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.
Illinois is an unmitigated disaster. One of the most influential politicians in the US is the Illinois Speaker of the House. He has been the longest serving politician in US history, literally decides what gets called for a vote (not even the outcome of votes, what GETS VOTED ON) and is a despicable human being. Oh yeah, his daughter is the Illinois Attorney General. Not to get R vs. D political, but how the voters allow this is insane.
I actual serve my smaller, suburban Chicago suburb and things are just insane. One thing that drives me the most nuts is that by STATE STATUTE we cannot bid on pricing of engineering services. When we bid out engineers, which represent a LOT of spend, we can only seek qualifications. Once we determine who we want, based on qualifications only, we then ask them how much they'll charge. If we pick XYZ Co for 100 feet of sidewalk engineering and they give us a bid of a trillion dollars our only option is to pay it or not do the project. We cannot go seek lower bidders for the work.
The pensions are a REAL problem. The state constitution says that public pension benefits cannot be reduced. So the fact that the secretary at the police department only paid in $4k/year for 20 years is irrelevant, she gets her $65k pension for lift GUARANTEED. It will be interesting to see if/how bankruptcy might change this.
Another real issue is the unions. You can only begin to imagine how entitled union public employees (who basically cant be fired) can be.
I could go on for days, but I'll end my rant here
Thanks Obama
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