responsible by your thinking is somehow Democrat like and therefore the Dems and the Unions are responsible for his actions.
I guess this makes Bush 43 a Dem too. His fiscal irresponsibility so mismanaged the economy that Obama has had little choice but to run deficits to keep the economy from total collapse. So I’m sure this is because of Bush’s liberal ways.
Then of course on his 100th birthday Reagan was a Dem as well. His tax cutting blew a hole in the budget of the US so big it took a real Democrat, Bill Clinton, to dig us out. I guess that makes Clinton a Republican by you standards and Jerry Brown will be one too when he cuts 12 or 25 billion from the state budget
Mr. Toad (if that IS your real name) how dare you defame the Gipper? Robust debate is one thing, but viciously attacking the dead ad hominem goes beyond the still extant but rapidly diminishing limits to civil discourse.
Other than that you made some excellent points.
So I started reading this expecting to find an increase in the employee contribution rate mentioned at least once. Nope. Whyzat?
Rifkin: “You say that stock investing is “gambling.” It can be if you don’t understand diversification and you don’t hold for the long term (20 years or more). But there is no reason to think stock-investing is “gambling” in any sense of that word if you have a divers stock portfolio and you are a long term investor and you hold a stock portfolio which is appropriate for your age group. (Younger investors should hold more stocks; older less.)”
Older folks cannot “recover” if their stock portfolio takes a dive – they don’t have 20 years to wait for the stock market to go back up. That is why so many seniors are currently underwater in their mortgages, or just barely hanging on. Income from their stock portfolios has dried up, the stocks themselves may be way down in value, which means to sell would result in a huge loss. These are desperate times for seniors who invested in the stock market. Many have literally “lost their shirts”…
To add a bit of context, if you are unlucky enough to hit a low in the stock market at the time when you hit your golden years, you are going to ultimately lose big…
RICH [b]”After the failure of Prop 76 … Gov. Schwarzenegger essentially governed like a liberal Democrat.” [/b]
Prop 76 failed in 2005.
TOAD: [i]”The first thing Arnold did was to cut the car tax blowing a hole in the budget so big that the state had a hard time recovering.”[/i]
That was 2 years earlier in 2003.
Moreover, tax and other revenues into the state government between 2003 (after he rescinded the car tax) and 2005 increased at the fastest rate in the history of California. That was the heart of our bubble.
So it is balderdash to argue that the loss of the enhanced motor vehicle license fee blew a hole in the budget. It was the rapid increase in spending which did that.
Also, the inflated car tax which Schwarzenegger rescinded in November 2003 had only been in effect for 5 months. Just 5 months. It’s not like the state was at that time or at any time dependent on those revenues.
[i]”When it did briefly [b]he blew another hole in the budget[/b] by failing to create a reserve of any meaning and gave everybody big raises while expanding the size of government.”[/i]
You are blaming Schwarzenegger here for what the legislature did.
[i]”A Republican who is fiscally responsible [b]by your thinking[/b] is somehow Democrat like and therefore the Dems and the Unions are responsible for his actions.”[/i]
I have no idea what this partisan nonsense means. It certainly has nothing to do with anything I have ever said.
[i]”I guess this makes Bush 43 a Dem too. His fiscal irresponsibility so mismanaged the economy that Obama has had little choice but to run deficits to keep the economy from total collapse.”[/i]
Again, your conclusions about my thinking are totally off base. I am not a partisan or an ideologue. I’m a pragmatist and centrist.
[i]”(Reagan’s) tax cutting blew a hole in the budget of the US so big it took a real Democrat, Bill Clinton, to dig us out.” [/i]
That is fallacious, though you don’t seem to mind when facts get in your way. It was not the case in the Reagan years that tax revenues into the federal government declined. It was that federal spending (largely on defense, SS and Medicare) increased even faster. Look at the numbers:
[img]http://www.nationalreview.com/images/chart_edwards_reagan6-9.gif[/img]
[i]”I guess that makes Clinton a Republican by your standards and Jerry Brown will be one too when he cuts 12 or 25 billion from the state budget.”[/i]
I am a big fan of Bill Clinton. I think he was a very good president in most regards.
First and foremost, Clinton was the best free-trade president in US history other than FDR. Clinton got the WTO-GATT agreement through in 1994 which substantially liberalized world trade (though not much in agriculture); and Clinton successfully won the approval of NAFTA, another improvement in trade liberalization.
Additionally, I liked the Clinton foreign policy. He deserves kudos for his work in N. Ireland, Israel, Bosnia and Kosovo. He managed foreign affairs in such a way as to make good use of our power without overextending us and overwhelming our resources. Clinton was the anti-George W. Bush, whose foreign policy was excessively ambitious and not cost-effective.
E Roberts – The ultimate horrible irony is that the concept of a laborer’s “retirement” – a very modern, recent concept – was designed around eliminating the economic uncertainties aging workers have experienced since the beginning of time, replacing the specter of slow starvation with security and dignity. But when so called “free market” principals crept into this concept, a worker’s retirement became subject to the very uncertainties that modern concept sought to replace. Once again, a comfortable retirement for millions is plagued with uncertainty and worry, where luck determines who can eat and heat their homes vs. those who must go without because they don’t have any money and are too old to compete in the labor market. There is something morally wrong with a system where comfort or depravation depends on the state of the stock market when one retires.
And let us not forget that allowing, if not encouraging, workers to essentially gamble with their retirement money by investing their savings in the stock market, served as a mechanism to shift wealth and capital from the middle class to the already extremely wealthy, because the economic system is gamed to protect and benefit the wealthy. That is why Goldman Sachs is bigger and richer than it was before this recent and continuing economic downturn, and those who are part of GS are wealthier than ever. When the average person goes to a casino and gambles with their paycheck, the casino owners ultimately win because the games are designed to take money from those who play and not give them a cent. The impression that there are jackpot winners is an illusion to keep chumps pulling the levers on slot machines. The stock market is no different. I’ve seen old men and women in casinos playing a single slot machine over and over again because they feel they’ve “invested” in that machine and that they need to keep playing in order to have a chance at winning back what they invested. People playing the stock market with their retirement accounts are no different than those poor, old fools – worse, because, if they have any chance of a comfortable retirement, the stock market is the only game in town.
ELAINE: [i]”Older folks cannot “recover” if their stock portfolio takes a dive – they don’t have 20 years to wait for the stock market to go back up.”[/i]
Most investment advisors suggest a 100-count formula for stock investors to make sure you don’t have the problem you are speaking of. What that means is subtracting your age from 100 to determine what percentage of your portfolio should be in equities. A person 20 years old should have 80 percent of his savings (100 minus 20) in stocks; and the rest in bonds, CDs, cash, etc. A person 40 years old should have 60 percent in stocks (100 minus 40). A 75 year old should have 25 percent in stocks. And so on.
If someone expects to die much younger or has some other reason to be very liquid at a younger age, he could do the same thing but subtract from 90 or 80 instead of 100.
What you want to avoid is trying to time the market, where you dump all of your stock at once. It’s far safer to gradually buy stocks (this is called dollar-cost averaging) beginning in your 20s and gradually sell them as you get older.
It really does not matter that much what the market is doing when you turn say age 65 if you have followed this approach. You will have benefitted from long-term stock growth, even if it happens that the day before you retire the market takes a big dive.
For example, the market bottomed in February, 2009. If you turned 65 right after that, kept 100% of your money in equities and sold all of your stock the day you turned 65, you still would have averaged a 5.16% compounded annual return on a broad market average (plus dividends), making your total return around 7% per year. That is twice as good as investing in real estate in Davis over the same time frame.
But you should not follow that strategy. You should have included cash, bonds and so on in your portfolio based on your age formula, so when you turned 65, you might have only converted a small percentage of stocks into cash at the bottom of the market.
[i]”That is why so many seniors are currently underwater in their mortgages, or just barely hanging on. Income from their stock portfolios has dried up, the stocks themselves may be way down in value, which means to sell would result in a huge loss.”[/i]
72 percent of home owners ages 65 and older have no home mortgage. And more seniors own second homes than the average for all adults.
([url]http://seniorjournal.com/NEWS/Money/6-12-07-SurveyOfHomeOwners.htm[/url]).
Beginning about age 30, investors should gradually reduce the share of their portfolios in stocks. Investors should trade out a small amount roughly once every year, so they have a balanced portfolio; or when they have new money to invest, they should buy in percentages so their portfolio of stocks, cash and bonds is balanced to their age. No one near retirement age should be over 30% or 35% in stocks. (Caveat: some older people well past 65 by choice. As long as they have a stable income from their work, there is much less reason for them to reduce their stock holdings.)
[i]These are desperate times for seniors who invested in the stock market. Many have literally “lost their shirts”… [/i]
No wonder I keep seeing those naked old people ([url]http://www.untoldentertainment.com/blog/img/2009_05_07/oldMan.jpg[/url]).
As to stock losses, it depends on what stocks they bought, when they bought them and how diverse their equities portfolio was. If they were gradually adding stocks to their portfolio, they made a decent return, far better than they would have in home ownership or bonds or money markets. But if they did not understand stock investing and just got into it when they were already old and they had a portfolio overweighted to stocks, then yes, they were foolish gamblers and they lost.
Good advice. But the guidelines you just described were not considered when most of those who lost their savings got involved. Too many were trying to ride the spreading wave to riches, believing the rising real estate and stock market tides would never stop rising. The same thing has happened countless times. I saw a bumper sticker in Texas in the 1980’s that read “Please, God, when the next boom comes, I promise not to piss it all away.” The modern economy is like a bowl of soda pop – with little bubbles of speculation and irrational enthusiasm rising and popping all over the place. But this last one was the mother of all economic bubbles, greater in geographic and demographic scope than virtually any that came before it.
The ultimate horrible irony is that the concept of a laborer’s “retirement” – a very modern, recent concept – was designed around eliminating the economic uncertainties aging workers have experienced since the beginning of time, replacing the specter of slow starvation with security and dignity.
The reason this is a newer concept is because in days of yore only a small percentage of our population–weighted to the wealthy–lived beyond age 65.
[img]http://www.bryanmarcel.com/wp-content/uploads/2010/11/us_life_expectancy.png[/img]
[i]”But when so called “free market” principals crept into this concept, a worker’s retirement became subject to the very uncertainties that modern concept sought to replace.”[/i]
Two things to note:
1. It was the success of the free market which increased life expectancies. Before the industrial revolution–as seen in pre-industrial societies to this day–almost all people lived very short lives. The free market generated the wealth to create better, safer water systems and other advances in health and diet;
2. The vagaries you speak of don’t exist when someone invests properly for the long term. What you are confusing is short term fluctuations, which have always been with us. Sound, lifelong stock investing is not rocket science. It can be easily understood in 15 minutes.
[i]”Once again, a comfortable retirement for millions is plagued with uncertainty and worry, where luck determines who can eat and heat their homes vs. those who must go without because they don’t have any money and are too old to compete in the labor market.”[/i]
There are more people in the world today than in any time in history who are living a comfortable retirement over age 65.
Certainly some older people failed to save or had some bad luck or made some other mistakes. But most who just followed a sound investment strategy all their lives are doing very well.
[i]”There is something morally wrong with a system where comfort or depravation depends on the state of the stock market when one retires.”[/i]
If a person followed a sound strategy and held an age appropriate portfolio, there is no system in human history which could have better aided him in retiring comfortably. It would not matter at all what day he chose to retire.
[i]”And let us not forget that allowing, if not encouraging, workers to essentially gamble with their retirement money by investing their savings in the stock market, served as a mechanism to shift wealth and capital from the middle class to the already extremely wealthy, because the economic system is gamed to protect and benefit the wealthy.”[/i]
This makes no sense. If a middle class person–say a worker for UPS–started buying stocks and bonds in 1971 when he was 25 and he retired this year at age 65, his stocks would have earned him an average return of just under 7% plus a lot more in dividends. That shifted wealth from him to the rich? What evidence do you have for such a bizarre claim?
[i]”That is why Goldman Sachs is bigger and richer than it was before this recent and continuing economic downturn, and those who are part of GS are wealthier than ever.”[/i]
Goldman Sachs is a very wealthy firm–though less so since it went public–because it has provided tremendous value for roughly 140 years to corporations which needed to raise capital.
I won’t accuse you of anti-Semitism. However, your accusations against this one company are exactly the same as those which have been made against Jews going back 500 years or more: that their companies, especially their banks, are enriching themselves on the backs of the hard work of the ordinary people solely for the benefit of the Jews. (I should add that a lot of Jewish marxists make these same indefensible attacks against Jewish banks.) The fact is that no one in the free market gives Goldman Sachs or any other bank any money unless the giver thinks he is profitting from the exchange.
Investment banks play a very important role in our economy and always have. I suspect you are completely ignorant of the history of how Jewish banks–most notably a New York bank called The Bank of the United States–were targetted for a deprivation of funds when they had bank runs in 1929 and 1930 by the Federal Reserve Bank. That kind of “eff the Jews” thinking is really what caused the recession of that time to turn into a depresssion–the Fed ended up starving our banks of cash; and that dried up the economy. (If you have any interest in facts and not just in a nonsensical anti-market ideology, I recommend you read “A Monetary History of the United States” by Milton Friedman. It will enlighten you as to the role banks play in a free economy, and how damaging them damages everyone else in an economy.)
[i]”When the average person goes to a casino and gambles with their paycheck, the casino owners ultimately win because the games are designed to take money from those who play and not give them a cent. The impression that there are jackpot winners is an illusion to keep chumps pulling the levers on slot machines. [b]The stock market is no different[/b].”[/i]
This is just utter nonsense. It [i]is[/i] a gamble to buy stocks and sell them in the short run and try to time the market. However, the risk is eliminated by holding a broad array of stocks for the long term. I’m amazed there are people who actually don’t understand that. (And by the way, I am not just talking about the US over the last 100 years. This has proved true going back to the original stock markets created by Portuguese Jews in Amsterdam after the Spanish Inquisition. They too had bubbles and busts. But long term investing in them enriched everyone who did, just as in our times.)
[i]”Too many were trying to ride the spreading wave to riches, believing the rising real estate and stock market tides would never stop rising.”[/i]
Again, you are not talking about stock investing. You are talking about pure gambling. That is a fool’s choice. Some smart person once said, “A fool and his money are soon departed.”
So don’t confuse an investor, who takes a lifelong approach, with gamblers.
To round out my views, I need to add one more thing when it comes to saving and investing: I am fully aware that there are a lot of people who live from paycheck to paycheck and do not save or invest any money; and then when they get old, they cannot take care of themselves. There are also people who suffer some kind of bad luck or illness or other reality in their lives which, despite their best efforts, wipes out their savings when it is too late for them to build up a retirement nest egg. For anyone in these two categories, I believe wholeheartedly in government welfare (which for many is what Social Security is). Because I know and understand the great value of a lifetime of saving and investing–despite Paul’s indefensible attack against the notion of investing in equities–does not mean I am heartless to those who are old and poor.
I think it would make a lot more sense that we had a Social Security system which was entirely for the poor and near poor. It doesn’t make sense to me that seniors who spend their leisure years golfing and cruising on luxury liners also get a welfare check from the government.
But even better would be if all workers were forced by the government to save and invest say 15% of their income. We could take care of all lower-income people by taxing the forced savings of the higher income folks at point of deposit and stick that money in the accounts of lower income people. That would ensure that everyone would have a nest egg in their elder years; and it would avoid the generational transfer problems which are inherent in a pay as you go program like Social Security.
If the government cannot constitutionally force all Americans to purchase health insurance, it certainly cannot force Americans to invest any percentage of their income in anything. Perhaps a better way would be through tax incentives to encourage the behavior government wants. It is a proven method of effective social engineering.
“I won’t accuse you of anti-Semitism. However, your accusations against this one company are exactly the same as those which have been made against Jews going back 500 years or more…”
I am not accusing you of accusing me of anti-Semitism, but I am nevertheless deeply mortified that anything I said was even obliquely similar to anything anti-Semitic. I will be more careful in the future. I am truly embarrassed.
“You are blaming Schwarzenegger here for what the legislature did.”
Huh? in 05 and 06 Arnold spent all the money in the budget giving raises to state workers and teachers too. He created the budgets that passed easily with votes from both sides of the legislature. Blaming the unions and the Democrats on this is a conservative canard.
“Again, your conclusions about my thinking are totally off base. I am not a partisan or an ideologue. I’m a pragmatist and centrist.”
And a solipsist as well.
As for your Cato Institute Koch brothers funded think tank numbers on Reagan”s budgets you forget to account for inflation that was still quite high during the Reagan years. The reality is that spending and income both went up because of inflation but the numbers on the income side were never able to recover from the tax cuts until both Bush 41 and Clinton raised taxes in the early 90’s. Actually an argument can be made that Reagan was a Keyesian of the most liberal and profligate sort.
Great posts. I find the topic of retirement fascinating.
I became a manager early in my career and consequently was usually the youngest of my peers. Working in the IT function for large organizations, I usually had staff spanning all generations of working-age adults. I was always a bit perplexed why many of the older employees (those 50 and over) would say things like “I can’t wait to retire!”
In contrast, many of my extended family members have been self employed. My grandparents were the inventors of Harmon’s Hot Cinnamon Toothpicks. You might remember the little square red striped cellophane bag of twelve flavored toothpicks. That was them. They opened the factory in the mid 1940s, and proceeded to raise seven children in McCook Nebraska. The sold the business when my Grandfather turned 77. Two years later they called me to help them start again because they felt useless and unhappy. I helped them develop a new formula, a manual manufacturing process employing special needs people, and set up a website for customers to order from. They made and sold toothpicks ordered from this website until my grandfather three years ago. He was 90. He died of a brain aneurism will working on a fresh batch of Hot Cinnamon Toothpicks. My grandmother is in an assisted living home now and helps run that place. She was 87 when she retired after she lost her business partner of almost 65 years. Note that both of them had a history of many different heath problems… including cancer and heart bypass surgery.
My problem-solving thinking on the problem of unfunded public-sector pensions transcends math. I think the root cause is the retirement entitlement expectation combined with our greater life expectancy. It is a social/cultural problem. Certainly it makes sense that people working difficult manual labor cannot continue into their golden years (although don’t tell a farmer or rancher this). But then why – when most of us are working in white-collar jobs; with 15 paid holidays, and five to seven weeks of paid time off per year – do we expect to retire at all, let alone stop working at age 50, 55 or 60? I think even age 65 should be challenged:
[quote]The age of 65 was originally selected as the time for retirement by the “Iron Chancellor,” Otto von Bismark of Germany, when he introduced a social security system to appeal to the German working class and combat the power of the Socialist Party in Germany during the late 1800s. Somewhat cynically, Bismark knew that the program would cost little because the average German worker never reached 65, and many of those who did lived only a few years beyond that age. When the United States finally passed a social security law in 1935 (more than 55 years after the conservative German chancellor introduced it in Germany), the average life expectancy in America was only 61.7 years. Of course, people who did reach 65 had a considerable number of years to live and to enjoy SOCIAL SECURITY benefits. [/quote]
So, we live longer, but in doing so we blow healthcare costs into the stratosphere. For those same golden years we are consuming copious healthcare resources, we also demand that society pays for our permanent paid vacation. With this we are racking up huge bills that we cannot pay. We are passing billions in debt to our children and their children. Many of the people receiving these benefits are the same consumers that drove the real estate market over the cliff and profited nicely on equity before it did. As Rich points out, a large percentage of retirees have no mortgage and own second homes.
Mortgage paid off, a second home, retired at age 55 with a lifetime paid vacation… all complements of young people who cannot find reliable income, and will possibly never own a home from paying off boatloads of student loans.
My out of the box idea… anyone physically able up to age 75 should have to work unless they can self-fund their early retirement. Instead of full government-paid retirement, after age 60, Social Security would subsidize four-six weeks of additional paid vacation… maybe more for jobs that are more physical… maybe the number of weeks off would gradually increase. This would be like FLMA for seniors. College students could be hired to fill the gap… thereby gaining work experience for when they graduate and jobs open.
For example, the last company I worked for gave senior employees (with 15 or more years of service) six weeks of PTO, plus 15 paid holidays per year. Add four more weeks to that, and you get a grand total of 13 weeks off… three months… 25% of full time. What a beautiful thing… working 75% but being paid full time. Banking more money; taking great vacations; being able to afford healthcare; helping grandkids pay for their college; keeping the mind active and engaged; saving cities, counties and states from financial collapse. What is not to like about this idea unless you one of those entitled-age-55-PEU-retirees? Somebody please shoot some holes into it for me.
[i]”As for your Cato Institute Koch brothers funded think tank numbers on Reagan’s budgets you forget to account for [u]inflation* that was still quite high during the Reagan years[/u].”[/i]
[img]http://www.dollarsandsense.org/archives/2009/Inflation500x312.gif[/img]
I love the way you just shamelessly make up your “facts”, Toad.
*The president who deserves the lion’s share of the credit for breaking inflation in 1983 was Jimmy Carter, not Ronald Reagan. Carter’s giant appointee (literally) to head the Fed, Paul Volcker, was the man whose understanding of how to curb the money in circulation is what did the job.
[i]”And a solipsist as well.”[/i]
I don’t know too much about how to treat cancer. However, I do know far more about oncology than ontology. Nice try at a philsophical dig, given your limited education.
Looks like you can’t read your own graph.As I said inflation was still high throughout the Reagan years. Funny that you talk about Carter here but not when comparing deficits. As I recall when Carter left office the federal debt was around $1 Trillion. When Reagan left it was over $1 trillion higher. So Reagan more or less doubled the federal debt. Reagan’s tax cuts blew a hole in the budget and set a pattern for Republicans who have for ever since labeled Dems as tax and spend liberals. Sad thing is that, for many, the Republican answer has been borrow and spend creating a distribution pattern of wealth skewed to the rich.
Anyway back to my point about rifkin claiming its the dems fault. From the SacBee 2-6-11:
5 opposed pension bill
Some GOP lawmakers had other reasons last year for opposing a two-tier system offering lower pension benefits for new state workers.
Their party has crusaded for cuts in state pension benefits, and most Republicans supported the bill. But five senators voted against the measure, preventing the necessary two-thirds vote for adoption in regular session. Three GOP Assembly members abstained.
Their reluctance angered then-Gov. Arnold Schwarzenegger, who suggested they were catering to labor unions and contradicting their party’s ideals.
“Republicans?” he chided them in a radio address. “The group who rails against government spending? The group who preaches fiscal responsibility? The group who accuses its opponents of being controlled by public employee unions?”
Schwarzenegger ripped several GOP holdouts by name, including Assemblymen Kevin Jeffries of Lake Elsinore and Cook, both of whom abstained; and Sen. Sam Blakeslee of San Luis Obispo and now-Senate GOP leader Bob Dutton of Rancho Cucamonga, both of whom voted no.
He cited $75,000 in donations that state prison guards made in past years to GOP members who did not support the pension bill.
Legislators criticized by Schwarzenegger scoff at the verbal spanking. They deny that campaign donations affected them and say they had legitimate reasons not to support the measure.
Dutton said he could not support passing the bill when the prison guard union, the California Correctional Peace Officers Association, had not yet negotiated a new contract.
“If you’re going to really have serious pension reform and budget fixes, you’re going to have to get them involved,” he said.
Dutton, Blakeslee, Cook and Jeffries objected to the frenzy of late-night negotiations that preceded passage in the frantic final hours of the Legislature’s 2009-2010 session. “I don’t like these sorts of late-night, smoke-filled room deals,” Blakeslee said.
Schwarzenegger ultimately ended the suspense by declaring a predawn special session, which allowed passage of the bill by majority vote.
Read more: http://www.sacbee.com/2011/02/06/3380886/gop-lawmakers-have-split-in-votes.html#ixzz1DC5MGKx9
Both Mr. Toad and Rifkin are admirable advocates for their positions, but both profess to be open minded to new ideas. I ask both to consider the following conceptual construct:
Neither political party wants to reduce the deficit, per se. The deficit is useful to both parties as a tool they hope to use to achieve another end.
Democrats are the party of “tax and spend.” Mr. Toad, that isn’t an insult; it is an observation. The Dems’ preferred method for resolving the deficit is to raise taxes and then spend those revenues to pay for a wide variety of programs and purposes that benefit their core constituents and interest groups.
Republicans are “borrow and spend.” The Reps don’t really mind spending on programs and purpose that benefit their constituents and interest groups, but they don’t want to do it via taxes because doing so would risk losing important core constituencies. But an increasing deficit, coupled with the political inability to raise taxes “starves the beast” ultimately requiring a reduction in spending – which is the true goal.
That strategy is working. The federal government must now cut spending. Everyone who counts accepts that reality. Taxes cannot be raised enough to address the deficit without harming the greater economy. The only way to begin to address the problem is through spending cuts.
The real battle ahead is determining what will be cut. Every cut has its consequences both economically and politically. The Dems want to protect the social safety net and and the government jobs. The Reps want to protect their own pet projects and services that also provide jobs to their constituents.
So in summary, focusing in on who is responsible for the deficit misses the bigger picture. Both parties are responsible for the deficit. For a while at least both wanted it because it provides the excuse necessary to achieve either greater taxation or program reduction. It seems the Reps won that game of chicken: taxes will not be raised enough to pay for programs, which means programs – and spending – will be cut, especially the cost of government itself.
Wow Toad, you are working hard to pin the unfunded PEU pension problem on the GOP. That is a complete nonstarter don’t ya’ think? You can always find a few faux Republican state legislators in this state. Regardless, given the unions spending and manpower muscle and their successful track record defeating opposition candidates and initiatives… and the number of leftie voting districts in this state, many GOPer have to play the game to stay alive.
There is a non-partisan point to be made though… that all politicians overspend. I don’t have state stats handy, but nationally, for the last 80 years, 67 were deficit-spending years. See here [url]http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms[/url] amazingly every prez since mega-spending FDR left office increasing the national debt.
Also, looking at the historical budget tables from 1901 to 2010 [url]http://www.whitehouse.gov/sites/default/files/omb/budget/fy2009/pdf/hist.pdf[/url], every year for 79 out of 110 years, our federal government has spent more than it has taken in.
Looking at the spending per GDP, defense spending (currently about 4% of GDP) has averaged about 7% since 1948. However, non-defense spending has skyrocketed. In 1948 the government spent 11.9% of the GDP on non-defense. Today the figure is about 28% and climbing. The average per-GDP non-defense spending from 1948 to today is about 22.5%… so we are way over the average. This per GDP social spending has remained somewhat constant since 1968. It is the looming social security crisis and Obamacare bills that threaten to blow it up.
It is clear that politicians of all stripes like spending our money and our children’s money without enough reservation. We can debate the virtues and evils of pensions; but none of it solves the larger problem of overspending. For that solution I suggest keelhauling.
A good conversation meanders, and, despite the invective, this has been a good one. But should we not take advantage of this opportunity to redirect our focus back to the problem at hand – i.e., Davis unfunded mandates? I’ve learned a great deal about the topic trying to keep up here. Even though there would surely be vehement argument over the causes of our city’s current pension costs crisis, it seems everyone agrees that pension reform must occur. So that is known. What is unknown is the shape and substance of that inevitable reform.
The ways this problem can be solved range between the option of doing nothing on one end of the spectrum and literally endless choices, all of which carry their own costs and benefits. But in the end, once a good faith effort to negotiate takes place and the impasse process plays itself out, the City can unilaterally impose virtually any solution it wishes. The only option employee groups would have at that point is (1) accept a unilaterally imposed solution, or (2) strike – with the caveat that there are limits to any strike that jeopardizes public safety.
I am very interested in the possible solutions you Vanguardians envision. If you could fix what is broken, how would you do it? I’m not asking about the negotiation process. I am wondering about the actual end decision you would implement – either through a negotiated settlement or via unilateral action – if you could do it.
“Wow Toad, you are working hard to pin the unfunded PEU pension problem on the GOP. ”
Not really, I just object to blaming the dems and the unions when as you say its a bipartisan problem.
Paul in response to your question. Going forward we need to get rid of the 3% at fifty and put a cap on total retirement compensation. The notion of people getting six figure pensions does bother me. We can begin to see the outlines in the last Gov’s pension deals on his way out but I would go further. I would cap age factors at 2.5% going forward. By that I mean courts have ruled that you can’t take someones pension away but there is a movement to reduce the age factor going forward. The logic is that if you haven’t earned it yet it isn’t vested. Waiting for new rules for new hires will bust the budget because the turnover is too slow. I would also get rid of City workers getting the money for health insurance they don’t use. This is an archaic relic of a time when health insurance was cheap. Maybe some sort of stipend in lieu of benefits is warranted but the amounts of money being given to city employees who don’t use City health benefits are outrageous. Cashing out sick days is another thing I’d get rid of. In Calstrs we can apply unused sick leave as service credit but can’t cash it out.
This is what I am looking for. More, please.
Green Bay rules!!
“Not really, I just object to blaming the dems and the unions when as you say its a bipartisan problem.”
I don’t blame them per se, but I do have a problem with unions… especially public-sector unions. Unions were formed initially to provide labor leverage to negotiate with company owners. As we the people are the owners of government, there is a conflict of interest with union people owning more power over non union people. In pursuing their self interest, it takes away from my self interest.
“This is what I am looking for. More, please”
Most of us must be selfishly thinking about our entitled retirement since there there seems to be little support for across the board raising of the retirement age. Raise the retirement age to 75 for everyone… maybe 65 for safety employees, and the problem pretty much goes away, does it not? Works for me. If not you, then I would like to understand why.
[quote]Raise the retirement age to 75 for everyone…[/quote] Are we to take this literally? That literal translation could be construed to mean that those who are younger than 75 should now stop receiving retirement benefits (private pensions, public pensions, social security, medicare, etc.) until they achieve (if they make it) age 75? That certainly would save money and bolster the funds available to those 75 years and older.
You couldn’t do it retroactively. I think 75 is too old for the retirement age. But certainly 65 unless good medical reasons prevail should be implemented.
hpierce – I think Jeff is talking about raising the City of Davis retirement age. The City of Davis has no power to affect the retirement age for any other purposes. For example, it is possible for an employee to begin obtaining SS benefits before receiving City of Davis retirement benefits that are supplemental to SS benefits. So it can be done. Whether it should be done or will be done is, of course, undetermined – but the option seems squarely on the table.
David – Depending on how the City of Davis retirement system is structured, it could possibly be done retroactively in the sense of voiding or altering future payments. I know of know way any government agency can take back payments that have been made in the absence of fraud, and there is no possible way the City will accuse any of the employee associations of fraudulently obtaining their retirement benefits. It seems clear that the City negotiated at arms length and entered into those agreements with eyes wide open.
Excellent discussion w lots of good ideas. Hope the CC is reading…
Hey Jeff Boone, another good Letter to Editor in Davis Enterprise!
Thanks Elaine! I had to respond to that guy’s letter.
On my point about raising the retirement age: Hpierce: yes, of course there is no way to retroactively bring someone back from retirement. Going forward though, I think we should rethink the entire concept of retirement… doing away with the mindset that someone “earns” a government-paid permanent vacation after so many years of service. I say we set the retirement age to say 70 (splitting the difference between my recommendation of 75 and David’s suggesting that 65 is more reasonable), and fully fund it. Then allow early retirement paid for by the employee. For example, if the employee wanted to retire early at age 60, then the employee should have been investing in a 401k, paying off his/her mortgage and basically doing what all of us in the private sector must do. Then when that retired employee reached age 70, the pension benefits would kick in.
My thinking here is that most people, baring big health issues, are able-mind/bodied and should be able to perform in their job more years than we want to admit. The primary reason I think we don’t want to admit it… we all like the dream of retirement before age-related health issues prevent us from traveling and hobbies. I have no problem with that dream as long as people fund it themselves.
So, why not allow early retirement after, let’s say, age 57… but without the government-paid pension and health benefits for the next 13 years.
For example, let’s say I was able to save $600k in my 401(k) by the time I turned 60 and I want to retire. I have $75k left on my mortgage. I pay off my mortgage and then purchase an immediate annuity with the remaining $525k. Assuming a 6% return, the annuity would pay me $5,828 per month for the 10 year term. I’m not sure about Medicare eligibility, but it is possible that this might kick in at age 65 until the pension kicks in at age 70. Regardless, this is still a much better deal than most people in the private-sector have.
Of course this type of change would face a number of technical/administrative challenges. For example, maybe it requires an incremental change to the retirement age over time since existing employees have less time remaining to save for their early retirement. Also, I think today a person would forfeit his/her pension by retiring early… so that rule would need to change. However, from my perspective and a historical perspective, we have a greater life expectancy yet we have not reset our expectations for how long we can and should be able to work. We, in fact, want our cake and eat it to. As we age, we burden the health care load and increase the costs, yet at the same time we expect to be rewarded with an end-of-life paid vacation for all those extra years. Our kids have to pay for all of this. My thinking is that we should all plan to work longer to help pay for the gap instead of passing the bill on to our kids… unless we bank enough to allow us to fund our own early retirement (paid vacation).
Good stuff. Very good. I am learning a lot here.
Jeff, you use the term “fully funded” but that term is flexible, meaning one thing to one person and something else to another. All retirement plans are “fully funded” to the extent that they are funded. “Full funding” can mean enough money to live a certain lifestyle. But how much can and should an employee expect to reasonably receive?
Here is my concern: Rifkin persuasively argues that a prudent person can achieve retirement financial security by careful and thoughtful investment. Jeff, you essentially argue the same thing. However, right now it is likely that some if not all of those subject to very generous retirement packages will argue that they have reasonably relied on the expectation of receiving the current benefits and have therefore not saved and invested as they would have if they knew that, when they retired, they would be receiving less. What does an employer do about that, if anything? Does an employer have a responsibility to consider the interests of those who did not invest, did not save because they thought they didn’t need to?
I have no opinion about this, but anticipate that it will become an issue and would like some feedback from this group.
JB: “For example, let’s say I was able to save $600k in my 401(k) by the time I turned 60 and I want to retire. I have $75k left on my mortgage.”
Here is the problem w these assumptions…
1) The $600K in the 401(k) is probably worth less than half that in the current economy… what it is worth will depend on how well the stock market is doing at the time the person needs to tap into those funds.
2) If seniors have taken a huge hit to their investments, they do not have the luxury of time to wait for their investments to go back up.
3) Often seniors have been forced to eat into their housing equities w reverse mortgages to pay for roof repairs, sudden medical calamities and the like. This is a very common scenario…
4) Annuities frequently have very high fees, and are a rip off and very unsuitable for seniors…
Of course, $600K really is not that much money when you consider it’s about $30K per year when spread over 20 years, whereas pensions can be a good deal higher.
Paul: in this instance, fully funded means that the city has paid it’s future obligations to its employees. An unfunded liability means there is a portion of the retirement still due when the employee retires.
“you use the term “fully funded” but that term is flexible, meaning one thing to one person and something else to another.”
Good question. This is my shorthand for calculating the entire ongoing pension payment obligation, and using conservative rates of return, demonstrate that the obligations can be met. Basically the accounting of expected inflows and outflows must balance using conservative rates of return. No additional debt would accumulate to require our children to cover. No wild projections of high rates of return should be allowed.
1) The $600K in the 401(k) is probably worth less than half that in the current economy… what it is worth will depend on how well the stock market is doing at the time the person needs to tap into those funds.
As Rich points out, using a balanced investment strategy that moves more of the portfolio to lower risk holding as a person ages, you mitigate the type of risks that caused so much loss. Let’s use a long-term rate of return of 5-6%. This is conservative. Now let’s take a 30-year old city employee making an annual salary of $75,000. Let’s say that that employee has been a home owner for five years and has 25 years of payments left on his 30-year mortgage.
Currently the IRS allows a person to withhold $15,500 per year pre-tax to invest in a retirement account (IRA or 401k or 403b). At age 50 and above, you can add $5,500 in “catch-up” to that assuming you have not already hit the maximum annual contribution amounts.
Let’s say that this employee starts withholding a few hundred every month beginning at age 30, and increases it every year until at age 50 he is able to contribute the maximum of $15,500. Then at age 55 the mortgage is paid off and he can contribute the full $22,000 per year. Remember, this is pre-tax. If you made $75,000 a year, and withheld $22,000 for your 401k, then your taxable gross would be $53,000. Assuming a combined fed and state marginal tax rate of 35%, the government would essentially be giving you $7,700 of that $22,000 to put in your retirement account.
Running different scenarios like this and assuming a conservative 5-6% rate of return, it is feasible to get to the $600k figure. In fact, it is feasible to exceed that amount with an aggressive savings plan and a well managed investment strategy. Remember, the government currently subsidizes this type of savings.
Certainly all sorts of things can conspire against this. Divorce is probably the most detrimental for an otherwise prudent retirement savings plan. Major health care costs can also throw a monkey into the wrench. These are the bad luck things that happen to people that sometimes mean they have to work more years before they retire… or sacrafice more on the nice-to-have things. Complain to a small business owner for sympathy on this. However, don’t do so owning big houses, new cars and trips to Europe ever two years… otherwise the small business owner will likely give you a piece of her mind!
Note that I am not fussing with inflation in all of this, but the model still works well enough. Note too, that this model is the ONLY model for non-public sector employees that lost defined benefits decades ago.
David – Thank you. “Unfunded liability” is a generally well-understood term, but I’ve been involved in discussions where a “fully funded pension” can mean different things to different people.
It is my impression, based in large measure what I’ve read in the Vanguard, that the City cannot fully fund its obligations to its employees. Is my impression incorrect? Is there a viable argument that the City can fully fund its obligations to its employees? I am not talking about “should” but “can.”
The city can pay its obligations, but the problem is that it will cost the city about $7 million in additional money to do so. Given our revenue stream, that means we either have to figure out ways to reduce our obligations or cutback on services to the taxpayers. That’s the point of this article.
But right now, the city has amassed a huge unfunded liability both in terms of its pensions and in terms of its retirement health. And that means we are going to have to in the future pay more money to people who are not working currently and providing current services to residents.
That’s what I thought. Forgive me for seeming slow on the uptake, but I wanted to make sure. The devil is always in the details.