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 Street.

SEIU Executive Vice President Eliseo Medina, in a Sept. 3rd commentary on the Huffington Post entitled “Wall Street is to Blame for Pension Shortfalls,” claims “For generations, Americans have counted on three sources of retirement income: social security, employment pensions, and personal savings. Wall Street is bent on undermining all three by pushing risky social security privatization schemes…” and further states, “Their goal is to strip away guaranteed pensions and force more workers into 401k-style plans that put all the risk onto workers while putting more money into the bankers’ own pockets.” But Wall Street returns are the only way pension funds can project solvency. Wall Street has already robbed the private sector taxpayer, and now those same taxpayers will have to also cover the losses of the pension funds, who gambled taxpayer’s money on Wall Street?

The President of the Los Angeles Police Protective League, Paul Weber, in an editorial published last month entitled “Public employee pension ‘reforms’ recipe for disaster” wrote “the 401K approach to retirement savings is, and will continue to be, an absolute disaster for this country.” In the same editorial, he goes on to say “while public pension plans have also taken severe hits, they have a long-term investment outlook, and their obligations aren’t due in full in the next five, 10 or even 20 years.” But all this means is that pensions are gigantic 401K plans, administered by professionals, managed over decades, but still reliant on Wall Street to survive.

What Obama, Medina, Weber and others don’t seem to fully recognize is that (a) massive public employee pension funds are themselves gambling with Wall Street just as much as any 401K plan participant, (b) the Wall Street crash was the result of a debt bubble that was built with the avid collusion of Wall Street, the government, and feckless consumers, and (c) long-term return on investment projections for large pension funds based on a 40 year expansion of unsustainable credit are too high for the era we now live in, where collateral continues to shrink and credit lines collapse apace.

Here are some additional thoughts:

(1) Social Security serves 80% of the retired population with benefits that on average are one-fourth what public sector pensioners receive, because they pay out 1/3rd vs. 2/3rd of recent salary, and because they begin payments 10 years later than public pensions.

(2) The absolute dollars necessary to pay Social Security to 80% of our retired population are therefore approximately the same amount as the absolute dollars necessary to pay public sector pensions to 20% of our retired population. The same size liability for one-fourth as many people!

(3) While in the past public sector employees made less than their counterparts in the private sector, in exchange for better benefits, that hasn’t been the case for over ten years. The average private sector worker in California earns less than $60,000 in total compensation (including all benefits). The average public sector worker in California earns about $100K in total compensation – nearly twice as much.

(4) Social Security is not in danger of going insolvent – it can be fixed with incremental changes; a higher ceiling on withholding, a higher percentage withholding, an older retirement age, and slightly lower benefits. Social Security is an appropriate taxpayer funded system of retirement security. In conjunction with personal savings, eliminating debt, and no new taxes, Social Security enables retired workers to live with dignity.

(5) Public sector pensions rely on the whims of Wall Street just as much as 401K plans. To demonize Wall Street at the same time as resisting calls to reduce public sector pension benefits is grotesquely hypocritical. Public sector pension funds are in bed with Wall Street, transferring over $250 billion dollars of taxpayer’s money through Wall Street brokers every year.

(6) If the inflation-adjusted projected rate of return for public sector pension funds were lowered from 4.75% to 2.375%, the contribution rates into these funds would rise from between 20-35% of salary (non-safety vs. safety) to between 40-70% of salary. This is not possible. This is why pension fund managers are making increasingly risky investments on Wall Street instead of admitting they will not be able to sustain 4.75% rates of return any longer.

(7) The solution to public sector pension plan insolvency – and they are all insolvent once you admit 4.75% returns will no longer accrue to trillion dollar funds in a debt-saturated, stagnant economy – is to move to a pay-as-you-go system, just like Social Security. Current tax receipts should be used to pay current retired workers.

Defenders of the status quo seem to embrace the seductive notion that Wall Street will solve all of our retirement security problems for public sector workers at the same time as they indulge the urge to demonize Wall Street for the failures of 401K plans. This contradiction escapes them, as they expect private sector taxpayers cover not only the downside of their individual retirement savings losses, but also whatever losses may accrue to the public employee’s pension funds.

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14 comments to Pensions: Giant 401K Plans

  • oz

    Ed-

    I agree with some of your ideas, but I’m really getting tired of your made up numbers. They are not anywhere near as clean as you want them to be.

    1) Social Security covers 93% of workers and over 90% of retirees, not 80% as you claim.

    http://www.socialsecurity.gov/pressoffice/basicfact.htm

    2) “Same size liability” argument therefore does not hold up and even if it did, it would be irrelevant.

    3) Average private sector worker in CA earns 62K in total comp! not 40K! The average government worker earns right about the same (66k) in total comp.
    http://www.taxfoundation.org/research/show/25162.html

    (I have heard your point about total compensation being influenced by predicted rates of return in the future, actuarial assumptions, etc. and that is a fair point, but that aside, the pay disparity is not what you make it out to be)

    4) You could substitute “public/private pension” for “Social security” and the statement would be true also.

    5) Public pension investments consistently outperform 401k plans. Maybe because they are “in bed with Wall street”? in a few cases, yes, but they also have a longer time horizon, grouped assets, and are not subject to the whims of individual untrained investors.

    6) If 2.3% real return is all pensions can get, it would still be better than only what social security can provide. If you truly think that is the best that can be expected then let’s reform pensions to that level. But why go with ponzi, which is guaranteed to be worse?

    7) Any real return, even 1%, is better than pay as you go’s 0%…

  • Ed

    Oz – thank you for your comment. Let me respond to your points one by one:

    1) Social Security covers 93% of workers and over 90% of retirees, not 80% as you claim.
    http://www.socialsecurity.gov/pressoffice/basicfact.htm

    The reference you use is probably accurate for current retirees, but my point is regarding future retirees. Predicting future retirees depends on two factors – what are the ratios of public vs. private sector workers today, and how many years will they be retired, respectively. For example, in California there are 1.85 million state and local employees, plus about another million federal employees and public utility workers – at least 2.5 million. California’s non-public sector workforce is $13.5 million. That is about 20% of the total workforce engaged in public sector employment. Moreover, because public sector workers begin to collect benefits on average 10 years earlier, the percentage of public sector retirees among all retirees will exceed the percentage of public sector workers among all workers. So I am comfortable with the 80/20 figure cited. I think the other reason the source you reference claims a 90%+ participation in social security may be because many public sector workers ALSO participate in Social Security.

    2) “Same size liability” argument therefore does not hold up and even if it did, it would be irrelevant.

    Based on my assumptions, I think it does hold up. But what if I’m off by 50%, which is very unlikely? Should the liability for the 20% of the workforce be, in absolute dollars, be even half what the liability is for the other 80% of the workforce? Remember the average public sector pension is at least 4x the average social security benefit, because it is paid out at least twice as long, and it is formulated to be at least twice as generous in terms of the percent of salary. Don’t forget that we can introduce the variable of average salary if all we’re talking about is the size of the liability, and since public sector salaries average significantly higher than private sector salaries, that will move the size of the liability up as well. All in all, I still believe we are on track in America, and certainly in California, to see total monthly public sector pension payments equal if not exceed total monthly social security payments, despite the fact that public sector workers represent 20% (or less) of the retired population.

    3) Average private sector worker in CA earns 62K in total comp! not 40K! the average government worker earns right about the same (66k) in total comp.
    http://www.taxfoundation.org/research/show/25162.html
    (I have heard your point about total compensation being influenced by predicted rates of return in the future, actuarial assumptions, etc. and that is a fair point, but that aside, the pay disparity is not what you make it out to be)

    You make a good point here because I have not been able to get good data here. The more times I sanity check statistics supposedly from impeccable sources (BLS, Census Bureau) the more I realize there is a lot of conflicting information. For example, here is census bureau information stating household income in California to be $62K per year. All you need are 50% of California’s households to have two wage earners are you are down to a $40K average income.
    http://www.census.gov/prod/2009pubs/acsbr08-2.pdf
    Here is a study by the Reason Foundation that claims the average private sector income in California is $41K.
    http://reason.org/news/show/public-sector-private-sector-salary

    But again, what if your number is correct? Ok, fine. So the disparity is only about 1.7 to 1.0 instead of 2.5 to 1.0. It’s still too much of a disparity to sustain. And thank you for acknowledging my point about how total compensation is influenced by rates of return in the future. Because I use very conservative assumptions in those calculations as well. If I were to use aggressive assumptions when estimating current funding requirements for future retirement pensions and supplemental retirement health insurance for public employees, my estimate of their average actual annual compensation would go up to at least $120K per year.

    4) You could substitute “public/private pension” for “Social security” and the statement would be true also.

    I’m not sure what you are getting at here. Unlike my libertarian friends, I support the idea of Social Security. My concern is that public sector pensions are too generous, unfair to taxpayers, and financially unsustainable. I have no such concern about Social Security.

    5) Public pension investments consistently outperform 401k plans. Maybe because they are “in bed with Wall Street”? In a few cases, yes, but they also have a longer time horizon, grouped assets, and are not subject to the whims of individual untrained investors.

    I agree with your point here, but as I said, “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,” and “long-term return on investment projections for large pension funds based on a 40 year expansion of unsustainable credit are too high for the era we now live in, where collateral continues to shrink and credit lines collapse apace.”

    6) If 2.3% real return is all pensions can get, it would still be better than only what social security can provide. If you truly think that is the best that can be expected then let’s reform pensions to that level. But why go with ponzi, which is guaranteed to be worse?

    A few comments here: The term “ponzi” is misused. A ponzi scheme is an investment scam wherein new investor deposits are used to pay interest to existing investors. A ponzi scheme relies on fraud – the notion that existing investors can eventually withdraw their principal. Pay-as-you-go is not a ponzi scheme because all pay-as-you-go means is that taxes on current workers are used to pay current retiree benefits, and eventually when current workers are retired, they will be supported through taxes on the new workers who replace them. This whole exercise is designed to show how pay-as-you-go would work for Social Security vs. with Public Sector Pensions, and I think you will agree the difference is dramatic.

    So should we go with a 2.3% projected rate of return and continue to administer public sector pensions? Sure, but there will be consequences. Either pension benefit formulas will be rolled back to roughly the levels they were back in the mid-1990s before all the upticks in benefits were negotiated, or the contributions required (as a percent of payroll) will double. That pretty much sums it up. And I still think the notion of labor union influenced public sector pension funds pouring money into Wall Street, distorting the market, and exercising influence through shareholder proxy on our publicly traded corporations is problematic.

    Finally – I appreciate your comments and want you to know I am trying very hard to use accurate statistics and to reason with integrity. This issue is far too important and far too complex to indulge in flights of rhetoric without regard to reality.

  • oz

    Ed-

    I appreciate your itemized response.

    Small point first: Even the study you cited by the reason foundation gives 41k as income, not TOTAL compensation. Total average comp for CA private workers is higher and is close to public sector. (both ~60k) In fact, the article you cited mentions that some studies show that state workers are underpaid compared to private sector workers in the same job function.

    Now where do you get average CA state worker total comp of 100k? Which you then add 20k to because of the actuarial issue to make 120K…? You pulled that one out of your imagination, I’m afraid.

    The disparity between private/public total comp in CA is little. (potential actuarial issue aside)

    Anyhow, that is really not the point of our discussion or of your posts.
    As for public pensions, this is a red letter day for CIV FI!

    Now, after months of discussion, you’ve finally admitted to hope for public pensions in your second to last paragraph (whether you intended to or not) Just like Social Security needs to and can be tweaked to success, so can public pensions.

    You finally admitted that going back to old 1990’s formulas or increasing
    contributions (or a combination of both, I extrapolate from you) CAN fix the problem. This “retrofitting” already being done all over the country including CA.

    Granted, some areas of CA have less autonomy related to CALPERS and are having tougher times reforming, but it is happening, and much faster than it is happening with social security.

  • Ed

    Oz – with respect to state and local government worker pay, in the post “California’s Personnel Costs” I did some work getting at the actual numbers:
    http://civfi.com/2010/01/24/californias-personnel-costs/

    In that post I document an average base wage/salary for California’s state and local workers at $59,000 per year, not including any benefits. That is based on actual payroll data shown here for the state:
    http://www2.census.gov/govs/apes/08stca.txt
    and shown here for the local governments:
    http://www2.census.gov/govs/apes/08locca.txt

    The question then becomes how much more are the benefits worth per year? Based on assuming 13% “safety” pensions at 3.0% per year, 87% “non-safety” pensions at 2.0% per year, for a blended pension benefit accrual of 2.13% per year, and based on an inflation adjusted rate of pension fund return of 3.0%, you have to add a pension fund contribution of 37% of salary. This adds to the $59K average another $22K per year. If you assume a mere $5K per year for current benefits such as health insurance, tuition reimbursements, anything and everything, plus another $5K per year to fund future retirement benefits other than the pension, such as supplemental health insurance, tax-free status, spiking, anything and everything, you will add another $10K, adding up to total compensation of $91K. I think this overhead rate ($32K/$59K) of 54% is on the low side. I think $100K is probably a more accurate number if you go down from 3.0% to 2.3% in fund return assumptions and make more aggressive assumptions regarding pension spiking and the value of future health care benefits, and the value of all current benefits. For more read:
    http://civfi.com/2010/08/27/the-cost-of-firefighters/
    and
    http://civfi.com/2010/04/23/the-real-reason-for-college-tuition-increases/

    With respect to the cost of the average private sector worker in California, I am still skeptical that the average base pay is as high as $60K. Have you ever tried to find a job in the private sector? People who make $60K are making a lot of money. Many studies that do this sort of analysis only sample large corporations to determine pay rates, but corporations pay much higher than small private companies – and most private sector jobs are with small companies, not large corporations. I’d like to see more data. So let’s assume $41K is the average for base pay not including any benefits – what is the total compensation? What is the overhead rate? For someone making $41K you would add – same as public – $5K for current benefits, and you would add about 15%, or $6K for Social Security, Medicare, SUI and SDI, and if the company was running a very generous matching 401K up to 6% (the legal maximum), you would add that, another $2.4K. So the total overhead on the best private sector package imaginable is 32%. This puts the average total compensation, best case, for private sector workers at $54K vs. $91K in the public sector. I would welcome the opportunity to review more sources of good information on these compensation statistics. I think most studies are biased and it would be beneficial to the discussion to independently agree on some good numbers.

    I’ve never been against taxpayer-funded defined benefit plans. But by granting defined benefits to public sector workers that are not incrementally better, but exponentially better than social security, I think we are making a terrible mistake as a society.

  • oz

    Ed-

    Ok, so getting up to the 91k/100k average public comp number itself requires adding in the potential actuarial shortfall. I thought you were claiming the average state worker total comp was already 100k to which an additional 20k had to be added.

    To answer your question, I do have a private sector job. I would not say that people making 60k Total comp or 40-45k wages are “making a lot of money.” I do not live anywhere near CA, though. But do you really feel that someone making 60K total comp is “making a lot of money”? I think you have been counting the beans for too long, Ed. (you can laugh a little)

    As for your last line, if “exponentially better” is unacceptable, but “incrementally better” is acceptable, what kind of incrementally better benefits would you support?

    1.5x, 2x better? are these acceptable increments? Or does it bother you that anyone have a benefit structure that is in any way better than social security?

    Seriously, we’ve already shown that a db plan will do better than SS. Tell me a multiplier and or income replacement that you’re comfortable with. Many states have already raised their age limit up to or near SS ages (I realize CALPERS has not done so universally yet, but some localities have), so let’s keep the age the same for now. What multiplier do your numbers tell you that you can support, even with just your conservative rates of return? Tell me honestly…..

    … Not bad, is it? Now why do we have to keep comparing pensions to social security?

    The “terrible mistake society made” was to start comparing 401k’s to pensions in the first place. They are both good tools which should complement each other, not be replaced by one another.

  • Ed

    Oz – Social Security IS a defined benefit plan. Here is a summary chart showing the benefit formulas:
    http://www.vaughns-1-pagers.com/economics/ssa-monthly-payments.htm

    When you ask what sort of public sector defined benefit may be equitable and sustainable, a few good ideas might be gleaned from Social Security (1) it is progressive, meaning the more you make, the less of a percentage of your final years pay comes back as a payment, (2) it has an upper limit on the amount anyone can receive. These two factor guarantee that Social Security is more easily funded, since the benefit percentages diminish as earnings rise, and since there is a cap of $35K on annual benefits. The modest scale of the Social Security benefit makes it an appropriate safety net for retirees, challenging them while they’re still working to pay off their mortgages, eliminate other debt and save money – i.e., to engage in responsible financial behavior.

    Consider a person in the public sector who retires at 90% of their final pay, which was $150K per year, the amount that earns the maximum Social Security payout. They will earn a pension of $135K per year, nearly four times what they would get under Social Security. In my opinion, any pension paid for by taxpayers should not exceed what a similar salary history might qualify for under Social Security by more than 100%, if that. To pay four times as much to anyone simply because they work in the public sector is unjustifiable and financially unsustainable.

    You probably would agree that public sector jobs pay at least as much as private sector jobs – with the rare exception of a few hundred top executive jobs at major corporations. For the vast majority of workers, public sector jobs pay at least as much as private sector jobs. I believe they pay far more in most cases, but let’s just assume they pay equally. Then why is there ANY premium for taxpayer supported retirement benefits between public and private sector workers? You probably would also agree that public sector jobs are more secure than private sector jobs – for this pay should be lower, not higher, or even equal. The only justification for public sector jobs to pay more than jobs in the private sector requiring equal skill and training is if those jobs entail personal risk – jobs in public safety. But even there, the actual base pay should constitute most of the premium for taking these risks. To make pensions literally four times better than Social Security for people earning approximately $100K per year is to remove these lucky beneficiaries from the challenges and responsibilities the rest of us face when planning for retirement.

    I’ll stand by my point that public sector pensions are just gigantic 401K plans. Public sector pension funds are making increasingly speculative investments with taxpayer money in an attempt to regain that 4.75% (after inflation, 7.75% nominal) rate of return that is simply not there. They are expecting taxpayers to make up the difference when they finally accept more realistic expectations for their funds. This is not right.

    In my opinion the maximum retirement pension for public sector workers should in no case exceed twice the maximum Social Security benefit – I would say cap them at that level, which today would be $70K per year. I also think the benefit should be capped at 75% of the average of the last five years salary, with no spiking. And I believe each public employee should contribute in the form of withholding at least 50% of the funds required to ensure the solvency of their future defined benefit pension. If public employees deserve a premium for the jobs they do, as is certainly true in many cases, then that should be reflected in their base pay.

  • boprn

    Ed

    Nothing to worry about. The coming dollar devaluation will shoot the stock market to the moon (as fixes/paid for assets revalue themselves). Pensions will easily be paid in the newly devalued dollar, making the pensions of those who work for the govt nearly worthless. In the mean time those in non-defined benefit plans will find the stock boom of great value, as 401Ks rocket to the stars. Those in 401Ks will reap the benefits because they are NOT in a defined benefit plan. The resulting under class of retired govt workers will no doubt please those that suffer from PENsIon(S) ENVY. Perhaps if your pension was bigger, you wouldn’t be so jealous of ours? (That was a joke…), but perhaps there is some truth to it?

  • Ed

    Boprn – it is good to have you back. Yes, those of us whose social security benefits will not even cover our property tax payments on our fully paid for homes will definitely envy those who collect pensions that are 3x social security and therefore get to keep their homes and even can afford to cover a mortgage payment. Under such circumstances, few of us are such saints that we would not suffer a bit of pension envy.

    Seriously, to your point about inflation – what if we have deflation?
    http://civfi.com/2010/03/15/the-razors-edge-inflation-vs-deflation/

  • boprn

    Well, if we have deflation, I’m going to make out like a bandit!!!

    The chance of deflation in the long term is pretty slim. Just this week, U.S. currency has lost quite a bit against major foreign currencies. Commodity based currencies (NZ as the best example) have made huge gains over the past ten years against the dollar. Manufacturing based currencies (China or Japan are great examples) have made large gains against the dollar EVEN WITH DOLLAR PEGGING IN PLACE. If those currencies were allowed to trade against the dollar in a free market, without politics getting involved, we would have seen Wal-Mart turn into Saks Fifth Avenue already. The devaluation of the dollar can easily be seen in metal prices, which are less apt to be influenced by politics. The globalization of the large ‘U.S.’ corporations provides these companies a protection against dollar devaluation, which in turn makes their fixed assets go up, and each companies market capitalization go up in U.S. dollar terms. Those who have 401k type plans, or just have money parked in the DOW (or those types of stocks) will see a great appreciation in their accounts – but of course, the inflation will balance those gains for a net of zero gain. Those in defined benefit accounts will find themselves stuck with the defined benefit, and be bypassed by the market gains; the benefit that would bring, thus reducing the retirement benefit secondary to dollar devaluation.

    One has to wonder why, with this obvious end coming, politicians are providing fodder for people to panic over ‘gold plated pensions’. The pensions saved by public/private workers are the last place to be raided by the dishonest politicians & corrupt Wall Street bangsters. I find it hard to believe a person such as you does not see the class warfare that is being created by people like the moron we have as a Governor. Once you wipe out the retirement plans of all the rest of society (those left I mean), we will all be slaves to a government that can force us into cheap Chinese style wages. But…I’m getting off topic.

    Surely you must admit that inflation is a greater threat than deflation. With inflation, fixed pensions (defined benefit pensions) are the ones to get hit the hardest. So, will you be there supporting increases to public/private employees with defined benefit pensions when they find themselves on the short end of the stick – is is this a one way street.

    And, its good to find you again. Always did enjoy the debate, even if its like playing chess with a beginner. Again – a joke….

  • oz

    Ed-

    Social security is an income replacement plan. The table in the link is not a “benefit formula”, but simply an estimate based on what people in those wage categories will likely get.

    I would not call it a defined benefit plan. It definitely is not an invested defined benefit plan, which is guaranteed to outperform social security.

    Further, I would NOT agree that public sector jobs pay the same WAGES as private sector jobs in the same job function. I would agree that generally the TOTAL compensation for similar private jobs and public jobs is currently fairly close. Sure service jobs tend to pay more TOTAL comp in the public sector than private, while jobs in the IT and legal fields tend to pay less TOTAL comp in the public sector than private, etc.

    But every time comparative studies are done, pension/retirement contributions for both are factored in. So is vacation, health coverage, etc.

    And again, generally, when everything is added up, the TOTAL comp in the job classification runs about the same.

    What I think you are really arguing is that the fundamental value of the pension for the public (and sometimes private) worker is mispriced.

    Your argument is not with the tool of the pension, the salaries of public workers, or even the generousity of some extreme pensions at all but with a fundamental mispricing of the pension, right?

    It is the mispricing/abuse of the pension, not how it compares to social security, that leads to all this confusion and budget problems.

  • Ed

    Boprn – I think you underestimate the resiliency of the U.S. economy. China’s currency, like all currency, is backed by its actual collateral – financial, material, and intellectual – the intrinsic and innate worth of all China’s institutions is the collateral that supports their currency. China’s economy today is over-heated and growing at an unsustainable rate, their rapid growth persists only as long as their financial collateral remains overvalued. Ultimately any nation’s financial collateral, including their currency, is artificial and always reverts to correlate with their underlying material and intellectual assets. In China, entire cities have been built that are unoccupied, with insufficient surrounding infrastructure or industry (ref. The China Bubble http://civfi.com/2010/06/08/the-china-bubble/). Europe has been pegging national economies to the Euro, and now faces debt crises that match the U.S. Demographically both China and Europe face an aging population challenge significantly more severe than in the U.S. Whether or not we are squandering our advantage is the topic of a larger debate, but today the U.S. currency can hold its own in a global environment of inflation or deflation because the relative strength of the U.S. economy is greater than China’s or Europe’s.

  • oz

    Ed-

    Couldn’t what you said to boprn actually be an argument for inflation also?
    It is possible for All currencies to inflate against real goods, no?

    I have read your inflation/deflation comments from months ago and I know
    that if what boprn said is true (I could not tell if he/she was being
    cynical, but) public/private db plans will indeed have no problems making
    ends meet. This would seem to render futile the part of our discussion on
    pension fund obligations.

    Either way, I think pension funds can and will outperform 401k’s.

  • boprn

    Oz,

    You have caught on to my point. Devaluation of the dollar against commodities will cause inflation. The resulting inflation will cause market caps of large corporations to increase. This makes pensions easily to pay in the long run, as a large portion of PERS type systems are invested in stocks. Politicians know this, so the real question is – why are the politicians making a run at the last thing left?…pensions. Simply put, they don’t know when to stop stealing, they don’t know when enough is enough. In the world that the moron governor of California lives in, HE is entitled to live like only a dictator can. The rest of us should be regulated to some sort of near poverty existence (unless of course you are one of his guards a.k.a. CHP). That mentality fits in with the typical tyrants of the past – they live one way, while telling the populace to live another. They take care of their private police force. The dictator will decry the pollution of the environment by the person who drives 20 miles to work, while flying a private jet 500 miles to work. The dictator will say ‘I take no salary to do this for you’ while getting special bond deals & stock options that make that very salary pennies in comparison. The dictator is ego driven, and will appear at events that feed the ego (where there are lots of adoring fans), but rarely address the real problems his own population faces. But, I have gone too deep into the problems of California….back to pensions.

    Then there are the pseudo-economic bloggers on the internet that out of fear, and a lack of understanding of large scale economics, feed into the fear cycle perpetuated by politicians. The bloggers use their misunderstanding of the economy to continue the now self feeding cycle. Bloggers omit critical data from their arguments to incite the fear cycle to the next level.

    I could go on to what that critical data is, but in short – the state saves quite a bit of money on employee costs because it has CalPers. Will save it for another post if needed.

    Viva EcoWorld…I mean CIV FI

    =]

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