Posts Tagged ‘Pensions’
AUSTIN, Texas—On the 13th floor of a sleek downtown office building here, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses.
The office’s occupant isn’t a highflying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state.
It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.
Oh, they promise high, steady returns eh?
Sounds like Charlie to me. You know…. Charlie PONZI?
Now I have no quarrel with a private pension system that has no recourse to the public purse making such a decision, provided that the beneficiaries decided to go down this road and accept the risks from doing so.
But that’s not the case here, nor with any other public pension system. In these cases if the “strategy” winds up with the result that is mathematically inevitable over time (that is, it is not possible to obtain reward without risk, and the more reward you expect the more risk you take) then the taxpayer will be attacked to make up the difference.
The solution to this problem is quite simple – remove the backstop.
That is, go ahead and do what you want, but if you can’t pay down the road then the system goes into receivership just like anyone else who makes a bet that doesn’t pay off, and the pensioners take it in the ass.
If that’s an acceptable trade-off for the pensioners then this sort of arrangement is fine. That’s called the “free market” and is how things are supposed to work.
But there is no such thing as a free lunch, and there is utterly no argument that one can raise for this sort of arrangement where public employees are able to gamble with the taxpayers money – getting paid irrespective of whether their bets win or lose.
Discussion (registration required to post)
Government promises to public employees have created “zero-risk” Wonderlands protected from the market forces of risk and consequence. These islands of privilege are snapping back to join the real economy.
Every government entity that reckoned it was moated from the market economy will be snapped back to “discover” risk and consequence. Let’s lay out the dynamic:
1. Every government can only spend what its economy generates in surplus.
2. Every government transfers risk and consequence from itself, its employees and its favored vested interests to the citizenry and taxpayers.
3. Every government collects and distributes the surplus of its private sector to its employees, favored constituencies and vested interests.
4. Since the government (State) promises guaranteed salaries, benefits and entitlements to its employees and favored constituencies, these individuals believe they are living in a risk-free Wonderland that is completely protected from the market economy.
5. Risk cannot be repealed or eliminated, it can only be masked or transferred to others.
6. The Federal government and the Federal Reserve have pursued a policy of inflating serial speculative credit-based bubbles.
7. These bubbles inflated assets, profits and taxes, creating the illusion that blow-off speculative tops were “the new normal.”
8. Speculative credit-based bubbles misallocate capital and incentivize malinvestment on a spectacular scale.
9. Once the bubble deflates, the capital is lost or trapped in illiquid malinvestments.
10. As a direct result of the dot-com bubble, Stockton’s tax revenues (general fund) leaped to $139 million in 2001. As a direct consequence of the housing bubble, it jumped to $186 million in 2007.
11. This “new normal” encouraged the belief that the stock market would double or triple every decade into the future, generating 8%+ annual returns for public union employee pension funds.
12. The city government granted employees open-ended guarantees of lifetime healthcare coverage.
13. This meant that there was no limit on the cost of each employee’s benefits.
14. As noted here many times, healthcare costs rise by 7%-10% every year, even as the economy which supports healthcare grows by 2% on average.
15. Healthcare alone will bankrupt the nation, and the bankruptcy of entities that promised open-ended healthcare is merely one manifestation of the coming bankruptcy of the entire sickcare/entitlement Status Quo.
16. Once the stock market reverts to the mean and is revalued to the “new normal” of global recession and low earnings growth, it will decline by 40% or more and yields will remain around 2%.
17. Pension funds earning 2% at best based on expectations of permanent 8% returns cannot sustainably pay the benefits promised.
18. If the city attempts to make up the shortfall annually, the services provided to the citizenry will be gutted. The risk and consequence of malinvestment and favoritism has been offloaded onto the citizens while those protected by the government moat live “risk-free” lives of guaranteed pensions and benefits.
19. The public-employee pension and healthcare benefits were separated from the market economy with this government guarantee: regardless of what happens in the real economy, you will be paid pensions and benefits that have zero exposure to the market economy and private-sector pensions/benefits.
20. In effect, the government has placed its employees and vested interests in a moated “risk-free” zone outside the market economy. The risk that is distributed to all participants in an open market (i.e. a democracy) is transferred to the citizens and taxpayers.
21. Any government that siphons off an increasing share of its taxpayers’ disposable income (to distribute to the privileged few) in return for declining services will eventually be overthrown by the citizenry and taxpayers who must bear the full consequences of the city’s mismanagement of their capital and income.
22. Every city, county and state in the U.S. which has secured a risk-free wonderland for its favored few will “snap back” into the real economy and face the discipline of the credit market and the “discovery” of price and value.
23. Risk cannot be eliminated by government mandate, it can only be transferred to others. No government entity can maintain a “risk-free” fortress outside the market forever. The moat around Wonderland will be drained or filled, regardless of what promises were made.
24. Government has no mechanism to transparently price risk, value and return on investment. The market will “discover” all these and re-set government services and salaries accordingly.
Charles Hugh Smith – Of Two Minds
A rising stock market buys near-universal complicity.
How can the Status Quo bail out pension funds without having to give them cash? It’s easy–goose the stock market ever higher. Since pension funds are heavily invested in the stock and bond markets, the presto-magico way to inject hundreds of billions of dollars into the pension system was to generate an 80% leap in stocks and lower interest rates to zero, effectively goosing bondholders’ equity as bonds rose in value.
No politically messy bailouts are needed–all you need is a permanently rising stock market. If the Federal Reserve can just goose the S&P 500 from 1,300 to 2,000, underwater pension plans will be “saved” without any visible sacrifice.
Thus is complicity bought and paid for.
Corporate management loves a rising stock market–it’s the ideal setting for dumping one’s stock options.
Politicians love a rising stock market–since the vast majority of one’s campaign contributions flow from wealthy people who own stocks, then the “wealth effect” of a rising market makes one’s contributors happy and fattens their contributions.
And as a bonus, this “wealth effect” is great PR for the unwashed masses who don’t get much of a direct benefit because they own at best a few thousand bucks of mutual funds in an IRA. But hey, that warm fuzzy feeling of a rising market makes everyone feel like “good times are here again,” even if they’re only marginally attached to the trillions of dollars in “new wealth” being generated.
Government employees love a rising stock market, too, because it means they won’t have to contribute much to their own pensions. What every employee wants is a return to 1995-1999, when the stock market enabled a quantum leap up in their “sweetened” benefits packages.
The financial media loves a rising stock market, because it helps generate positive buzz and more readership and advert sales.
Wall Street loves a rising stock market, because it masks the entire panoply of fraud and embezzlement that is the beating heart of Wall Street, from high-frequency skimming to the “never have a losing day” trading desks.
The Fed loves a rising stock market, of course, because it makes the Fed look successful and omnipotent.
The President and his administration love a rising stock market, too, because it offers up a welcome sheen of economic “growth” that extends the promise of the mythical “self-sustaining recovery” just around the corner.
Politicos also love a rising market because the capital gains generate rising tax receipts. If there was ever financial magic, it’s tax receipts increasing even while the real economy tanks. You just gotta love that permanently rising market!
Everybody benefits from a permanently rising stock market, and as a result they don’t really care how it is engineered or at what eventual cost. The Fed has a free hand as long as it’s enriching pension funds, insurance companies, politicos, corporate management, the media–what’s not to like?
Thus is complicity bought and paid for.
But there are signs that this skyscraper rising to the stratosphere is built on swampy muck. The stock market looks impressively robust as it rises toward the outer atmosphere, but that strength and power may be masking vulnerabilities that are rising side by side with the market.
The game of driving down the dollar to goose stocks seems to be running out of oxygen. Despite the best efforts of the Fed to keep it heading to zero, the dollar is tracing out a long-term uptrend.
Then there’s that massive double-top in the market’s star performer, the NASDAQ:
If the Fed can’t blast through that resistance to a new high soon, that could signal the end of the entire “everybody loves a permanent rally” project.
The problem is that this project is a one-time deal: once faith in the Fed’s ability to permanently game the stock market is lost, the Fed will have used up its three wishes. And when that brittle delusion of Fed omnipotence expires, it will do so with breathtaking speed.