There was a write up in the WSJ about a particular type of pension called a voluntary employee beneficiary association or VEBA. You can read the article for the particulars of this type of pension but the bigger point is that like other pensions, one element that will determine the future is stock market performance and the realization that the VEBAs mentioned can't count on the expected returns built into the plan.
The general take is that one way or another, retirees and future retirees are going to be adversely affected. There will be benefit cuts and current workers will need to pay in more and more.
One point I have made over the years is that if there is not enough money saved then something will have to give; either lifestyle, working longer or saving more before retiring. This pertains to defined benefit plans too.
All manner of retirement plans are facing some serious headwinds. The viability of social security and medicare as we know them has come into question, pensions are underfunded and savings rates and average 401k balances are generally much lower than they need to be.
I've also made clear the extent to which I think sole reliance on something like a pension or social security is destined to end badly for a lot of people. The reality that I think is coming down the road is various forms of "bailouts" for people who are not otherwise prepared for their financial futures and if you are somewhat prepared, or in even a better position than that, then you will not think the bailouts (there will be some other word) are fair because you won't benefit.
The benefit though is the psychic value of your own self-sufficiency and not having to fret over whether you will get one of these retirement bailouts. Self sufficiency is very empowering and not to be minimized. As far as not having to fret over the bailouts, financial stresses are very bad for us so the extent which we can have one less source of financial stress or mute the impact of a stresser offers the opportunity for being healthier. This always draws disagreement which is good but this is a philosophical point of not wanting to be at the mercy of something that is both beyond your control and on very shaky ground.
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21 comments:
You are correct that future "bailouts" for those who have never saved is "unfair" to those of us who denied ourselves and worked harder so we would be able to support ourselves in retirement. I learned in about 7th grade that the world is not "fair" in any sense. But I was very happy to read your point about the psychic value of being prepared, or at least knowing that one did the best they could to be prepared, for retirement, not dependent on taking from others.
You raise a point I hadn't thought about but I think you are right - especially in our society of entitlement. At some point, we need to do a better job of educating our society about retirement, pensions, investing, social security, etc. Kids today are provided with a single quarter of financial literacy in high school - very lame. Give a person a fish, they eat for a day, teach them to fish and the eat for a lifetime.
We have a society that wants to be protected from everything by the government.
We have lots of public sector unions who want to be over paid to protect them.
Current politicians lie and say they will protect them. All kinds of BS. Remember AL Gores Lock Box for Social Security? People are stupid and gullible. Politicians in greece and italy are no different than our elected officials. They will tell you pensions, medicare, etc. will be there until the numbers are so bad they have to default.
It is all a ponsi scheme and teachers government employees politicians of both sides will keep telling you it will work and all they need to do is tweak it.
And the stock market was not in a bubble. And the housing market wasn't in a bubble. And we can handle all the debt out there. - sure
the only problem with the lockbox was that only Al and Tipper were going to have a key (SNL reference)
So, there are a few things about that NYT article that bother me.
1. At some point, can these guys realize it's smart to hire an intelligent guy like me at a comfortable 6 figure salary who can explain to them that these plans are stupid?
2. 820k people. healthcare for 80 years. Say it's $500/month per person, which is probably a low estimate. That's $4.9b/year. If they're $20b in the hole NOW, my guess is they've been in the hole since the beginning and never did anything about it.
3. 2010 deductible? $340. My 2010 deductible? $400.
4. 2010 out of pocket max? $570. Mine? $6100. Who the heck negotiates health insurance where the difference between the deductible and the total OOP is $240? That's criminally stupid.
Note that there appears to be zero cost per paycheck. Yet another shining example of no one knowing what their healthcare really costs.
If half a billion in loans to Solyndra because they were big campaign donner doesn't convince you politicians will not look after the public's best interests what will?
A few random observations (aka vents):
1. Most people want to work hard. They want the satisfaction and security that comes from employment. Stop with the bunk about a 'society of entitlement.' I, and many others, want to work hard AND be justly remunerated for our labor. The last part of that equation increasingly is missing in our economy.
2. Ah yes, Al Gore and the lock box. You know what, maybe, just maybe, we shoulda elected him instead of the Guy Whose Name I No Longer Care to Speak. I wasn't a Gore fan. But boy, look at what we ended up with.
3. One poster says we should better educate our children in high school about financial literacy. True enough, but fat chance. Another poster almost immediately takes a gratuitous slap at teachers. A fair number of politicians have done their level best to gut education and have pushed schools to focus on a narrow curriculum. Few of us do nothing to support schools beyond carp about them. Full disclosure: a daughter who teaches high school math in a poor, rural district and likely earns less than you do. But hey, you want her to save the world and do it on the cheap. (Well, she's doing that.)
4. You can provide social support to your fellow citizens or you can have a lot nastier developments than the current Occupy movement. So pick you poison.
5. The prudent will do exactly what our host has routinely suggested in terms of personal financial planning. The prudent also will do this in a gracious, good-spirited manner, with personal optimism and personal generosity to those around him. (If you gotta ask why, don't bother asking.)
BillM
BillM-
Applause to your comments. Ditto SD. You seem part of the "sane" folks.
BillM,
We are going down the road of Greece, Italy, Spain, etc as we promise more and more "social support" for people. We are trying to support a ponzi scheme.
As far as people wanting to work hard I disagree. My cousin the retired toll taker whose retirement is around $100k a year does appreciate your support for big government after having had to have done little work to earn it. Seems like fair and appropriate compensation or "justly remunerated" as you put it.
Are you suggesting that capital would suddenly stop coming into the U.S? And that the U.S. would somehow lose control of its own money supply and interest rates?
That's what is hurting Greece, Italy, and Spain. I'm not sure now that's connected to poorly negotiated pension contracts.
not next year, but eventually yes we will have a harder and harder time borrowing the 38 trillion in unfunded medicare promises down the road. It is not just pensions there are all types of government promises that will not be kept or will bankrupt us.
"higher interest rates for borrowing" is a different matter than either of the things I mentioned.
It should also be pointed out that Greece and Italy are paying higher interest rates BECAUSE of the factors I mentioned. the rates are a result, not a cause.
This is what you said
"And that the U.S. would somehow lose control of its own money supply and interest rates?"
after my reply that we would have a harder time borrowing you said this
""higher interest rates for borrowing" is a different matter than either of the things I mentioned."
how high interest all of a sudden different now?
We will only be able to borrow at very, very high interest rates eventually and yes we will loose control of our currency as we will be forced to print, print and print some more worthless money.
We will never be able to borrow for all of the promises we have made to the public to buy votes.
" yes we will loose control of our currency as we will be forced to print, print and print some more worthless money" implies that we do have control of our money supply and we're trying to inflate our way out of the problem (in this awesome future).
Note that Greece, Italy, and Spain cannot even attempt to print money. They don't control the euro. These countries do not control their own monetary policy.
A lot of the big numbers tossed about are fictional but, even where they are not, any big number can look scary to those who lack sufficient knowledge of national accounting and/or macroeconomics to put it into context. It does little good to keep repeating those numbers as if they meant something in the absence of that context.
For example, the notion that there are "38 trillion in unfunded medicare promises" depends on a Heritage Foundation analysis that projected the budgetary "road" out a century (that's certainly "down the road" all right) and also assumed all economic, revenue and policy trends would remain unchanged. None of this is standard accounting analytic practice for reasons that should be obvious.
NB: Thanks for that comment BillM; fair and balanced as we used to say in the days before that phrase was turned into a caricature of itself.
I understand the euro stephen
There is more than one way to lose control. We can print dollars unlike them so we will lose control by printing like germany did after WW I if we continue down this road of making promises we can not keep.
If the promises are unsustainable we will lose control. we are a trillion a year unfunded today. It will only get worse as baby boomers consume more medicare. Lets not forget money for people who can not pay there mortgage or student loans or what ever. It is a system where the government just can not provide everything that is being promised.
RW
Nice pay no attention to the big numbers speech.
OK simple this years deficit is estimated at 1.3 trillion. This years gdp is estimated at roughly 13 trillion.
We are borrowing roughly 10% of gdp per year and the really expensive years with baby boomers retiring is coming quickly. We will not be able to borrow enough, interest rates will go sky high eventually.
10% is unsustainable and government promises just continue.
Anon 12:21, nice string of unsubstantiated assertions and unsupported conclusions.
Hope you don't mind if I get my numbers and conclusions from professionals; e.g., http://tinyurl.com/ccjhotf
FWIW I have no doubt that "interest rates will go sky high eventually" just as I have no doubt we will all be dead given the same time horizon but I have made a lot of money the past four years, even more than I made in gold, betting that US interest rates would fall and I expect them to continue to do so as a world desperate for safe financial assets finds no where else to turn.
NB: Since this is an investing forum that is the crux of the matter for me. So, are you betting on your convictions here or are you blowing smoke?
For everyone else I have a really scary albeit smallish number for y'all: 7.4%, the rate on 10-year Italian bonds this morning.
RW
I know you think you are smarter, but why don't you try reading
This Time Is Different: Eight Centuries of Financial Folly
by
Carmen M. Reinhart, Kenneth Rogoff
We are clearly going down the path of excess debt and financial insolvency of some kind if we do not stop all these promises to voters.
BTW, The number for the deficit are also valid
Don't know what "smarter" means here other than whether or not money is made so I guess that makes me 'smart' -- until the next time the market demonstrates I'm 'stupid' (which it will certainly do) -- but I have read some of Rogoff and Reinhart's work, including the paper you cite (available online at http://www.nber.org/~wbuiter/cr1.pdf), and think it solid and cause for concern even if it does not support the inevitability of the outcomes you outline; i.e., validity of numbers is good, validity of interpretation is better.
But you are not in bad company because some of Rogoff and Reinhart's subsequent work has been criticized for assumptions and projections which their previous work does not well support either; e.g., their follow-up paper, Growth in a Time of Debt (draft available at http://tinyurl.com/7bov6uj), claimed that debt-to-GDP ratios over 90% are associated with lower growth but this is not only weakly supported by their own research it is contradicted by the work of others; e.g., http://tinyurl.com/7udvylp
But these kinds of wrangles evade a big-picture point that I haven't seen emphasized enough and it really puts a burr under my saddle: It has nothing personal to do with you but far too much of the talk I've been hearing or seen in writing seems to take American failure and decline as a given. The message seems to be we can't grow or innovate our way out of this crisis so we must cut services, cut education, cut spending everywhere while telling ourselves lies about contraction really being expansionary as we send the old and weak out onto the ice.
That is not the America of faith, broad shoulders and stone cajones that I know and it kind of freaks me out.
It does remind me of something my favorite longshoreman philosopher, Eric Hoffer, said some years ago though:
"Our achievements speak for themselves. What we have to keep track of are our failures, discouragements, and doubts. We tend to forget the past difficulties, the many false starts, and the painful groping. We see our past achievements as the end result of a clean forward thrust, and our present difficulties as signs of decline and decay."
We have hit a very rough patch and badly need to get out of it but first we need to remember how much tougher some of the times we got through in the past really were and then get over this funk. There may be a day in the future when someone doesn't want to buy our bonds but right now they are buying them at negative interest rates (you read that right) and for us not to be selling them hand over fist to finance all the things we need to be doing is not only ball-less it is f**ing stupid!
Okay, rant over, no more soap box for awhile. It was nothing personal, just got the ring in my neck pulled.
Atrios at http://tinyurl.com/78fg8rf captures part of what I'm feeling here: The fat cats who run the show thought they did just fine and just can't imagine why everyone is still so ticked off.
It's like they all read Rogoff and Reinhart, decided it was gospel instead of a warning and concluded they were All Stars for accepting what could not be avoided; hate to clue 'em in but any weak-kneed, brain-damaged jacka$$ can make that team.
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