Posted on 07/19/2015 7:44:43 AM PDT by george76
Why Pensions Are A (Big) Black Swan – Chicago’s Unfunded Liabilities Are 10 Times Its Revenues, 50% Of Their Cash That Will Have Go To Pensions. [ Full title ].
...
When talk turns to what might derail today’s debt-driven “recovery,” the big names and easy stories get most of the attention: China with its soaring debt, volatile equities and heavy-handed intervention; Japan with its stratospheric debt and science fictiony demographics; Greece, which needs no explanation; the developing countries with their weak currencies and mountain of dollar-denominated debt. And of course America’s triple bubble of stocks, bonds and derivatives.
Underfunded pension plans, to the extent they come up at all, tend to be mentioned in passing largely because most of them are 1) too small to matter on their own and 2) too hard to understand for most people to form a strong opinion.
But they deserve a closer look. In the US there are dozens of state and local pension plans that in the aggregate are underfunded by several trillion dollars (meaning they’ve promised this much to beneficiaries but don’t have it). When one plan blows up it will impact lots of others, so the aggregate number is a pretty good indicator of the real risk.
The generally-accepted poster child for pension mismanagement is Chicago.
...
Consider the plight of huge California pension plan CalPERS:
CalPERS misses its target return by a wide margin.
(Excerpt) Read more at investmentwatchblog.com ...
Those retirees are only viable and important so long as they can still vote.
In the case of the state and local pension plans, they don’t qualify as a Black Swan, since the probability of a major bust is predictable, not a surprise.
But it certainly is a disaster waiting to happen.
The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.
The theory was developed by Nassim Nicholas Taleb to explain:
1.The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.
2.The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).
3.The psychological biases that blind people, individually and collectively, to uncertainty and to a rare event’s massive role in historical affairs.
Due to the demographics of this city,
anyone who opposes a taxpayer bailout when they go bankrupt
will be called “racist”.
You have your eyes and ears shut, or
You are a politician, or
You are a Liberal
All they need is a bigger can and a longer road.
chicago... america’s next detroit
this is what ‘progressives’ push for... to burden the system to the point of failure.
‘progressives’ are american commies spun up by cold war russian agents in our university system
From a free market perspective, pensions nothing more than deferred compensation. An employee agrees to contract with an employer for labor at a price which includes current compensation (wages, medical insurance, etc) and deferred compensation (future pension benefits). If the employee in good faith provides the labor, the current and future compensation is owed by the employer today and in the future.
Cutting pensions of employees who have provided the labor they were contracted to provide is nothing more breach of contract and outright theft. Whether or not the employer (public or private) overpaid for the services of the employee is not an issue. The labor was provided and the compensation is owed.
Employers (municipalities, states, and private corporations) have successfully lobbied Congress for decades to loosen up pension funding rules on the books as well as block legislation which would require employers to fully fund pension plans. To blame greedy employees (government or private) for unfunded pension plans is disingenuous. It is employers, aided and abetted by Congressmen owned by K Street, who have deliberately underfunded private and public pensions in this country for decades.
In 2012 Congress buried in a highway bill a provision allowing corporations to reduce payments into private pension plans. In 2014 Congress passed a bill for the first time allowing pension plans to cut earned benefits. Essentially Congress approved the theft of labor. Instead of loosening funding requirements, Congress should have passed legislation protecting pensions by requiring all employers, public and private, to fully fund pension obligations within five years and to maintain full funding thereafter.
A person who truly believes in free market principles should stand with the employees on the issue of pensions. To allow any employer to walk away from pension obligations is to condone outright theft. Reducing pension benefits is no different than the state allowing a person to walk into a store, take an item to the cash register, hand the cashier partial payment, and walking out the door with no fear of prosecution. Whether or not the price charged by the store was fair or not, to render only partial payment is theft.
It is very possible some public or private pensions are overly generous. One could also argue a firm in bankruptcy paying its CEO a large bonus or severance payment is also excessive. It matters not. If are to be a nation built on respect for rule of law, we must enforce fulfillment of contracts no matter if the contracts are perceive to be good or bad. When we either condone theft or we don’t.
Sue the Democrat Party for the money.
They caused this and they have LOTS of money.
I'd suggest there's also a Reason (3) at work here: Most people ignore the pension problem because they know governments will eventually screw the pensioners if necessary.
The big dividing line is that while private employer and/or private business union pensions may have a portion of the actuarial liability Un-funded (under invested), there are public pension benefits that have no underlying investments to fund the pensions at all — they are simply funded from future public revenues.
In this case, the employee often votes for office holders that will increase benefits regardless of the burden on the public. It is a symbiotic theft ring. In that case, the employee that helped keep a corrupt practice in play does deserve a good portion of the risk should the pension benefit be disavowed in part.
I would agree with this on almost any other issue, but not when it comes to pensions. The problem with a modern pension system is that it gets fouled up for reasons that are completely out of the employer's control. Demographics, life expectancy and medical advances, for example, have been a much bigger factor in the insolvency of pension plans than reduced employer contributions. Simply put, we have reached the point where it has become commonplace for people collect pensions for a longer period of time than they were actually employed. No employer can stay in business for very long under this scenario.
We must end public pensions. Make all benefits payable now. Fund employee 401Ks or 403Bs, as generously as current funds may allow, leaving future taxpayers off the hook.
Cutting pensions of employees who have provided the labor they were contracted to provide is nothing more breach of contract and outright theft.
Is it theft when a private corporation goes bankrupt and can no longer pay a pension?
A person who truly believes in free market principles should stand with the employees on the issue of pensions.
I think these pensions should be converted into 401Ks.
Reducing pension benefits is no different than the state allowing a person to walk into a store, take an item to the cash register, hand the cashier partial payment, and walking out the door with no fear of prosecution.
And when the pensions have bankrupted the store?
These are government pensions.. not corporate that are being discussed.
As for the promise... anything too good to be true usually is. These pensions with retirement at 50 ish and up are not sustainable. The only way to support them is taxation.
Most of us out in the real world are self-funding for our pensions. Most are underfunded because too many don’t understand that the only way to be partially successful is to save AT LEAST 25% of your GROSS pay at at least 6% for at least 35 to 40 years.
Employers are being held to their pensions. Governments will hold us to their pension obligations by brutal taxation even if we can’t ever afford to retire.
Some things are just not possible no matter what the contract says. You had better keep that in mind when you sign up for something that is too good to be true... it usually isn’t either true or possible. You can wish all you want but you can’t get blood out of a turnip.
“Underfunded pension plans, to the extent they come up at all, tend to be mentioned in passing largely because most of them are 1) too small to matter on their own and 2) too hard to understand for most people to form a strong opinion.”
And this means most of them are STUPID as bricks or in denial and don’t want to understand. They signed up for something too good to be true and it isn’t and now they expect someone... a tax payer... to bail them out.
I’ve tried to explain under funded liabilities and wishful thinking to my union inlaws ages age... waste of time. Results in rage borne of fear that I am right I suspect.
I must have been one of the first 22 year-old engineers that ever questioned the stability of Exxon’s pension funding. I thought the HR manager would fall out of his chair when I asked about rates of return, actuarial tables and pay-out calculations. At the time, 40 years ago, Exxon was the same as the federal government... up to 80% of the high-three compensation that my Dad had. It was based on working at least 30 years but not taking the pension until you were at least 60 or so... so that you didn’t live too long as a pensioner. I’d done the calculations as a project in my engineering economics and finance class... just for fun... by hand, no excel. Just me and my Ti-50A.
I’ve seen pension funds go broke and seen people who are lucky to get the pension fund trust minimum pension. It has happened many times in the past. It is going to happen many times in the future and it NEEDS to happen to government pensions.
Social Security is a promise. It is going to be cut and the promise broken. There isn’t enough money to fund the benefits. It has been mis-managed and stolen. Same thing needs to happen to public pensions. They have been mis-managed but they have also been over promised. Labor needs to take some equal responsibility for this. They trusted too much and understood too little.
What’s the problem Chicago? Just raise taxes. Be like Kaliporniastan.
Chicago - thug city...
Your argument is both interesting and correct. As you said so well, to arbitrarily cut pensions just because they are a "burden" flies in the face of the rule of law.
Orderly Bankruptcy courts are the solution here. And that's something many municipalities will have to consider.
IMHO, courts should look at the payment per retiree. Here's what I mean. You have retired folks at the bottom (janitors, etc.) collecting maybe $12,000 per year. And then you have folks at the top collecting maybe $100,000 per year.
If a haircut must be given, it should go more towards those folks at the top. Those folks put in more when they were working, sure, but a, say, 20% cut across the board would devastate the janitor. The top exec, not so much.
I know that's 'progressive" talk (ugh), but it makes sense to me.
“Why Pensions Are A (Big) Black Swan”
That’s racist!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.