Kurt Brouwer September 18th, 2009
This chart from Capital Economics shows their projections for economic growth for the balance of this year and 2010 and 2011. The recovery could start soon, but it will likely be quite tepid. It looks about right to me:
Source: Capital Economics
Via: Clusterstock
Kurt Brouwer September 17th, 2009
This is part two of the Plunging Pensions series (go here for Part One).
Some other states are starting to wake up and take notice of the mess we have made in California [emphasis added]:
Pension Costs Can Ruin Cities and States (Grand Forks Herald, June 18, 2009)
…As a result, California is “less than 50 days away from a meltdown of state government,” the state controller said last week.
It’s hard to know whether to stare in horror or avert your eyes.
Our advice: Stare. Because in California’s example, there are lessons for Minnesotans and North Dakotans to learn.
One such lesson has to do with public-employee pensions and a state’s fiscal health. California faces unfunded public employee retirement benefits of somewhere between $300 billion and $1 trillion, a panel discussion at the Milken Institute’s State of the State Conference concluded in May.
Joel Kotkin, presidential fellow at Chapman University in Orange County, Calif., and a popular writer on public policy, agrees. “The item that is most killing the state budget is the huge pensions for public employees,” he said in a recent CNBC interview.
“We have to figure out what we’re spending, how we’re spending, and to begin to make the public employees live by something close to the rules that the rest of society does.”
Basically, California governments let many workers retire early and collect generous pension and benefits for life. In Vallejo, Calif., for example, “base pay for firefighters is more than $80,000 per year, and employees can retire at age 50 with a pension equal to 90 percent of their salary,” Governing magazine reported last year.
Vallejo declared bankruptcy in 2008, citing pension benefits it no longer could afford.
The Milken Institute estimates that California has an unfunded pension liability of between $300 billion and $1 trillion. Unless changes are made, that monstrous shortfall is going to haunt our workers, bankrupt our state and cause even more difficulties than we currently have.
And, just to put a human face to this, consider these stories of what our out-of-control pension laws have wrought. The Grand Forks Herald continues:
“According to the data compiled to date, the highest paid public employee retiree in the state is Bruce Malkenhorst, the former city administrator, clerk, finance director and treasurer of the city of Vernon, Calif.,” the Sacramento Bee noted in an editorial.
“Vernon is a tiny industrial enclave near Los Angeles. He earns $499,674.84 a year or $41,639 a month in pensions.
“The local governmental agency with the most retirees earning $100,000 or more is the Sacramento Metropolitan Fire District. Fifty former employees of the Sacramento Fire Department receive pensions of more than $100,000.”
A pension of almost $500,000 per year for a small town treasurer? Assuming he lives 30 years past retirement, that would be $15,000,000 and probably much more with cost-of-living increases (see the SacBee’s State Worker Blog for more).
Just to put the last point in perspective, the City of Sacramento is paying out $5 million per year to just 50 retired firefighters. Now, I admire firemen and I have friends and relatives who do that work, which is dangerous and hard. I don’t begrudge them a thing, but does anyone think this is sustainable. $5 million per year for just 50 retirees from one modest-sized city?
In addition to underfunded state and local pension plans, we have the underfunded biggies — Social Security and Medicare. This chart from investment firm, TCW, demonstrates the rapidly-rising liabilities at just the Federal level. The biggest unfunded liability is Medicare, but there are many more:
Source: TCW / Jeffrey Gundlach
As you can see the Feds owe vast sums stretching as far as the eye can see. Yet, there is a steady stream of applicants for more Federal backing — private pensions, state and local pensions and so on. The Feds are the backer of last resort, but that backing is getting mightily stretched.
Either governments rein in the soaring costs of public pensions or they face an increasing likelihood of bankruptcy, as we saw in the case of Vallejo, CA. Stopgap measures will not work for very long and the longer we wait to address this, the worse it will get. Even raising taxes won’t help for very long because states such as California have tax rates among the highest in the nation.
And, our top Federal income tax rates are already high compared to the global rates, as this chart illustrates. How much higher can they go?
Source: Carpe Diem
Taxpayers are the ones who will be left holding the bag when all the politicians’ pension promises blow up. I also believe that public retirees are at risk because taxpayers are increasingly restive and unwilling to accept tax hikes. Yikes.
Update: I had a few questions about the chart above which tracks the top personal income tax rates around the world. One CPA I had lunch said that the average seemed low because many of the European countries have high rates of 40% or even 50%. And, that is true. The U.S. does not have the highest country rate, that honor goes to Denmark I believe. But, the U.S. rate is well above the worldwide average.
By the way, the data underlying this chart is from a study done by accounting firm, KPMG. The study can be found here.
I come away from this with three points. First, the study found that there has been a steady downward decline in global income tax rates, even in Europe. For example, the average rate in Europe was 41% in 2003 and now it is 36%. Part of this decline has been the introduction of flat tax rates in several Eastern European countries.
Second, that there is wide disparity in rates with Europe generally having the highest rates, averaging 36%. But, in South American the top personal income tax rate is about 26%. In Asia, the highest rate is Japan at 50% for the top personal rate. The lowest rate seems to be Hong Kong, which is 15%.
Third, the U.S. seems to be bucking the trend as we have before Congress a number of proposals to significantly and substantially increase our income tax rates. For example, there have been discussions of income tax surcharges to pay for healthcare reform. There is also a strong likelihood that the Bush tax cuts will be phased out, which would be an effective tax increase. Those alone will be controversial. Adding additional income taxes or additional payroll taxes to deal with Social Security or Medicare, would be both very difficult and very divisive.
See also:
Kurt Brouwer September 14th, 2009
Source: Pew Research
As this chart above shows, news organizations have a serious credibility problem. This survey from Pew Research’s People and Media Center underscores how far the media has fallen. In terms of public trust and confidence, news media credibility is at a two-decade low point [emphasis added]:
Press Accuracy Rating Hits Two Decade Low (Pew Research Center for the People & the Press, September 13, 2009)
The public’s assessment of the accuracy of news stories is now at its lowest level in more than two decades of Pew Research surveys, and Americans’ views of media bias and independence now match previous lows.
Just 29% of Americans say that news organizations generally get the facts straight, while 63% say that news stories are often inaccurate. In the initial survey in this series about the news media’s performance in 1985, 55% said news stories were accurate while 34% said they were inaccurate. That percentage had fallen sharply by the late 1990s and has remained low over the last decade.
Similarly, only about a quarter (26%) now say that news organizations are careful that their reporting is not politically biased, compared with 60% who say news organizations are politically biased. And the percentages saying that news organizations are independent of powerful people and organizations (20%) or are willing to admit their mistakes (21%) now also match all-time lows…
Why is the news about the news media so bad? The advent of the Internet and its many free sources of information have posed a serious problem for media organizations with high cost structures. Not only has the Internet offered alternative sources of information, but it has also brought along serious competition for classified ads and advertising, both of which are essential to the media business model. Changes in this realm have caused newspapers to fail, magazines to fail and have hurt the value of media franchises.
However, this series of surveys from Pew Research go back many years and the surveys indicate a steady erosion of trust and confidence in the media. There is widespread belief that media stories are frequently inaccurate and often biased. That’s a killer.
Some of my friends are in the media
I know many hard-working folks in the media — broadcast, print and online. The ones I know have spent years building their skills and their credibility as objective journalists. They believe in their craft and they work hard at it. Yet, on the few occasions when this topic of media bias or inaccuracy has come up, my media friends have downplayed the problems of bias or inaccuracy as being rare or unusual.
If that’s the case, why does the media itself get very low marks? Bad public relations? A few bad apples? Or, is it systemic? And, why has the public’s faith in the media been sliding for decades as we can see from the Pew Research findings?
The Internet passes newspapers
This chart from Pew Research shows the trend and it’s bad news for the traditional news media. As you can see, the trend for television is down, but it’s going down from a high level. On the other hand, newspapers are losing ground as a source for national and international news and they have just been passed by online media as a source.
That’s a trend to which I can relate because I get all my news online. I don’t have television at home and I don’t subscribe to any newspapers or general interest magazines. So, for me, online is everything. I do still go to newspaper sites such as the Wall Street Journal, Washington Post and so on, but it’s to their online sites that I go. And, I spend time at other online sites such as MarketWatch, Bloomberg as well as many financial and general blogs:
Source: Pew Research
Finally, take a peek at this chart which covers classified advertising at Craigslist versus the traditional media. Craigslist revenues (blue line) are in the millions as seen on the left hand side. Newspaper classified revenues (red line) are on the right hand side and they are in the billions. So, this is not a straight comparison, but rather a look at the revenue trend for each side. Newspaper classified revenues have fallen from $16 billion or so to about $6 billion at the same time that Craigslist revenues have ballooned by a factor of 10:
Source: Clusterstock/Business Insider
As Craigslist online ad revenues have grown, newspaper industry ad revenues have plummeted. And, along with falling revenues, newspaper valuations have tanked. Ouch.
See also:
Kurt Brouwer September 11th, 2009
Good piece from MarketWatch on the mounting problems we are experiencing with pension plans, both private and public. Many corporate and public pension plans are underfunded and that means taxpayers are probably on the hook. Why you ask? C’mon. You and me and other taxpayers are the payer of last resort.
First, we find that faltering industrial companies have failed to adequately fund their pension plans and that leads to the Feds as the funder of last resort [emphasis added]:
Companies’ Pension Problems Could Hit Taxpayers (MarketWatch, September 3, 2009, Andrea Coombes)
When the agency that insures traditional pension plans is running a $33.5 billion deficit — the largest in its 35-year history — should you be worried? If you’re a worker or retiree counting on a traditional pension, the answer is probably not. But if you’re a taxpayer, start worrying.
Though it will likely take years, it’s all but inevitable that at some point the Pension Benefit Guaranty Corp., the agency responsible for guaranteeing pension benefits for some 44 million Americans, will need to either cut those benefits or raise a lot of cash, experts say.
Given that slashing payouts to older people is considered political suicide, the likely scenario is that the U.S. government will pony up funds to shore the agency’s finances.
Pensioners “don’t have to worry,” said Douglas Elliott, an author of numerous studies on the PBGC and a fellow at the Brookings Institution, a Washington-based public-policy think tank.
“The taxpayer has to worry.
This is the crux of the matter. When pension plans fail, taxpayers are the funders of last resort. The problem is that all kinds of pension plans — Social Security, state and local pensions, the Pension Benefit Guaranty Corporation — are all sinking into fiscal insolvency. And, then there is Medicare and Medicaid. What happens if they all go broke? MarketWatch continues:
… “There’s a point where the Social Security fund starts to run out of money if they don’t change anything. That’s a similar analogy to the PBGC,” said David Kudla, chief executive of Mainstay Capital Management LLC, an investment advisory firm that often works in the auto industry. “At some point, they either need to charge higher premiums or reduce benefits to current beneficiaries or have a capital infusion from the U.S. government,” he said. “The third [option] is probably the most likely.”
…If taxpayers do eventually bail out the PBGC, it could be a bitter pill for some of them. “You [pension recipients] would be getting a bailout from taxpayers who never had a defined-benefit plan,” Bovbjerg said. “If you have a 401(k), you don’t have guarantees like that,” she said…
In my opinion, it’s not a matter of if taxpayers bail out PBGC, but when taxpayers bail it out. Unfortunately, this issue of corporate pension failures is far from the full extent of the problem.
Next, as this opinion piece from the Wall Street Journal demonstrates, we find another huge problem, the underfunding of public pension plans:
Public Pensions Cook the Books (Wall Street Journal, July 6, 2009, Andrew C. Biggs)
Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods — which discount future liabilities based on high but uncertain returns projected for investments — these plans are underfunded nationally by around $310 billion.
The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won’t be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That’s nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it’s likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers…
Public pension plans have been quietly accumulating huge long-term liabilities with very little public notice. But, a few factors have brought this issue to the public’s attention. First, the bankruptcy of Vallejo, CA and other cities, with pension liabilities a significant part of the bankruptcy filing. Second, the huge pension payouts being received by public employees.
Budget Busting Pension Plans
On a daily basis, we are seeing alarming news about the pension crisis in towns and cities across the state of California and the nation. What the heck is going on? In a nutshell, while you were out living your life, your local and state politicians were making pension promises that extend many years into the future. And, in many cases, the required funding simply is not in place. To make things worse, these promises were made to our firefighters, police and other employees of the government. These are the people who make everything in a given town work.
42 Years Driving for Dolly Madison Cakes
Columns such as these two below have been attacked by unions as an attack on public employees. I view it differently. I come from a union family. My father drove a Dolly Madison Cakes delivery truck for 42 years and he was a member of the Teamsters Union. My mother still receives a very modest monthly check from the Teamsters.
My view of this issue is that if a city or county makes a promise to its employees, it should keep it. But, if the city goes bankrupt, then of what value is the promise? Both sides — taxpayers and employees — should be on guard to make sure that promised benefits are reasonable and sustainable because if they are not, then everyone loses.
This is no longer a boring and arcane topic of interest only to local politicians, municipal employees, union officials and pension plan actuaries. We posted on this several months ago when pension obligations threatened the city of Vallejo, CA. Now we see that the city of Vallejo, California has broken a union contract after having to seek court approval for doing so (see CalPensions).
The $3 Billion Pension Miscalculation
The Sacramento Bee makes an important — and politically explosive — point in the following piece. About 10 years ago, the State of California got taken to the cleaners on employee pensions [emphasis added]:
Pension hike of a decade ago backfires (Sacramento Bee, June 22, 2009, Dan Walters)
A milestone on California’s meandering journey toward fiscal insolvency occurred exactly a decade ago when the Legislature enacted a massive increase in state employee pensions on the expedient assumption that it would cost taxpayers nothing.
Although the new pensions would generate almost countless billions of dollars in extra income for retirees in the years ahead, the CalPERS board, dominated by union representatives, told legislators that taxpayers wouldn’t have to bear the load because investment income, which was flowing into the pension trust fund from high-tech stocks, would continue indefinitely.
As it has done in so many ways, California took the good times for granted and assumed lavish investment returns would buoy public pension plans forever. Unfortunately, reality has hit home, not once, but twice. First, the tech bubble blew and now the real estate bubble and tumbling stocks have done the same.
“They (CalPERS) anticipate that the state’s contribution to CalPERS will remain below the 1998-99 fiscal year for at least the next decade,” said a final Senate analysis of the 1999 legislation that expanded state pensions, allowing Highway Patrol officers, prison guards and other “safety” workers in some cases to get more than 100 percent of their salaries.
…Within a few years, dot-com bubble had burst, CalPERS had suffered major losses and the state’s burden for pensions had pushed into the multibillion-dollar range, not counting the heavy impact on local governments that had cavalierly followed the state’s lead on boosting pension benefits (see Oakland ‘Mulls’ Bankruptcy).
The situation was ripe for a backlash, such as an initiative measure that would rein in public pensions, but union-controlled CalPERS lowered the political heat by offering employers a “smoothing” policy that would protect them against immediate jolts, spreading out the increases over a number of years.
By and by, the economy improved, albeit through an unsustainable explosion in real estate development, and the pension issue dropped from the political radar screen. But now we’re mired in the worst recession since the Great Depression, CalPERS’ investments have dropped by nearly a third and the state is paying more than $3 billion a year into the pension fund, nearly 10 times what it paid a decade ago when CalPERS made its bogus assertion to lawmakers…
I would say that’s a bit of a miss. California is being forced to pay $3 billion a year (10 times what it paid a decade ago and far more than estimated) and we are now hearing that another billion or so is needed. Eventually, a billion here and a billion adds up to real money.
This is an example of how little credibility we should give to legislative estimates of future pension costs. Either our legislators — in Washington or Sacramento or anywhere else — don’t know or they simply don’t want to know what a given pension will really cost. But, shame on us for believing their estimates.
This problem — plunging pensions — is one that will be plaguing us for many years.
Stay tuned for Plunging Pensions (Part Two) — next week.
See also:
Kurt Brouwer September 10th, 2009
There have been lots of claims that this was the worst recession since the Great Depression. As a loyal and frequent reader of Fundmasteryblog you know better of course.
The correct answer is that this is not even close to the worst since the Depression. Here is a new chart from blogger and economist Donald Marron:
Source: Donald Marron
As you can see, this downturn is not close to the 1945-47 decline so it is definitely not the worst since the 1930s. You could fairly say that this is the worst recession since the aftermath of World War II, but even that still overstates things a bit because the GDP decline was more than three times deeper than this time around.
Back in March, we wrote this:
GDP: Great Depression vs. Current Recession
To start this comparison, here is a chart from the wonderful Calculated Risk blog that shows how far GDP has declined in this recession versus that the cataclysmic decline during the Great Depression:
Source: Calculated Risk
Calculated Risk had this to say about the chart [emphasis added]:
What is a depression? (Calculated Risk, March 10, 2009)
…The Great Depression saw real GDP decline 26.5%.
The post-WWII recession lasted 8 months and saw real GDP decline 13%. This decline in GDP was due to winding down the war effort – something that was celebrated – and is excluded when analysts call the current slump the “worst since the Great Depression”…
This point about the post-World War II recession is a good one that is often overlooked. It was sharp and severe as our war effort wound down and millions of men and women returned from the war. It was a deep recession that is largely ignored in all the media hype about this being the worst downturn since the Depression.
Just the facts please
All this talk of the Great Depression is interesting and informative, but also not very accurate when you look at the facts.
Via: The Corner