America's Crumbling Pension Future?
Nearly one million working and retired Americans are currently covered by pension plans that are in imminent danger of insolvency, according to an organization trying to help people keep their retirement earnings.I decided to provide you with a glimpse of America's pension future. It's not pretty and I'm afraid this is only the beginning of a long and painful pension crisis which will impact millions of Americans who will end up in pension poverty.
The union pension funds have been designated as being in “critical and declining status” — which means trustees are eligible to apply for cuts on their payouts.
Reducing the payout load lengthens the life expectancy of the stressed fund — but does little to alleviate the suffering of seniors who see their checks cut to about a third of what they were promised upon retirement.
According to the Pension Rights Center, which works with seniors facing a downgrade of their retirement checks, a small iron workers union shop in Ohio recently had to accept a pension cut.
The payouts for retirees dropped by as much as 60%, the center said.
Ten private-sector union pension funds have applied to the U.S. Treasury Department for the green light to slash retiree payouts, according to the center.
Among them are labor organizations affiliated with the auto industry, several from the trucking industry and others from the iron workers and bricklayer unions.
There are 68 — including several from New York — that have been listed as having “critical and declining status,” meaning they too will soon have to apply for permission to cut retiree payouts.
A few have enough funding to carry them for 20 years, according to the list compiled by Pension Rights Center using data collected from The Multiemployer Pension Reform Act of 2014.
But many of the funds in critical status have a life expectancy of 10 years or less — some as few as three years.
The Pension Rights Center urges working Americans to take steps to educate themselves about the looming pension crisis.
The prognosis is gloomy for upwards of 10 million Americans over the next few decades if several large funds collapse — particularly the Central States Pension fund that covers 407,000 Teamster truckers in the Midwest and South.
Several other Teamster pension funds are also poised to dissolve — and one of them, Local 707, officially went broke this month.
That has left 4,000 retirees on the edge of financial disaster — many having to make do on less than $1,000 a month when they were pulling down more than $3,000.
For retirees who want to know how much of a cut they might be forced to take, the Pension Rights Center has a calculator to do the math.
All over the United States, retired union workers are pinching pennies to survive, fearing the worst is only just beginning. In Kansas City, Teamsters retirees are ready to offer ‘earful’ to Trump team on the failing Central States pension and other Teamsters retirees are meeting with Paul Ryan and Bernie Sanders in hopes of saving their crumbling retirement fund.
How did we reach this point? I discussed all this back in October 2015 when I went over why the Teamsters' pension is withering:
This is a very important development which impacts all U.S. mutiemployer plans. Unfortunately, I don't expect any relief from Congress as it effectively nuked pensions last December which led to this restructuring.In short, the biggest problem with all these multiemployer pension plans is they never had proper governance, were raked on fees by Wall Street, and were poorly managed for decades. And I wouldn't be surprised if on top of gross incompetence there was a lot of fraud going on at these union pensions.
Welcome to the United States of pension poverty where important social and economic policies are never discussed in an open, constructive and logical manner. Instead, there is the usual divisive politics of "less" versus "more" government which obfuscates issues and impedes any real progress in implementing sensible reforms in education, healthcare and retirement, the three pillars of a vibrant democracy.
Now, let be clear here, I don't like multiemployer pension plans because they are poorly governed which is why many risk insolvency unless comprehensive reforms are implemented. But the problem here is much bigger than multiemployer plans. U.S. retirement policy needs a drastic overhaul to properly cover all Americans, most of which have little or no savings whatsoever.
I've shared some of my thoughts on what needs to be done when I examined whether Social Security is on the fritz:
...politics aside, I'm definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don't work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.Yes folks, it's high time the United States of America goes Dutch on pensions and follows the Canadian model of pension governance. Now more than ever, the U.S. needs to enhance Social Security for all Americans and implement the governance model that has worked so well in Canada, the Netherlands, Denmark and Sweden (and even improve on it).
One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they're incapable of getting the governance right.
So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That's the real challenge that lies ahead.
And now that the chickens have come home to roost, retirees seeing their pension benefits being slashed by half or more are rightfully asking for the government to help them (unfortunately, the government agency that backstops these pensions is running out of cash).
But the problem is the entire system was designed to benefit Wall Street, not Main Street, so it was destined to fail. The fat cats on Wall Street couldn't care less about the plight of retired Teamsters, they are focusing on extracting a pound of flesh from their next victims.
Now, to be fair, it's not Wall Street's fault these pensions were poorly designed and poorly managed, but they were more than happy to play the game as long as it increased their profits.
It would have been much better if all these multiemployer pension plans were managed by their state pension funds. The governance at large state pension funds is far from perfect, but it's much better than what they have at multiemployer pension plans.
Unfortunately, even large state pension funds are experiencing difficulties and it's starting to impact payouts to retirees. I recently discussed why California is crumbling and this morning I read an article by Romy Varghese of Bloomberg, Californians Hit as Bad Debts Lead to Government Pension Cuts:
Maureen Lynch, 66, retired when the California government job-training agency where she worked was shuttered in 2014, assuming she could count on a $1,705 monthly pension for the rest of her life.What a mess and in the end, it's always the poor retirees who get screwed. They worked all their lives, socked money away for a pension that vanishes the minute they go to collect it.
But her former employer, East San Gabriel Valley Human Services Consortium, left a $406,027 unpaid bill to the California Public Employees’ Retirement System, which manages benefits for 3,000 local governments and districts. As Calpers, the nation’s largest public pension, deals with a growing gap between what’s been promised and what’s been set aside, it may slash the checks of Lynch and 190 other workers by 63 percent -- the rate by which the agency has fallen short.
"We were always told that it was set in stone. Now to find out that’s not true -- is the sky blue? Is water wet?" Lynch, who lives in a 1994 motor home, said of her pension. "We’ve paid 100 percent of our responsibility into it. I just don’t understand how they can come along and cut so much out."
The East San Gabriel agency would be the first to see benefits reduced by Calpers since November’s action against the tiny city of Loyalton, illustrating what can happen to promises once viewed as sacrosanct when money runs out. Two other small California agencies may also face cutbacks, affecting five people, as Calpers pushes back against derelict governments.
"We end up being the bad person because if the payments aren’t coming in, we’re left with the obligation to reduce the benefit, as we did in Loyalton," Richard Costigan, chairman of Calpers’s finance and administration committee, said in an interview. "Otherwise the rest of the people in the system who have paid their bills would be paying for that responsibility."
Across the country, states and local governments have about $2 trillion less than what they need to cover retirement benefits -- the result of investment losses, inadequate contributions and perks granted in boom times. In Puerto Rico, where the retirement system is nearly out of cash, pensioners may take a hit, while employees in cities including Dallas and Chicago are also under pressure to give back some benefits to prevent their plans from collapsing (click on image).
Calpers has been paying benefits at a faster pace than it brings money in. In December, the system moved to ensure its long-term sustainability by reducing the assumed return on its investments to 7 percent from 7.5 percent. That will trigger higher annual contributions from governments, since it can’t count as much on financial-market gains to cover the obligations.
"Unless something is done to stem the mounting costs or to find ways to fund those mounting costs for employees, then the only recourse, beyond reducing service levels to unsustainable levels, is going to be to cut benefits for retirees," said Michael Coleman, fiscal policy adviser for the League of California Cities.
Calpers, which holds some $311 billion of assets, says it’s following its fiduciary responsibility. It doesn’t set benefits but manages them on behalf of local governments, most of which are fulfilling their obligations. Permitting monthly checks to flow to retirees whose former employers haven’t paid their bills undermines a system that has just two-thirds of what it needs to cover liabilities due in the years ahead (click on image).
Both the Independent Cities Association, a nonprofit with one retiree, and Niland Sanitary District, which has four workers in the system, may also see benefit reductions. The board of the cities’ group, which promotes municipal issues, hopes to resolve the matter, its attorney Arnold Alvarez-Glasman said in an interview. Debbie Salas, a Niland board representative, didn’t reply with detail to emails or return phone messages.
The action against Loyalton was believed to be the first time, at least in recent decades, that Calpers reduced employee benefits.
The case of the former East San Gabriel agency would be felt more broadly. Known locally as LA Works, the service at its height had about 140 employees and an annual budget, funded mainly through government grants, of about $13 million, said Tom Mauk, a consultant hired to help wind down its books. It went out of business after Los Angeles County severed its relationship, citing overbilling by the agency.
Calpers had asked the cities that formed the entity -- Azusa, Covina, Glendora, and West Covina -- to pay the debt to the retirement plan because, as staffers said during a February board meeting, of their ethical responsibility.
"What’s unacceptable is the fact you have a number of employees who were promised a benefit, nobody is paying to meet that liability and people are walking away from their responsibility," Costigan said in an interview.
Municipal officials said they have no legal obligation. Any payment could be considered an illegal use of public funds, said Chris Freeland, West Covina City Manager.
"Personally, I think it’s a way to deflect from their handling of pensions for the last several years," said Glendora City Manager Chris Jeffers of Calpers’s request.
Retirees feel abandoned. Sandra Meza, who spent nearly three decades at the job-training service and receives about $3,300 a month, said she plans to attend a March 15 meeting of the agency to appeal for help. The 62-year-old Chino resident views the cities and Calpers as equally responsible.
"When it comes to money and business, sometimes moral and ethics don’t mean anything to those people," she said.
Folks, I'm just providing you with a glimpse of America's pension future. It's going to get much, much worse for everyone -- those with a DB or DC plan -- when the stock market rolls over and rates hit new secular lows.
And as I keep warning you, massive pension poverty and an aging demographic are not a cocktail for rising inflation expectations and higher rates, they are deflationary and will hamper economic growth for years to come.
I know, the Trump rally is on fire, Warren Buffett hates long bonds, everything is just peachy, rates will rise and assets will keep soaring, wiping out all these pension deficits and bolstering America's 401(k)s.
If you believe that rosy scenario, you're in La La Land and in for a bad ending. In fact, an informed reader who agrees with David Rosenberg's cautious stance on the Trump rally, sent me this:
On Monday, Feb. 27, Buffett was on CNBC's Squawk Box for 3 hours, and he reiterated that these displaced workers need to be "taken care of". Buffett expects the government to do this because the US is a sufficiently wealthy society, it can and should do this, as in "it's the right thing to do".
Where's the money going to come from? Who are you going to tax? The top 10% already pay 2/3 of all income taxes, whereas the bottom 50% only pay 3% of aggregate income taxes collected. The world's rich already believe they are over-taxed and this is why they squirreled away $30 trillion in offshore tax havens. US corporations have $2.1 trillion in offshore tax havens which is depriving the US Treasury of $650 billion in tax revenue. What happens if Trump's proposed tax cuts are not revenue neutral causing the budget deficit to expand adding to the already exorbitant national debt?
The Federal Reserve is privately owned and was created because these bankers knew that lending to the government was much safer than lending to corporation or individuals because the govt. has the ability to tax its citizens. It's no coincidence that the Fed was created in 1913 as was the passage if the Federal Income Tax Act, also the creation of the TAX FREE Rockefeller Foundation. The elite Rockefellers are major owners of the Fed, but god forbid they should have to pay income taxes like everybody else.
The US has 45 million people on Food Stamps, 2 million on Unemployment Insurance, 11 million on Disability Insurance (this is where you go when your Unemployment Insurance runs out; i.e., you have a bad back and can no longer work). According to Rosenberg (and I believe him), the US has 23.5 million between the ages of 25 and 54 who are no longer counted in the workforce (they've stopped looking for work) because they are essentially unemployable due to a lack of any marketable skills in today's workplace.
Trump talks jobs returning to the US, but I don't see it happening. Why? Corporate America isn't going to pay someone $15.00 an hour for work that can be done for $15.00 a day in Asia. Continually throwing money at this human scrap heap isn't the answer either. The US needs to totally revamp the education system so that people are being educated/trained for today's/tomorrow's jobs. They also have to establish some form of re-education/re-training for these millions of disenfranchised people who are living well outside of the American dream.I thank this very wise reader for sharing his thoughts with me and I agree, rising inequality, massive unemployment, the aging of America and the developed world, the ongoing retirement crisis all over the world, and the real possibility of an economic crisis in China spreading to other emerging markets will all but ensure a protracted deflationary cycle unlike anything we have ever experienced before.
Income/Wealth disparity in the US is quite striking. My wife is a CA native, so I'm in CA at least 2-3 times per year. The last time I was in LA, we were headed to Dana Point to visit my wife's aunt, and we decided to get off the Interstate at Irvine and take the PCH (Pacific Coast Highway) to Dana Point. Once you hit Newport Beach and start heading south, you're literally in obscene wealth La La Land. I pulled up beside a woman driving a Bentley convertible, and her platinum hair matched the color of her car! Now, if you headed 15 miles inland it's quite conceivable you could be in a depressed neighborhood where every home has bars on its doors and windows to discourage/ prevent B & E's. My take on CA is that unless you live on the west side of Interstate 5, you may as well live in New Jersey.
I agree with your deflation scenario; i.e., lack of aggregate demand. The US has always been the "buyer of last resort", but when you hollow out the middle/working classes by offshoring jobs and no pay raises for 10+ years, there's no one to step up to the plate and buy Asia's manufactured output. It's this lack of aggregate demand which has forced China to go on a debt-fueled infrastructure binge which I don't see ending well because vacant real estate can't service debt. The Chinese Communist Party needs to create these jobs because the party is fearful that if they don't create jobs, the natives will get restless and overthrow the government.
And Mr. Buffett is baffled by who in their right mind wants to buy a 30-year bond? Of course, he won't be around to witness the full force of the deflationary tsunami headed our way (he might be). If you ask me, who in their right mind doesn't want to buy a 30-year bond yielding 3%?!?
Please share this comment with everyone you know, especially your elected representatives in Washington who are all but clueless on what is about to hit them hard in the not too distant future.
I also embedded President Trump's address to the joint Congress. I thought it was his best speech, but just like his predecessor, he too isn't aware (or doesn't care) of America's crumbling pension future.