The Wall Street Journal reports the Long Bull Market Has Failed to Fix Public Pensions.
“Some of the states allowed themselves to get so underfunded that the higher returns aren’t helping them enough,” said Michael Cembalest, chairman of market and investment strategy for the asset-management arm of JPMorgan Chase & Co. and the author of an annual study on the financial health of cities and states.
Illinois Tops the Worst State List
Illinois, New Jersey and Kentucky top the list of states in worst shape on a percentage of revenue basis.
Chicago the Worst City
Worst Cities on Percentage Basis
- Chicago, IL
- Baton Rouge, LA
- Pittsburgh,PA
- Atlanta, GA
- Lubbock, TX
Deeper Pension Cuts Didn’t Materialize
Many states and cities reduced benefits for new employees after 2008. But deeper cuts often met resistance from judges, unions and angry constituents—even in some of the most indebted states.
The Illinois Supreme Court in 2015 threw out cuts by the legislature that were expected to save tens of billions of dollars. Kentucky’s legislature last year declined to approve the governor’s proposed cuts to cost-of-living increases for retired teachers after protests brought thousands to the state capitol and forced cancellations of classes in several school districts.
Pension Plan Assumptions
The average pension plan assumption is about 7.3%. That’s not going to happen.
Please consider charts and commentary from John Hussman’s April 2019 post You Are Here.
Valuations Second Highest in History
Expected Total 12 Year Return is Zero
The following chart shows nonfinancial market cap/nominal potential GDP on an inverted log scale (left), with actual subsequent 12-year S&P 500 total returns on the right scale. As usual, note that speculative bubbles always make it appear that valuations haven’t “worked” in the period immediately preceding the top, precisely because a substantial, if temporary, violation of historical norms is required to get to those extremes. As indicated by other reliable measures, investors are presently facing the likelihood of prospective nominal 12-year S&P 500 total returns averaging roughly zero.
I remember a little boy listening to a concert at a Fourth of July celebration one year. As the music played, the little boy waved his arms as if he was conducting the orchestra. Monetary authorities are a lot like that, except that everyone who watches these kids at play actually believes that they are, in fact, conducting the orchestra.
I’m utterly mesmerized by the credulity of investors who believe that the Federal Reserve is capable of saving them from every possible contingency, no matter how irresponsible their own speculative behavior might be.
Imagine the shock of pension plans if the 12-year average is as low as 4% a year let alone a total return of zero,
Mike “Mish” Shedlock
The unions have won, but like the proverbial scorpion riding the frog across the river, they are stinging the taxpayer frogs to death because…they’re unions. It’s what they do.
This will also end. Neither the Illinois Supreme court nor the Kentucky legislature can prevent the coming bankruptcies which will start to roll across these states and others. There is no national political candidate so stupid as to propose a federal bailout for them.
It won’t be called bankruptcy, but a 25% benefit haircut and 50 year state General revenue bonds should about do it, and the effects are the same.
“There is no national political candidate so stupid as to propose a federal bailout for them.”
Considering they all lined up to do a heck of a lot more than just propose, bailing out a bunch of banksters, I’m not so confident…
As Mencken pointed out, noone ever lost neither money nor public office underestimating the intelligence of the masses. He made that in an era when public indoctrination was much less pervasive than it is today. Politicians are well aware of this.
Yeah those horrible public pensions. Totally unlike social security PENSIONS where people currently get WAAYYY more from it than they ever paid in. “But. but, thats not true!! We paid in that money to SS years ago! It was invested over time! We should get way more than we put in!” Sorry Charlie, your contributions went out as soon as you sent them in … to older people getting SS. Take a look in the mirror, boys …
If you support public pensions fine but dont attach this crap to my house! My house is not the community piggy bank! And if there’s no other way to pay for them then please recall math class where 0+0=0!
The most important thing is to not “attach” any of it to people’s income, nor to any of their economic activities. Noe of which any even remotely civilized government have any business spying on whatsoever.
OTOH, if you want Government to protect your house for you, why should you not pay for the service? And, more importantly, why the heck should someone else be forced to pay them to protect your stuff?
Exactly, jivefive99. We will never agree as to who has the better deal when it comes to retirement funds, so we should eliminate all of them (SS and pensions). Same with public school teachers: We can’t agree with how much they should be compensated, let alone what they should be teaching, so let’s just shake hands and politely part ways. The taxpayers no longer get taxed for education and public school teachers sell their skills in the open market, like private sector employees do. Heck, let’s extend the process as far as possible to other government occupations as well. Let everyone play on the same level playing field when it comes to freely exchanging ones goods/services for compensation, so we can avoid all these childish “but you have a bigger piece of pie than me” complaints which started the day our government decided to be the biggest employer in the country.
The new 7% return strategy: Increase property taxes, sales tax etc. It will go bust also but will keep them going till it doesn’t work and, like brexit, will drag on a long time and destroy everyone including those without a pension. Public pensions are just like the alcoholic analogy of trying to crawl out of a bucket of crabs.
Public pensions. Franklin Roosevelt said they shouldn’t exist. We are now seeing why he was right.
The sales tax here just went up to 10.25%. $10.25 tax on a $100 purchase. Back whenever, the tax was in the 7% range. I would guess that once upon a time it was in the 5% range.
Higher taxes cut the standard of living for the people who produce 70% of the GDP- consumers, who have less discretionary money to spend into the economy. It is a self defeating vicious cycle.
That which cannot continue, won’t, which is why in Biblical times, there was a debt jubilee every 50 years.
“Back whenever, the tax was in the 7% range. I would guess that once upon a time it was in the 5% range.”
Back when America was civilized, they were 0%. Just like Income taxes.
Civilized countries, by definition, simply don’t employ the massive, STASI style, spying and surveillance apparatus’, nor do they mandate the kind of rat-out-your neighbor disgustingness, required to make any such activity tax schemes even remotely possible.
Most pensions can’t or don’t invest in the stock market for obvious reasons. So the same thing that’s causing a boom in equities is killing fixed rate investments. The FED slashing interest rates.
Assume you own a long-term bond. Then market interest rates double. What happens to the value of your bond? Once you figure that out, you’ll know why “slashing interest rates” has either a positive or negative effect on your bond.
Secondly, where did you get the idea that “most pensions” can’t or won’t invest in the stock market? If that’s true, where have they been investing?
OK, you’re right a bond can increase in value when interest rates drop, but pensions typically hold to maturity and most have to invest in safe havens like T-Bills or equivalent. Interest rates being extremely low for over a decade has killed interest income for most pensions.
Didn’t used to I think is what was meant
Good analogy, the conductor. My favorite analogy is the rain dance. Because there is lots of capital and liquidity when the economy is going well, the Fed thinks that if it injects money, the economy will pick up. It’s like making the street wet before doing a rain dance, because when it rains, the streets are wet.
You might check out Brian Reynolds, formerly the chief strategist for Rosenblatt, on Real Vision. His thesis is that the pensions’ need for a 7.5% return has driven them to buy low grade paper and that the funds for this paper has been mostly allocated to buying back stock, helping to drive the market.
Nothing will change.
Public unions are, by far, the all time largest campaign donors in history. They wield incredible power. And they give nearly all of it to democrats. Democrats will not cut one penny from their insane pensions or benefits.
The public unions expect taxes to be raised and raised and raised some more to cover the insane promises of payback for supporting democrats. Because a “promise is a promise” no matter how fiscally untenable it is.
There is no solution to this problem except let them all go bankrupt with no bailouts.
The best a hard working non-public union taxpayer or business can do is to use the state and city lists (from above) as a DO NOT MOVE HERE warning or a MOVE OUT OF HERE IMMEDIATELY warning list.
They also need to ensure the federal government will not bail anyone out. Instead of, in traditional sheeplike fashion, fall for every “starving children” and “tanks in the streets” hobgoblin the leeches go on TV to scare them with. As if those can even remotely add up to the outright horrors of the terror state we now live under.
And, they need to end The Fed. Otherwise, the Fed will just rob them via debasement, in order to generate enough loot to prop up the failed plan’s assets.
As long as there is a way fro leeches to leech, they will leech. The only way to prevent it, is to make it physically impossible for them to do so: Transact in Gold or some solid Crypto; be better armed than the taxman. It’s either those two, or being a nothing more than a slave and a plaything for the leeches.
“Nothing will change.”
When the ultimate crisis occurs, things will change. At one time it was inconceivable that the Soviet Union would fall or Germany would be reunited.
On the other side of the coming crisis, public employee unions may be eliminated for all anyone knows.