Guest Post by Martin Armstrong
At the current federal minimum wage of $7.25 per hour, working 40 hours per week, 52 weeks per year, yields an annual income of only $15,080. This is below the annual poverty line. It also reflects something that most people are unaware of — in Illinois, there are more than 19,000 retired teachers who get OVER $100,000 per year in their pension. According to the latest data, nearly 1.5 in ten federal employees are eligible to retire RIGHT NOW, and in five years the number will hit three in 10 or about 30%. The Housing and Urban Development Department in the federal government has the highest rate of employees eligible to retire right now of any major agency in government, which stands at a shocking 24%.
Under U.S. law, there are two broad types of retirement plans: defined-benefit (DB) and defined-contribution (DC) plans. The Defined-benefit plan has been mostly abandoned in the private sector because they were rapidly revealing how they failed to work. The DB plan use to come with a gold watch and ensured you some level of benefit for the rest of your life. This was all part of how to prevent another Great Depression. Typically, your employer would invest part of your compensation in the plan based on some formula.
In some cases, you, the worker, might have added more money to the pot. The employer was required to send your defined benefit each month or quarter to a fund. Typically, this was in the form of a fixed-dollar amount, sometimes with periodic cost-of-living adjustments. That scheme ran into trouble that set standards for private-sector pension plans and defined their tax benefits under federal law because government wanted a piece of the action due to income taxes.
Most state and local government employees, actually 87% of those working full time, participate in a defined benefit (DB) pension plan. They contribute nothing but are simply guaranteed a pension on top of what they earned. These plans typically provide pensions based on members’ years of service and average salary over a specified period before retirement. On top of that, most members also receive cost-of-living adjustments that help maintain the purchasing power of their benefits during retirement. In the private sector, where defined contribution (DC) or 401(k)-style plans dominate, only 19% of full-time workers belong to DB plans. This is the real PENSION CRISIS. Government workers generally contribute nothing and demand tax increases to fund their pensions.
The DC plans emerged when the DB plans were showing signs of economic stress. The handwriting was on the wall. As taxes rose, the standard of living declined and governments wanted to regulate pensions to prevent too much money going into tax-free vehicles. The 401K is a kind of defined-contribution plan (as are various types of IRAs/Keogh/SEP plans, etc.) which emerged under the DC plan structure. Government regulations govern who puts money into the plan and how much. Typically, it’s you and your employer. Your employer also has to give you some reasonable investment options, but it’s up to you to use them wisely. Good luck. Most people have discovered nothing but losses. The advice for the general public has been biased, subject to conflicts of interest, and fragmented. This is because we have fragmented agencies (i.e. SEC & CFTC).
The CFTC is regarded as the unqualified regulator. The lawyers there are the people who generally are turned down by the SEC. But the real crisis is that the regulations under the SEC and CFTC are exactly opposite. If you managed money under one agency’s rules, you went to jail under the other. This resulted in the development of offshore hedge funds where you paid a manager to make all the decisions, whereas domestically, a manger in stocks could not also advise on commodities. This resulted in conflicts of interest and has seriously harmed average people in understanding how to manage their own 401K.
Therefore, regulations have prejudiced the private sector while the public sector is predominantly under DB plans where government workers have no decisions they confront. This stark difference is coming to a head. Before 2032, there will be more people on retirement from government than actual workers. Taxes have NOWHERE to go but up dramatically because nobody is willing to look at reform. The new Modern Economic Theory is their answer — just print.
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I’ve always considered public sector unions a contradiction in terms. You don’t live off the taxpayers back. Here in California the teachers, police and firemen control the political class. I hope I live to see the absurd pension promises made to them go belly up.
Never. Gonna. Happen.
Mathematical certainty.
The ultimate financial can kicking- public sector pension funds.
They. Will. Be. Bailed. Out.
Sorry DB, I’m with James and 22.
First, let me ask: Just WTF of value does the article provide that we do not already know? Is the guy writing “Pensions for Dummies”? No answers needed, simply venting.
DB is partially right; James and 22 more so: public pensions will continue to be bailed out, but only to a certain point-which, by the way-myopic politicians and pension managers cannot and will not see. Margaret Thacher joked about socialism ending when the OPM runs out. It is not a joke, though it generally is uncharted territory in the US as long as fiat money is viable.
There are plenty of canary-in-the-mine scenarios to be found with each new municipal bankruptcy (too many to mention) and scandal (think Bell, CA). Pension plans routinely are suddenly found to be massively understated. Raise taxes? Painful. Reduce benefits? “Unthinkable!!!” Quietly play with the discount rate that no mortal understands? Sure, it happens far too often, but will eventually hit a brick wall and no longer be available for severely over-stressed/under-funded plans. All the easy stuff has been done; there is little low hanging fruit available, other than the continued rape of the taxpayer.
Take a look at previous financial meltdowns and where they originated-often offshore in places that would never have been expected to cause such widespread pain. History does repeat itself, though often in clever ways that are not identified early on. Ask yourself, what will it take to trigger the next major financial dislocation, and when? We certainly do not have those answers, but we do know it is coming, if for no other reason it has before and it will again.
As is frequently said: “This time it will be different”. We are living in a “house of cards” world. I suspect that Thatcher’s “Law” will be an immediate aftershock of the next big one. Governments will lose control, things may get ugly. Hungary, 1956 and France 2019 are but
examples of the kind of discord that could spread far faster and far wider than expected.
People are tired of being over taxed and being lied to in the process. Most importantly, people are now able to see through more of the smokescreens, primarily due to the exponential growth rate of information flow and the sharing of knowledge. Information will induce action. Covington is a perfect example: exploding information (and mis-information) has led to all kinds of actions. What will it take to drive us into sustained reaction territory? Same as when SHTF, in some form or another. At precisely that time the rules will change. As a civilized society we generally do not shoot each other (Chicago and other places seem not to be civilized); but, when rioting starts and the “authorities” declare martial law and “looters will be shot”, the rules have changed. When governments lose control and the “authorities” can no longer issue commands the people will act, and the equivalent of “looters will be shot” will manifest in many ways. One of which will be that public pension plans will be stripped of their “right” to plunder. When is anybody’s guess; I am with Old Shoe and firmly believe that will be in our lifetime.
The solution is a pension surtax. The gov’t retirees plan on using the very broad powers to tax to screw the rest of us. We need to turn that power back on them. They should get the pension they were promised. On a pretax basis. Sucks for them that we tax the pensions rather than the property, or income, or sales, or gas, or everything else of the rest of us.
Put either a progressive schedule, or fixed percent surtax on pensions over a modest level. The problem is not the gov’t worker on an $1,800 a month pension. The problem are the system gamers who have $15,000 a month pensions. Take 30% (or whatever is necessary to keep the system afloat) of all amounts over $2k or $3k a month. Or take no surtax below $2k/mo, 10% of $2k-4k, 25% of 4k-7k, and 50% of everything over $7k/mo. Adjust the percentages and thresholds, make the problem go away.
The power to tax is broad indeed. That plus taxing the money on the way out the door helps manage the issue of fat pension retirees moving to low tax states to avoid getting stuck with the bill for themselves. There is a reason the South Florida NYPD retiree reunion is better attended than the one in NYC.
The only way out is . . . wait for it . . . INFLATION. Even the basics/essentials are set to go up BIG-TIME! The “pensioners”/fixed-income are in for a very “rude awakening” – especially the “citYzens/coasters” in rentals and totally unprepared/dependent/reliant on the shelves continuing to be stocked. To the [majority of] parasitic gov-agent/academic/judicial/financial “services” and other “UNproductive” [current/future] pensioners – squirm, you bastards!
Is Boat Guy alright? He’s usually all over these pension crisis items. (and I usually agree with him 100% on this issue).
Boat Guy is probably BUSY WORKING RIGHT NOW because he got fucked on his private sector retirement!
The prophet George Carlin predicted this:
……They want obedient workers. Obedient workers. People who are just smart enough to run the machines and do the paperwork, and just dumb enough to passively accept all these increasingly shittier jobs with the lower pay, the longer hours, the reduced benefits, the end of overtime and the vanishing pension that disappears the minute you go to collect it, and now they’re coming for your Social Security money. They want your retirement money. They want it back so they can give it to their criminal friends on Wall Street, and you know something? They’ll get it. They’ll get it all from you, sooner or later, ’cause they own this fucking place. It’s a big club, and you ain’t in it. ~ George Carlin
Carlin’s “American Dream” is mandatory listening.
“…they don’t care about you, they don’t give a fuck about you, at all…at all…at all”.
I hope those public pension collecting chair-warmers get it good and hard!
On the other hand, what has happened to private sector retirements is an abomination. If “the people” are going to come out shooting anytime soon, it will be largely because they and/or their family members are being thrown out in the streets when they try to pull 2008 Part II on us.
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Sounds like a standard government sponsored plan , destroy and bankrupt everything they touch and demand those damaged the most to not only pay for damages but fully compensate them for life after their plan goes belly up . But we all know their plan is to continue government theft thru increased and excessive taxation regardless of what happens to average non government employees . The demand for government pensions being funded regardless will eventually meet with serious opposition . Why do you think there is a continuous effort to disarm average Americans . Remember these wonks do not give a fuck about you your children your elderly nothing all they want is more for themselves and fuck everybody else . This will end badly as more people are tax levied out of their homes into the street .
Happy Marsh Rabbit ?
Greed is does more damage than envy.
It looks like TPTB have instituted several Cloward-Piven strategies . They are there on several fronts from illegals crashing the welfare system ,massive deficit spending,mind boggling unfunded liabilities,student debt or the funny money system we call the Federal Reserve.
It seems that they weren’t really sure which one would ultimately crash the foundation of our society so they figured that they needed to hedge their bets and see which one worked first.
More to follow on the pension crisis .
pensions are one of the main reasons that the fed has been trying to raise % rates,their actual rate of return is far below the assumed rate–
KPERS-Kansas Public Employees Retirement System, allows for a retirement based on a formula of years of service plus attainted age=a certain “point” value (I think it was ’85 and out’).
When retirement begins (I know a man who retired at 59, with a little over $3ooo month), the retiree can go to work in the private sector with no reduction in the amount of pension they recieve. If they were to return to work under another ‘KPERS’ qualified employer, they WERE limited to an annual compensation of around $7000 gross earnings and still recieve the retirement pension. About a year ago, that changed. They can now retire, re-enter as an employee of the public sector, and continue to recieve their pension with no restriction on how much they earn in the new position…..they can always raise taxes !
annuit coeptis novus ordo seclorum-George Carlin was right !
401k plan for the private sector now there is a deal only the circle jerk of Wall Street to K-Street to Capitol Street could come up with . The private sector employee puts up 100% of the cash assumes 100% of the risk absorbs 100% of any lose and in the end of a 30 plus year run receives only 30% of the gains . Does anyone else recall BOHICA …?
Meanwhile our circle jerk critters get a full bail out with bonuses paid for crashing the financial system and the Capitol swamp creatures are exempt from insider trading leaving the average Americans financial retirement in a free fall state of FUBAR !