Monkeys,
Another week passes, and with it comes the penning of another concerning article regarding the future of this aging nation.
Witness Illinois: as of this post, they have $14.6 billion in unpaid bills. That encompasses everything from hospital reimbursements to road construction payments. For two years, these obligations have gone unmet, with many services being cut back or crumbling outright. When the next set of bills come due, many contracts will be halted mid-fulfillment.
Not enough for you? What if I told you that after they sort out their $14.6 billion mess, they will then need to face the issue of $250 billion in shortfalls on their pension obligations? Keep reading the article, and know that I am telling the unvarnished truth.
What if I told you that Illinois, with their inability to pony up merely 5.5% of these two forms of obligation over two years, is only one such state experiencing this kind of gargantuan funding shortfall, albeit the worst offender by Moody's estimate?
There's Puerto Rico, with a $6.5 bn shortfall
How about I save us the tallying effort: there's something like a $1 tn (thats trillion with a T) in unfunded pension obligations nationally.
What if I told you that 56% of Americans have less than $10,000 saved for retirement? And that 32% of those between ages 53 and 62, right on the precipice of retirement, have no emergency savings whatsoever.
I have been raising this topic again and again. It seems to me not a matter of whether, but when the combination of pension shortfalls and nonexistent savings will cause economic damage to the US or global economy on a tremendous scale.
I want to hear from experienced professionals around WSO: do you agree that this confluence of facts will produce economic cataclysm? If not, why? And if so, how does your business or the businesses you work with face exposure to the ripple effects of this broken dynamic?
Illinois is in serious trouble, credit rating might get cut to junk on Saturday if no budget deal. You're seeing a lot of pensions now underfunded partially because of 08.
Some public employees will be paid out $1-2M in pension benefits over their lifetime
The sad thing is what will really happen: pensioned employees that form the middle class, and have saved nothing in anticipation of the $1-2M they see their predecessors pulling down, will be faced with the very desperate proposition of receiving nothing other than what can be plundered from the pockets of taxpayers in their states.
Except they are also the taxpayers in their states.
I really have no idea how some of these states can possibly hope to turn things around, short of another unprecedented effort to sweep the dirty economic laundry of the nation under the Fed's balance sheet, a la '08.
this article will make you sick to your stomach about government waste. Pension crisis
In all, 53 percent of the over 213,000 state pensioners in Illinois can expect to receive lifetime pension benefits of more than $1 million. Almost 40,000 (18 percent of all pensioners) will receive $2 million or more in benefits.
Thanks Obama
I know I can't force people to allocate their bananas and shit any way other than how they please, but I respectfully request that if you're going to shit the post, you explain your reasoning. A large part of me taking the time to write this is to solicit educated, dissenting opinions.
This is exactly the shitshow that occurs when finance people go into politics. I blame GTCR.
Care to elaborate?
Governor Rauner is the "R" in GTCR.
Ron Swanson quotes about gov.
couple thoughts because I think about this often:
retirement today is a broken concept. people are able bodied into their 70s with minimal lifestyle decisions, and yet we give people full retirement at 67 and medicarel at 65. furthermore, the average couple at 65 has a 50% chance of one person living into their 90s. the math is broken from when FDR and LBJ thought up our social safety nets.
they'll change the calculus. vesting will be delayed, benefits won't be as rich, the amount of income which is subject to SS wages will stagnate or not keep pace with wage growth (in effect, inflating the problem away)
the gov't will bail out the people who were too stupid or shortsighted to plan on their own, increasing taxes for workers
this will continue to be a problem as humans by and large shun personal responsibility
what should happen, if I was in charge:
change retirement age for SS and medicare to 70 with full vesting at 75, enhanced vesting maybe at 80. have the stated COLA at 75% of CPI/PCE (whatever rate the Fed uses). have this go up by 3 months every 2 years or so, or whatever life expectancy at 18 increases at (life expectancy at birth isn't as useful).
give companies that do autoenrollment (opt out) programs for retirement savings a tax break and adjust that tax break/credit based upon participation. start it at 20% of salary, with half going to pretax, half going to after tax. autoenroll them in target date retirement funds mostly with global equity index funds to keep costs down (instead of having defaults be money markets). have the CIOs be outsourced and not be gov't employees, have gov't people on a board of directors but have the actual CIO team be someone who's not a gov't employee. reward people who leave money in their plans after a certain time with tax credits/breaks
encourage states and local gov'ts to start financial education in elementary schools and continue throughout. maybe you give big banks an incentive to send in their best FAs or management teams, or maybe you give state and local govt's allowances to hire experts, but the money is use it or lose it
end income limits on Roth IRAs, the lost tax revenue can probably be offset by taxing carried interest as income and other expansions of the definition of income
continue reforms on advice industry, adding in SEC legislation and enhancing consumer protections similar to the banking industry.
start ad campaigns about saving money and good financial rules of thumb. we need to change the mindset of americans that the gov't will bail them out no matter what. similar to how we used war propaganda to help americans get behind the war, we need people to know about this, it can't exist in congressional committees and long legislation, it needs to be disseminated to the masses
Social Security wasn't mandatory initially, also it was based on an actuary table where something like 80% of those involved in the programs were never going to receive benefits. Everyone lauds these programs as some kind of amazing triumph in social welfare protections when in reality they were designed to sucker people into something they were very unlikely to ever benefit from.
Don't bring LeBron James into this.
Why public sector employees have pensions but the private sector has all but moved towards 401(k) plans I don't understand. IMO public sector employees have some very rich plans and these unions successfully pushed for plans that were above and beyond whats reasonable.
Net result is those who joined the government later on were screwed due to budget shortfalls and other factors (the 2008 Financial Crisis added more salt on the wound).
BTW a good podcast story on this very issue albeit for California: How Much Is A Firefighter Worth?
It stems for years of financial mismanagement by politicians who care more about getting reelected than properly doing their job. It is easy to get reelected when you promise government employees goodies. Case in point every level of government runs huge deficits unless they are expressly forbidden by their respective constitutions. They expect the feds to bail them out.
Sell drugs drink liquor collect disability check$
Going to try to take the contrarian viewpoint here, if for no other reason than to liven the debate.
As OP has mentioned, I am particularly interested in how this affects the broader economy. The problem would likely manifest itself in the form of reduced consumption amongst state pensioners when their promised funds erode - probably through a combination of age thresholds being elevated, benefits inflated away, or direct haircuts. (Btw, i agree with thebrofessor that these reforms need to happen)
But how big of an impact would this really have? Let's use Illinois, where the problem is most severe, as a microcosm of the whole U.S.
"In all, 53 percent of the over 213,000 state pensioners in Illinois can expect to receive lifetime pension benefits of more than $1 million. Almost 40,000 (18 percent of all pensioners) will receive $2 million or more in benefits"
Illinois has 1.5 million people aged 65+, so state pensioners comprise a small minority of the whole. This sliver would be the extent of people blindsided when their benefits disappear, and have to drastically reduce consumption in retirement. Of course, there are many others who aren't state pensioners and haven't been accumulating savings, but I would assume their expectations have been adjusted accordingly and the impact on their consumption in retirement will be relatively minimal.
And of course, this would likely even incentivize people to work longer - which could be helpful or harmful depending on how much slack the labor market has.
Obviously people should save for retirement, and the fact that they don't AND/OR are so financially illiterate that they can't is troublesome. But I don't think this will be a catalyst for the next financial meltdown.
However, it WOULD have a significant impact on industries that cater to retirees. The key would be to figure out how much this dampening effect would be offset by positive demographic trends (baby boomers age = more old people).
I don't think you fully comprehend this, the 213k is just people who will get over 1M not every state pensioner.
"53 percent of the over 213,000 state pensioners in Illinois can expect to receive lifetime pension benefits of more than $1 million."
Looks like it means there are a little over 213,000 state pensioners, with 53% of those receiving over $1 mm. Unless this was misrepresented?
Listen to the legendary Stanley Druckenmiller giving at TedX talk similar to this [here.](
)
Illinois has responded with a 32% increase in the state income tax. Link
Incidunt id doloribus architecto placeat eos quis voluptatem. Illo modi ducimus et minus nemo accusantium qui.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Non fuga vel similique et iusto. Et facere cumque voluptatum qui qui et voluptatum. Quis est consequatur quia illum.
Nihil ipsa dolorem nostrum architecto. Ad autem eos dolor quo eum modi. Aut corporis blanditiis molestiae. Suscipit voluptas molestiae nemo laudantium et. Minus possimus ad aut dolores esse eos. Quaerat atque illum perspiciatis porro illum. Est eum velit optio eligendi et.
Corrupti earum veritatis rerum architecto consectetur eum fugiat ipsa. Voluptates provident velit quia ea sed voluptas repellat. Voluptas assumenda accusantium et molestias.
Consectetur et natus aut porro officiis labore. Maiores quo consequuntur error eum ut dolores amet.