Pricing A Taxpayer Bailout of California’s Pensions

Last month both of California’s largest government employee pension funds, CalPERS and CalSTRS, released their portfolio earnings numbers for the most recent twelve months. In a statement released on January 24th, “CalSTRS Calendar Year-End Investment Returns Show Slight Gains,” CalSTRS disclosed “Investment returns for the California State Teachers’ Retirement System (CalSTRS) ended the 2011 calendar year posting a 2.3 percent gain.” CalPER’s statement released on January 23rd, was titled “[CalPERS} Pension Fund earns 1.1 percent return for 2011 calendar year.”

These funds, and the rest of California’s many local government employee pension funds, are still clinging to long-term rate of return assumptions of between 7.5% and 7.75% per year. So how much would taxpayers be on the hook for if rates of return stay this low?

The first step towards determining this would be to estimate the average pension paid out to a state or local worker in California, based on recent retirees who have worked a full 30 year career. Despite the claim that “The average CalPERS pension is $2,220 per month” (made yet again in the final paragraph of their above-referenced press release), for a more accurate figure, one must look at the average pension awarded recent retirees, based on a full 30+ year career. The problem with the low figure used by CalPERS and others is that it includes people who retired decades ago [...] Read More

Preserving America’s Middle Class

To say America’s middle class is threatened is a common refrain. But there is no malevolent force operating to shrink America’s middle class. America’s middle class is challenged by the momentum of history. Technology automates jobs at the same time as the capacity of foreign manufacturers continuously improves. At the same time, American taxpayers confront the challenges of providing for an aging population as well as choosing what is affordable from an expanding array of social welfare and safety-net choices. In some respects, America’s middle class is a victim of its own success – we live longer, we have better medical technology, our productivity is continuously improving, and American military power – expensively purchased – enables competitive global commerce. Here then, relieved of ideological cant, are the reasons for America’s shrinking middle class:

(1) More money is needed to take care of retirees, and investment returns will no longer cover most of the costs. America’s aging population creates higher demand for liquidity, because retired people need to sell assets to generate cash to pay bills. As an ever higher percentage of America’s population are retirees, there will be more sellers in the investment market, dampening prices and price appreciation. This will lower rates of return on retirement investments and, in turn, all assets.

(2) Advancing technologies have automated millions of jobs. From office information systems to robotic manufacturing, innovation has eliminated the need for millions of highly educated, highly skilled workers. Despite rising productivity, workers have been relentlessly displaced. Entire [...] Read More

The Faces of the Forgotten 33%

Last month a post entitled “America’s Forgotten 33% ” described those Americans who are not members of the elite 1% super-rich, nor part of the privileged 20% who work for the government, nor among the nearly 50% of America’s population who are, apparently, poor enough to avoid taxes altogether.

Who are these forgotten 33%? Who is this one-third of America, people who, compared to the other two-thirds, pay far more in taxes than they receive in return? Who are the faces of the forgotten 33%?

They are small business owners who can’t compete with the crony capitalist captains of big business, who use their financial influence with legislators to enact regulations that small businesses can’t possibly afford to comply with. They are independent contractors who work multiple jobs to earn a mid-five-figure annual gross income, yet pay nearly 50% in taxes on every extra dollar they make (25% federal, 9% state, 13% social security and medicare). They are small investors whose retirement savings lose value at the same time as government employee pension funds beat the market using high-frequency trading and other manipulative tactics that individual value investors can’t hope to emulate (and hold taxpayers accountable to cover the difference when they don’t beat the market). They are parents who can’t get a decent education for their children in public schools, because the teacher’s union makes it impossible to fire bad teachers, and creates a self-serving bureaucracy where administrators outnumber teachers. Parents who have no chance to influence local or [...] Read More

America’s Forgotten 33%

Much has been made of the 1% vs. the 99%; the “super-rich” vs. the rest of us, who are presumably the hard working, loyal Americans who’ve been left behind. But who are the rest of us, and how does who we are affect how much we pay in taxes, and how we may vote?

The chart below depicts the American electorate divided not into two groups – the 1% vs. the 99%, but four groups – the 1% super-rich, then 20% representing government workers, 46% representing citizens who either pay zero taxes or negative taxes (ala the “earned income credit”), and the remaining 33% who are neither super-rich, government employees, or not paying taxes. One might term this group the forgotten 33%, because no special interest will speak for them. They have neither the numbers nor the financial wherewithal to decisively influence elections.

The choice of colors – red for the 20% political class AND for the 46% entitlement class, is not accidental. These voters have an identity of interests that automatically inclines them to favor more government spending; government workers because more government spending means more job security, higher pay and benefits, and more expansion of their organizations, and citizens who pay no taxes because their economic status is enhanced through receiving entitlements for which they bear no share of the costs. This identity of interests between the political class and the entitled class has created a supermajority of voters in America who have a self-interest in [...] Read More

Apolitical Government Reform

Not as a libertarians, but as a good government fiscal conservatives, who value government and government programs, how might we respond to charges of right wing radicalism? How might we respond to charges that we are biased against working people, or want to destroy the middle class, or are a tool of the super-rich? If you want to keep good government programs, but want to make government more financially efficient, how to respond to charges of resenting government workers, or wanting to change the deal on government workers, or not appreciating government workers? Focusing on the state and local government entities here in sunny California, here are some thoughts:

(1) Public employees used to take jobs that paid less than private sector jobs. Up until about 20 years ago, the trade-off was clear: Government workers exchanged a lower salary for better benefits, a pension that was better than social security, and job security. This was a fair exchange, and the system worked just fine.

(2) Over the past 20 years, during the economically unsustainable internet bubble followed by the real-estate bubble, public sector unions stirred up envy among public sector employees, prodding them into demanding unsustainable increases to their compensation to match the private sector. Since these bubbles have burst, these unions use their nearly absolute power over California’s state and local politicians to maintain unsustainable levels of public sector employee compensation.

(3) We now have a situation where public employees have, in most cases, better base salaries than in [...] Read More

The Contract on California

California’s state and local government workers, who enjoy pensions that average at least five-times what a social security recipient can hope to receive, love to claim they have a “contract” that makes reducing these pension benefits impossible.

They certainly do have a contract – sort of like the contract an underworld boss might order on a troublesome associate. Except in this example the underworld bosses are the public employee unions, the troublesome associates are the taxpayers, and the “contract” requires the taxpayer to cover public employee pension fund returns. That is, whenever these government worker retirement funds fail to achieve their projected returns, the taxpayer covers the difference with higher taxes. Nice deal for Wall Street brokerages, who get to manage all the money with no risk. Nice deal for California’s state and local government workers, who enjoy retirements that are, on average, five times better than social security. Really, really bad deal for the taxpayer.

Spokespersons for the government unions and the government worker pension funds have long stated that “the market has just been beat up a bit lately,” and “investment professionals assure us there is no cause for concern.” But the sobering truth is starting to emerge, and according to “contract,” taxpayers are going to get hit hard.

On December 20th the CalSTRS CEO, Jack Ehnes, in a rather convoluted acknowledgement on the “Ask Jack” section of CalSTRS website, admitted that funding to CalSTRS would have to increase by $3.8 billion per year for the [...] Read More

Agroforestry is Regreening the Sahel

The African Sahel is the arid belt of land that forms a buffer between the Sahara desert to the north and the more temperate savannahs to the south. From the coast of Mauritania and Senegal to the west, the Sahel stretches over 3,500 miles to Sudan and Eritrea’s Red Sea coast to the east. Over 500 miles wide, this vast area forms the biggest front line on earth in the relentless battle against desertification.

For decades there has been nothing but bad news. Population increase led to overgrazing and unsustainable harvests of fuelwood. Equally if not more harmful to the Sahel ecosystems were the imposition of western methods of agriculture and forestry, techniques that began under colonial administrations and have been perpetuated over the past 50 years by well-intentioned aid agencies. A fascinating article by Burkhard Bilger in the December 19th issue of The New Yorker, entitled “The Great Oasis (subscription required),” documents a new and hopeful trend in the Sahel that may reverse over a century of environmental decline.

Back in the 19th century and through the first half of the 20th century, French colonial administrators in the Sahel attempted to develop commercial agriculture according to Western techniques that worked well in temperate zones, where sunlight needed to be maximized, but were disastrous in the arid Sahel, where crops responded better if they were beneath a protective tree canopy that attenuated the sunlight. The areas designated as forest were considered state property and were [...] Read More

How Wall Street Bought the Public Employee Unions

Earlier this week, on December 7th, 2011, as reported by the San Jose Mercury, the “San Jose City Council votes 6-5 to place pension reform on June ballot.”

This plan is drawing fierce resistance, but there are two financial considerations that most critics of pension reform don’t take sufficiently into account when making their arguments:

(1) Pension contributions are very sensitive to how much the fund can earn. A pension that earns 3% per year, i.e., allows someone who works for 30 years to retire with a pension equivalent to 90% of their final salary, will require a 10% increase in annual required contributions (as a percent of pay) for every 1.0% the earnings on the pension fund drop. That is, if the contribution to a firefighter’s pension is currently 35% per year (based on employer and employee contributions combined), and CalPERS lowers their expected rate of annual return by just 1.0%, from 7.75% to 6.75%, then the required annual contribution as a percent of salary goes up to 45% per year.

(2) The rate of return being currently maintained by most pension funds, 7.75% per year, is much higher than can be sustained going forward. A key reason for this is because equity growth over the past 20-30 years, and especially over the last 10-15 years, was fueled by increasing debt. By enabling massive borrowing – consumer, commercial and government – more consumer spending [...] Read More

Merge Social Security and Public Pensions

When solutions to the challenge to provide retirement security to American citizens in the 21st century are considered, they typically address either social security or public sector pensions, but rarely focus on both of these systems together. But when considered together, as systems that each have unique strengths and weaknesses that might be combined in a single program available to all Americans, options present themselves that might otherwise be ignored.

With both social security and public sector pensions, the challenge of maintaining financial sustainability is dramatically affected by the demographic reality of an aging population. As increasing numbers of people live well into their eighties and nineties, the ratio of workers to retirees edges closer and closer to 1.0.

There are four ways to address the reality of an aging population: (1) Increase withholding from current workers, (2) Increase the retirement age, (3) Lower the level of retirement benefits, and (4) Increase the amount the retirement trust fund can earn. Before delving into each of these further, however, it is important to identify one crucial advantage the USA enjoys vs. virtually all other major developed nations. America, alone among major nations, is projected to have a perfectly even distribution of ages within her population.

AMERICA’S DEMOGRAPHIC ADVANTAGE

America, like all developed nations, has an aging population. But as the four charts below indicate, unlike all other major developed nations, America’s population is replacing itself at an even rate. It is difficult to overstate the serendipity of this phenomena, nor the [...] Read More

Why Not “Occupy” Public Sector Pension Funds?

A CIV FI post back in January 2010 entitled “Axis of Wall Street & Public Sector Unions” identified an irony still lost on the occupy movement’s rank and file – Wall Street is financed by the pension funds of unionized government workers. Every year, taxpayer funded government agencies pour hundreds of billions of dollars into Wall Street investment funds.

Occupy Wall Street? Why not “occupy” Wall Street’s union paymasters, the government employee pension funds?

Here’s a summary of the dynamics between Wall Street, unionized government workers, and the taxpayer:

(1) The government workers provide services vital to the taxpayer, and charge the taxpayer, on average, about 40% of their income (middle class worker, all taxes – state, federal, social security, medicare, property, sales) to receive these services.

(2) The government workers receive, in addition to their normal pay, funded by these taxes, pensions that are, on average, five times better than what taxpayers get from social security (the average government pension is $60K per year with an average retirement age of 55, the average social security benefit is $15K per year with an average retirement age of 65).

(3) The government workers tell the taxpayers – don’t worry – you don’t have to pay additional taxes for us to get these generous pensions, because we’ll invest the money on Wall Street, and Wall Street will earn 7.75% per year on these investments.

(4) Wall Street invests the taxpayer’s money, funneled through [...] Read More