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I feel like local governments are going to be the first to really be affected by significant pension overlays that are not properly accounted for -- a lot of pe

I feel like local governments are going to be the first to really be affected by significant pension overlays that are not properly accounted for -- a lot of pension funds assume rates of return that are historically farcical. I think the industry average used to be about 8%. "During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually." http://davidgcrane.org/?page_id=702 http://davidgcrane.org/?page_id=702 It doesn't auger well for the future of stable financial markets. Weak localities will fail, and eventually the states that have to support them. Puerto Rico is the canary in the coal mine.

toomuchtodo 9y ago
I think the concern is overblown. States will need to backstop local governments, and the federal government will backstop the states. Benefits will get (mostly paid); taxes will go up (they have to, they're at unsustainable historic lows). This is not the end of the world.
- bpodgursky 9y ago
  > and the federal government will backstop the states I think it's unlikely the federal government will be backstopping pension problems in IL and CA anytime soon, without a dramatic congressional shift. I think you underestimate how much taxes will need to raise to cover these liabilities. The federal government already has its hands full with SS + Medicare commitments it can't handle. I'd rather see failures and bankruptcies at a local level, which will maybe convince other municipalities to reform before they collapse. I don't want everything centralized into one giant US federal government default. That's not a better plan.
  - toomuchtodo 9y ago
    > I think it's unlikely the federal government will be backstopping pension problems in IL and CA anytime soon, without a dramatic congressional shift. Agreed. That shift is going to happen though. Seniors are not a cohort you can ignore. They vote like clockwork. > I think you underestimate how much taxes will need to raise to cover these liabilities. The federal government already has its hands full with SS + Medicare commitments it can't handle. I don't, but we should've been setting aside these funds. We didn't, and we'll still need to pay out even at a reduced benefits level. > I'd rather see failures and bankruptcies at a local level, which will maybe convince other municipalities to reform before they collapse. I don't want everything centralized into one giant US federal government default. That's not a better plan. Reform will not happen. That's code for "cutting benefits". As long as the US government maintains the ability to tax, it will not default. Social Security keeps a third of seniors out of poverty. 45 percent of Puerto Rican's are already in poverty. Cutting benefits further? That's not tenable. No one held government accountable over the last several decades, and now we're stuck with the fallout. EDIT: Because of ye olde' HN throttling limits: Most seniors don't pay taxes, due to marginal tax rates. Seniors will vote all day to keep their benefits intact. I don't blame them.
    - nopinsight 9y ago
      Unless the brinks of defaults will happen in close successions in > 20-30% of the country, what are the incentives for MPs to vote yes on the backstopping for jurisdictions far from their own? > Reform will not happen. That's code for "cutting benefits". The benefits to be cut will happen in a few small areas given the size of the US, thus will not affect the majority of lawmakers. If the GOP controls the Congress, that doesn't seem like a large enough impact for them to change their overall ideology towards pension subsidies.
      - roywiggins 9y ago
        > what are the incentives for MPs to vote yes on the backstopping to jurisdictions far from their own? Stick it in an omnibus bill with stuff they do like?
    - AnimalMuppet 9y ago
      Sure, seniors vote. Don't assume that the seniors in, say, Texas are going to be in favor of higher taxes in order to rescue pensions in California and Illinois, though.
      - Jedd 9y ago
        Texas (at the time of writing) only appears in this page the once ... which is surprising in this context given its history. [1] A country / protectorate defaulting is not necessarily something that can't be recovered from, and in some cases is the only sensible (or indeed feasible) course of action. [1] https://en.wikipedia.org/wiki/Texas_dollar https://en.wikipedia.org/wiki/Texas_dollar
  - deleted 9y ago
    [deleted]
- DamnYuppie 9y ago
  My biggest concern and issue with the federal government backstopping pensions is that the vast majority of people would now be paying for benefits for people who rendered services in areas they didn't live. Because the populace of one city voted to give certain benefits to public sector employees why should I be held accountable for that decision? I neither had a vote nor partook of their services. I am sure I am being very naive here but this seems to me to be the essence of taxation without representation.
  - toomuchtodo 9y ago
    The EPA is going to spend millions of dollars to clean up Flint, Michigan's water supply lines; you don't get a say in that either. "Representation" is a bit of a vague concept in US governance.
    - maxxxxx 9y ago
      I am fine with bailouts as long as systems are being put in place to avoid repeating it in the future. That's for Flint, pensions or banks. Obviously the prevention step never happens....
      - toomuchtodo 9y ago
        Run for office. Help fix the problem. That's what I'm doing.
      - WillPostForFood 9y ago
        Bailouts create more bailouts because people know they are going to get bailed out.
    - deleted 9y ago
      [deleted]
    - JBReefer 9y ago
      To me, there's a difference between something you need to live that was made poisonous by the government requireing aid and former managers pulling pensions of $200k+ a year. If I lived in Michigan, I'd have a big problem bailing out the FDNY pension fund when I heard that. It's endemic too, look up "LIRR Disability abuse". http://nypost.com/2015/10/21/more-than-2-dozen-ex-fdny-collecting-200k-in-pensions/ http://nypost.com/2015/10/21/more-than-2-dozen-ex-fdny-colle...
- cnnsucks 9y ago
  Well that's not the precedent. When these mismanaged governments finally throw in the towel and hand the reins over to grownups what happens is the pensions and retiree benefits get cut. Detroit just had this happen after the state stepped in and dealt with that mess. Cleveland is in the process of cutting benefits before it goes bankrupt. CalPERS cut pensions last December for retirees from Loyalton. Same thing in the private sector; GM cut retiree benefits with the help of the Federal Government. Last year the Iron Workers union saw huge pension cuts. USPS is going to have this happen as well, probably very soon; you can be very, very sure Trump and the Republicans aren't going to bail out that hot mess. We're actually getting pretty handy at cutting retiree pensions and benefits. The deals negotiated decades ago predicated on fantastic rates of growth aren't really plausible and they eventually have to be reworked. That means cuts. That's reality and reality has, at long last, arrived for Puerto Rico. So expect cuts. Don't believe there is some pot of gold out there filled with untaxed entities that just need to be tapped to fix everything. Its fiction and it won't happen like that. The big reckoning after Puerto Rico is going to be Illinois. Producers are straight up evacuating IL while the state government just keeps digging itself deeper into the hole. That situation is going to set all sorts of precedents for how this nonsense gets resolved.
  - vkou 9y ago
    > When these mismanaged governments finally throw in the towel and hand the reins over to grownups what happens is the pensions and retiree benefits get cut. What makes it appropriate to cut obligations to creditors we call pensioners, but inappropriate to cut obligations to creditors we call 'bondholders'? (The answer is, obviously, that our politicians are quite happy to push our elderly under the bus, in order to protect wealthy investors.)
    - BenoitEssiambre 9y ago
      These are usually the same people. Pension funds hold bonds.
    - cnnsucks 9y ago
      "but inappropriate to cut obligations to creditors we call 'bondholders'?" The part where I said bondholders should be held harmless is a fiction inside your head. When the gears finally strip the bondholders in these cases (Detroit, GM, etc.) take epic baths, and I don't shed any tears for them either. $7 billion in bondholders’ obligations in Detroit were erased, for example. So I suppose there is little difference between supposed "creditors we call pensioners" and actual creditors; everyone gets wrecked.
vkou 9y ago
There weren't any public pension funds at the start of the 20th century. If we instead look at time periods during which the industry average was considered to be 8%... https://dqydj.com/dow-jones-return-calculator/ https://dqydj.com/dow-jones-return-calculator/ 1960-1990 = 9.5% average return. 1960-2000 = 11.5% average return. It's largely pointless to talk about inflation-unadjusted average-rate-of-return for long time periods. A 12% YoY return when inflation is at 15% is terrible. A 5% YoY return when inflation is at 0% is amazing.
- EternalData 9y ago
  You're overfitting. This is exactly the problem I'm describing. Case in point, you've omitted 2000-2010. Real (CPI as inflation) averaged annualized return on the DJIA 2000-2010: -2.219% This is with relatively mild inflation. Of course, 1960-2000 looks better when you literally put in the apex of the software bubble when P/E ratios shot skywards...part of which corrected over the decade following. Expecting a 8% nominal or real return is simply nuts in my opinion because you are staking yourself on a really small sample size with crazy inflation to boot. Nominal or real is a nuanced distinction to what is plainly just bad overfit thinking. The introduction of just one decade with low inflation and bad returns can wreck you -- case in point: Dallas Firefighters/Puerto Rico ($43bn + of unfunded pension obligations)/Detroit etc. etc. etc.
  - EternalData 9y ago
    Also, to add another wrinkle to this discussion, most pension funds won't weight themselves 100% in stocks (corresponding positions in cash/bonds average much lower real or nominal return), and most pay significant management/consulting fees on top...
  - vkou 9y ago
    Were pension fund managers in 2010 predicting 8% growth? I have my doubts about that.
mjevans 9y ago
The answer to pension problems is real socialism. Produce in bulk, provide in bulk, eliminate the waste and middle-person profit by providing as much of the pension as possible directly so that the allowance for other items can be of a much smaller serviceable size.
- altstar 9y ago
  They have tried in Venezuela. Did not work.
  - InitialLastName 9y ago
    Venezuela tried petro-socialism, backing their welfare state with a single resource that they happened to be swimming in. Price of that resource false -> no more monetary value -> money is worthless and welfare state fails.
    - enraged_camel 9y ago
      I'm not sure why you are being downvoted (probably for ideological reasons). You are totally correct. Socialism hasn't really been tried in countries with diverse, abundant resources and powerful economies.
      - deepnet 9y ago
        Post WW2 UK elected a socialist government which created the welfare state, comprehensive schools, state pensions and the National Health Service and nationalisation of some industries.
      - vkou 9y ago
        It has been tried, we call that country 'The United States' - at least, if you're over the age of 65.
        enraged_camel 9y ago

toomuchtodo 9y ago

I think the concern is overblown. States will need to backstop local governments, and the federal government will backstop the states. Benefits will get (mostly paid); taxes will go up (they have to, they're at unsustainable historic lows). This is not the end of the world.

bpodgursky 9y ago
> and the federal government will backstop the states I think it's unlikely the federal government will be backstopping pension problems in IL and CA anytime soon, without a dramatic congressional shift. I think you underestimate how much taxes will need to raise to cover these liabilities. The federal government already has its hands full with SS + Medicare commitments it can't handle. I'd rather see failures and bankruptcies at a local level, which will maybe convince other municipalities to reform before they collapse. I don't want everything centralized into one giant US federal government default. That's not a better plan.
- toomuchtodo 9y ago
  > I think it's unlikely the federal government will be backstopping pension problems in IL and CA anytime soon, without a dramatic congressional shift. Agreed. That shift is going to happen though. Seniors are not a cohort you can ignore. They vote like clockwork. > I think you underestimate how much taxes will need to raise to cover these liabilities. The federal government already has its hands full with SS + Medicare commitments it can't handle. I don't, but we should've been setting aside these funds. We didn't, and we'll still need to pay out even at a reduced benefits level. > I'd rather see failures and bankruptcies at a local level, which will maybe convince other municipalities to reform before they collapse. I don't want everything centralized into one giant US federal government default. That's not a better plan. Reform will not happen. That's code for "cutting benefits". As long as the US government maintains the ability to tax, it will not default. Social Security keeps a third of seniors out of poverty. 45 percent of Puerto Rican's are already in poverty. Cutting benefits further? That's not tenable. No one held government accountable over the last several decades, and now we're stuck with the fallout. EDIT: Because of ye olde' HN throttling limits: Most seniors don't pay taxes, due to marginal tax rates. Seniors will vote all day to keep their benefits intact. I don't blame them.
  - nopinsight 9y ago
    Unless the brinks of defaults will happen in close successions in > 20-30% of the country, what are the incentives for MPs to vote yes on the backstopping for jurisdictions far from their own? > Reform will not happen. That's code for "cutting benefits". The benefits to be cut will happen in a few small areas given the size of the US, thus will not affect the majority of lawmakers. If the GOP controls the Congress, that doesn't seem like a large enough impact for them to change their overall ideology towards pension subsidies.
    - roywiggins 9y ago
      > what are the incentives for MPs to vote yes on the backstopping to jurisdictions far from their own? Stick it in an omnibus bill with stuff they do like?
  - AnimalMuppet 9y ago
    Sure, seniors vote. Don't assume that the seniors in, say, Texas are going to be in favor of higher taxes in order to rescue pensions in California and Illinois, though.
    - Jedd 9y ago
      Texas (at the time of writing) only appears in this page the once ... which is surprising in this context given its history. [1] A country / protectorate defaulting is not necessarily something that can't be recovered from, and in some cases is the only sensible (or indeed feasible) course of action. [1] https://en.wikipedia.org/wiki/Texas_dollar https://en.wikipedia.org/wiki/Texas_dollar
- deleted 9y ago
  [deleted]
DamnYuppie 9y ago
My biggest concern and issue with the federal government backstopping pensions is that the vast majority of people would now be paying for benefits for people who rendered services in areas they didn't live. Because the populace of one city voted to give certain benefits to public sector employees why should I be held accountable for that decision? I neither had a vote nor partook of their services. I am sure I am being very naive here but this seems to me to be the essence of taxation without representation.
- toomuchtodo 9y ago
  The EPA is going to spend millions of dollars to clean up Flint, Michigan's water supply lines; you don't get a say in that either. "Representation" is a bit of a vague concept in US governance.
  - maxxxxx 9y ago
    I am fine with bailouts as long as systems are being put in place to avoid repeating it in the future. That's for Flint, pensions or banks. Obviously the prevention step never happens....
    - toomuchtodo 9y ago
      Run for office. Help fix the problem. That's what I'm doing.
    - WillPostForFood 9y ago
      Bailouts create more bailouts because people know they are going to get bailed out.
  - deleted 9y ago
    [deleted]
  - JBReefer 9y ago
    To me, there's a difference between something you need to live that was made poisonous by the government requireing aid and former managers pulling pensions of $200k+ a year. If I lived in Michigan, I'd have a big problem bailing out the FDNY pension fund when I heard that. It's endemic too, look up "LIRR Disability abuse". http://nypost.com/2015/10/21/more-than-2-dozen-ex-fdny-collecting-200k-in-pensions/ http://nypost.com/2015/10/21/more-than-2-dozen-ex-fdny-colle...
cnnsucks 9y ago
Well that's not the precedent. When these mismanaged governments finally throw in the towel and hand the reins over to grownups what happens is the pensions and retiree benefits get cut. Detroit just had this happen after the state stepped in and dealt with that mess. Cleveland is in the process of cutting benefits before it goes bankrupt. CalPERS cut pensions last December for retirees from Loyalton. Same thing in the private sector; GM cut retiree benefits with the help of the Federal Government. Last year the Iron Workers union saw huge pension cuts. USPS is going to have this happen as well, probably very soon; you can be very, very sure Trump and the Republicans aren't going to bail out that hot mess. We're actually getting pretty handy at cutting retiree pensions and benefits. The deals negotiated decades ago predicated on fantastic rates of growth aren't really plausible and they eventually have to be reworked. That means cuts. That's reality and reality has, at long last, arrived for Puerto Rico. So expect cuts. Don't believe there is some pot of gold out there filled with untaxed entities that just need to be tapped to fix everything. Its fiction and it won't happen like that. The big reckoning after Puerto Rico is going to be Illinois. Producers are straight up evacuating IL while the state government just keeps digging itself deeper into the hole. That situation is going to set all sorts of precedents for how this nonsense gets resolved.
- vkou 9y ago
  > When these mismanaged governments finally throw in the towel and hand the reins over to grownups what happens is the pensions and retiree benefits get cut. What makes it appropriate to cut obligations to creditors we call pensioners, but inappropriate to cut obligations to creditors we call 'bondholders'? (The answer is, obviously, that our politicians are quite happy to push our elderly under the bus, in order to protect wealthy investors.)
  - BenoitEssiambre 9y ago
    These are usually the same people. Pension funds hold bonds.
  - cnnsucks 9y ago
    "but inappropriate to cut obligations to creditors we call 'bondholders'?" The part where I said bondholders should be held harmless is a fiction inside your head. When the gears finally strip the bondholders in these cases (Detroit, GM, etc.) take epic baths, and I don't shed any tears for them either. $7 billion in bondholders’ obligations in Detroit were erased, for example. So I suppose there is little difference between supposed "creditors we call pensioners" and actual creditors; everyone gets wrecked.

vkou 9y ago

There weren't any public pension funds at the start of the 20th century. If we instead look at time periods during which the industry average was considered to be 8%... https://dqydj.com/dow-jones-return-calculator/ https://dqydj.com/dow-jones-return-calculator/ 1960-1990 = 9.5% average return. 1960-2000 = 11.5% average return. It's largely pointless to talk about inflation-unadjusted average-rate-of-return for long time periods. A 12% YoY return when inflation is at 15% is terrible. A 5% YoY return when inflation is at 0% is amazing.

EternalData 9y ago
You're overfitting. This is exactly the problem I'm describing. Case in point, you've omitted 2000-2010. Real (CPI as inflation) averaged annualized return on the DJIA 2000-2010: -2.219% This is with relatively mild inflation. Of course, 1960-2000 looks better when you literally put in the apex of the software bubble when P/E ratios shot skywards...part of which corrected over the decade following. Expecting a 8% nominal or real return is simply nuts in my opinion because you are staking yourself on a really small sample size with crazy inflation to boot. Nominal or real is a nuanced distinction to what is plainly just bad overfit thinking. The introduction of just one decade with low inflation and bad returns can wreck you -- case in point: Dallas Firefighters/Puerto Rico ($43bn + of unfunded pension obligations)/Detroit etc. etc. etc.
- EternalData 9y ago
  Also, to add another wrinkle to this discussion, most pension funds won't weight themselves 100% in stocks (corresponding positions in cash/bonds average much lower real or nominal return), and most pay significant management/consulting fees on top...
- vkou 9y ago
  Were pension fund managers in 2010 predicting 8% growth? I have my doubts about that.

mjevans 9y ago

The answer to pension problems is real socialism. Produce in bulk, provide in bulk, eliminate the waste and middle-person profit by providing as much of the pension as possible directly so that the allowance for other items can be of a much smaller serviceable size.

altstar 9y ago
They have tried in Venezuela. Did not work.
- InitialLastName 9y ago
  Venezuela tried petro-socialism, backing their welfare state with a single resource that they happened to be swimming in. Price of that resource false -> no more monetary value -> money is worthless and welfare state fails.
  - enraged_camel 9y ago
    I'm not sure why you are being downvoted (probably for ideological reasons). You are totally correct. Socialism hasn't really been tried in countries with diverse, abundant resources and powerful economies.
    - deepnet 9y ago
      Post WW2 UK elected a socialist government which created the welfare state, comprehensive schools, state pensions and the National Health Service and nationalisation of some industries.
    - vkou 9y ago
      It has been tried, we call that country 'The United States' - at least, if you're over the age of 65.
      - enraged_camel 9y ago