How Unions Can Save America

In a previous post entitled “The Razor’s Edge, Inflation vs. Deflation,” the following assertion is made:

“When the financial history of early 21st century America is written, it is interesting to wonder how historians will characterize the behavior of public sector unions, who were indifferent to deficits, who were incestuous with Wall Street, who rode the waves of unsustainable debt and deficit-fueled phony booms to guarantee their members would enjoy magnificent benefits calibrated on bubble values, but contracted to endure even after the bubbles burst. Will the refusal of all-powerful public sector unions to embrace fiscal reform be seen by future historians as contributing to the collapse of the bond markets, the pension funds – and under the burden of new taxes instead of reform, property values, as the nation’s collateral imploded? At the least, it is fair to say that what today’s leadership of public sector unions decide – whether they embrace concessions for the sake of the nation, or not – is one of the biggest opportunities remaining to avert further financial calamities.”

The point of this is certainly not to hold public sector unions solely accountable for the financial predicament facing the United States. The root cause is a 40 year debt binge that enabled unsustainable economic growth and unrealistic consumer expectations. And everyone is to blame; consumers who borrowed more than they could afford, lenders who pounced on them, and politicians who – in a bipartisan failure of leadership […] Read More

Dramatizing the Inequity

This is a hilarious video that is accurate and nicely summarizes our challenge – our state and local governments are going broke in order to pay not only for pensions that are 3-5x more generous than social security, but for overall compensation and benefits to public employees. To balance budgets, we don’t have to cut services or raise taxes, we just need to reduce the grossly over-market compensation paid to public employees. Warning – while clever and accurate, this video does contain foul language…

By the way, I have personally verified the compensation parameters referenced in this video, as summarized in this post:

Inflation, Population & Government

For several months I have been privileged to receive informational emails from Senator Jeff Denham, who represents California’s 12 Senate District, a verdant (if gerrymandered) expanse of land that includes vast swaths of the San Joaquin Valley, along with virtually all of the beautiful Salinas Valley to the west. Senator Denham has been resolute in his opposition to California’s economically disastrous, politically opportunistic Global Warming Act, which has earned him credibility here, and hopefully elsewhere.

Today Senator Denham’s email dealt with another topic, the size of California’s state government, another area where Denham’s stated preference for smaller state government earns him additional points. Today’s email included some comments from one of his constituents that bear analysis – here they are:

“…in 1970, California took in 28 percent of state revenues from personal income taxes. Fast forward to 2010 and you find the state now pulls in a whopping 52 percent of its revenue from personal income taxes. During this same time period, our state budget increased from $6 Billion to $120 billion, an increase of approximately 2,000 percent. All the while, our population has barely increased 100 percent. As such, you could say that for every 1 percent increase in population, our spending has increased 20 percent.”

These are dramatic numbers – but they are misleading. Unlike people, who cannot be devalued, currency is a fluid asset, whose value is only pegged relative to other currencies and the commodities we use currency to purchase. And […] Read More

Pensions: Giant 401K Plans

One of the biggest apparent misconceptions on the part of those who believe public sector pension benefits can remain unchanged is that somehow there is a difference between 401K plans and public sector pension funds. The only difference is one of scale. Individual citizens save money and invest the money in a 410K plan or other individual retirement account. Public sector pension funds take vast sums of money and invest it in the very same places – primarily Wall Street equities.

While it is true that an institutionally managed, massive and diversified pension fund may be less volatile than an individually managed retirement account, it is also true that massive pension funds are far less likely to enjoy returns that beat the market. They’re too big. So when the market value of stocks and other assets fall, it is impossible for large pension funds to not also see their values also fall.

If you recognize this – the fact that public sector pension funds are just as subject to economic ups and downs as individual 401K funds, and that they are invested in exactly the same things – then comments by defenders of keeping the public pension benefit system unchanged become inexplicable.

President Obama, in a speech last month where he lambasted the nonexistent Republican plan to privatize social security, said “I’ll fight with everything I’ve got to stop those who would gamble your Social Security on Wall Street.” But public sector employee pension funds are themselves gamblers on Wall […] Read More

Sustainable Retirement Finance

When assessing the financial sustainability of any government administered plan to provide retirement security to their citizens, it is important to consider two factors, (1) the nation’s overall population demographics, and (2) the economic model of the plan. In-turn, when evaluating the economic model of the plan, it is important to consider the plan’s sustainability apart from reliance on returns from passive investments. It is important to assess how well a government-funded retirement benefit plan can be supported via a pay-as-you go system, where each year, tax assessments on current workers are used to pay retirement benefits for retired workers.

In the United States, there are two government operated financial systems that administer our collectively funded, i.e., taxpayer funded programs to pay retirees a certain amount each year that they may live comfortably. One may assume a great range of thresholds to define “comfortably” but in any event these two systems are very distinct, in ways that are fairly easily explained. They are social security, for which about 80% of the U.S. workforce participates, and public employee pensions, for which about 20% of the U.S. workforce participates.

Social security is based on the assumption that participants work, on average, from the age 25 to 65, then are retired from age 66 to 85, i.e., there are two participants in the work force for every one recipient who is retired. Social security, on average, also may assume that payments to retirees average one-third what earnings are by workers. On this basis, […] Read More