The Pension Time-Bomb is Closer to BOOM!

I wrote some time ago about the increasingly serious fiscal plights of many pension plans across America.  You can read that post here: http://centerlineright.blogspot.com/2019/07/revitialized-scotus-and-skin-in-game.html .  The plain and simple fact is that many states have exercised terrible fiscal judgment over the last few decades and that has resulted in their state treasuries being on the verge of financial collapse.  The prime (but not the only) component in this bad behavior is their irresponsible approach to exclusively fixed-payment pensions; essentially making promises they knew they could not keep.  And over the last handful of years, we have repeatedly seen groups like state employees, teacher unions, industry unions, and many other such organizations dig in their heels and absolutely refuse to renegotiate their pension plans. 

They do this for two reasons.  First, they are confident that those who are already receiving the pension payments will never give an inch on what they feel they have justifiably earned over the course of their careers.  Secondly, those that are still working and contributing to the pension plans see the great deal their predecessors are currently receiving in retirement and there is no way in Hades that they are giving up on that same dream.  Both of these attitudes are the equivalent of whistling past the graveyard and will not prevent the grim reaper of fiscal reality from making his gruesome presence known in the not-too-distant future.

Simple math and the harsh morning glare of reason dictates that when the funds flowing into a pension fund plus any financial gain from its asset value less its administrative costs do not cover the funds flowing out of a pension fund in the form of retiree payments, there will be a shortfall and the fund is unsustainable.  That unsustainability will by necessity result in one of two likelihoods.  Either those receiving pensions will continue receiving funds at the same rate while those working members contributing to the fund increase their portions to cover the shortfall…or…both those currently receiving pension payments and those who will receive them in the future will in fact receive not the full payment, but pennies on the dollar based on the capacity of the fund.  Of course, this dynamic can be avoided if structural changes are made to the fund to make it fiscally sustainable.  For that to happen, somebody in the system has to take a financial hit.  And that, my friends, is where the problems lie.  Nobody wants to take that hit.

The result is that the economically-shaky pension funds continue to rattle down the road; pensioners continue to trek to the bank with their overly-generous retirement checks; and current workers continue to make contributions at unrealistically-low rates and look forward to the false promises of a comfortable retirement.  The whole machine is hurtling down a hill with inadequate steering, worn out brakes, an incompetent driver, and an impenetrable wall waiting at the bottom of the incline.  It does not take an accountant to see how this story ends.

And now, under the cover of federal coronavirus relief funding, many of these same state pension guardians come forth with the notion that suddenly, like completely out of left field and no doubt due to this terrible and unavoidable global pandemic, their pension funds are on the verge of collapse and it is the obligation of this nation’s taxpayers to bail out these programs.  Catch that logic; people who will NEVER benefit from these poorly-designed and poorly-managed pension funds will nonetheless prop them up with their tax payments.  And…they will do this while struggling to finance their own retirement and while the insanity that led to this disaster simply continues unabated.  

This shameless attempt to forego any accountability for their reckless management of worker’s pension funds and to seek taxpayer relief for their own fiscal transgressions is pathetic beyond description.  Unfortunately, because many of the beneficiaries are powerful and influential players in our political system; this ruse stands an excellent chance of succeeding.  This particular phase of the coronavirus stimulus legislation might just be the Trojan Horse that states roll through the gates of Congress with a sweet little pension bailout hidden deep inside.

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·       The Gross Domestic Product is a number that expresses the annual worth of the output of a country in local currency; in other words, the market value of all goods and services produced in the United States for one full year.  America’s GDP has been running about $20.5 TRILLION over the last few years. 

·       The tax receipts that our government receives annually to pay for our nation’s business have been running around $3.3 TRILLION. 

·       The federal spending deficit for FY2018 was $779 BILLION, with total federal spending clocking in at $4.1 TRILLION. 

·       That FY2018 federal spending deficit grew by 17 percent (that is $113 BILLION) compared to FY2017 and is the highest federal deficit in six years (since FY2012).  

·       The current national debt of the United States is approximately $24,000,000,000,000.  That is in TRILLIONS.  

·       Keep in mind that this dynamic is occurring when federal tax receipts are at all time highs and the spending numbers are BEFORE any of the coronavirus stimulus was instituted.

      As the numbers reflect, we as a nation are spending essentially everything (and more) that we make each year while our monstrous debt continues to accrue interest and multiply in astronomical terms.  Look at these numbers…so many zeros…is it any wonder that our elected officials lose track of how much money they are spending?

Now comes the coronavirus pandemic and the federal effort to offset its punitive fiscal effects on our nation and its people.  Under the guise of a national emergency, called a war by some, our government has ginned up the printing presses and has thus far spent $2 TRILLION in one stimulus package and $480 BILLION in the recent follow-up bill.  And don’t be misled by Governors who are screaming that the feds are not doing all they need to do; these two spending packages were in addition to previous actions and expenditures taken to address the viral outbreak: https://www.investopedia.com/government-stimulus-efforts-to-fight-the-covid-19-crisis-4799723 . And hold on tight…there appears to be a good deal of sentiment in WDC to pass even more stimulus legislation with an ever-increasing cost on the federal debt. 

To put this in perspective, imagine that you and your family are receiving a total family income of $75,000 per year.  You get notified that your work-week will be cut down drastically; which results in a reduced or totally lost paycheck. You have debts like everyone else; a car payment or two, a mortgage, perhaps a second mortgage, education expenses for the kids, utilities, insurance, and groceries…a lot of bills.  Now after paying your bills, it would be ideal if you could set-aside a bit of your income in savings for the future or for rainy day catastrophes; but that is extremely hard to manage and the plain fact is that most people are not doing it.  Instead, and if you are operating like our federal government, you are spending almost $100,000 per year; or about 25 percent MORE than you actually receive in income. 

Now here is the rub…you do this while not paying one…red…cent on your outstanding debt.  Nothing goes to principal repayment on the car or the mortgage.  You are simply digging your financial hole deeper and deeper with the certainty that one day; the debt will have to be addressed.  If you are John Q. Citizen, the likely result is bankruptcy.  You don’t have a money tree in the back yard; but the government does. 

If you are the United States of America, the solution is…you print more money.  You kick the debt can down the road.  While you pass out stimulus checks to every Tom, Dick and Harry and spend money on federal programs like drunken sailors, you are saddling future generations of Americans with the consequences of your irresponsible and extravagant fiscal habits.  When we see parents do this to their children; we call it a tragedy.  When our government does it; we call it business as usual. 

Consider this… In recent years, our government has been receiving RECORD HIGH tax receipts from its citizens to fund itself.  But instead of taking this increased revenue and trying to apply it in some responsible fashion towards decreasing our federal debt and annual spending deficit; our elected officials have simply spent the additional revenue and more on federal programs too numerous to count.  And now…with the global pandemic paralyzing our economy and chopping down federal tax receipts to a fraction of what they have been; do you think they might consider re-priortizing spending?  Do they cut back in some areas in order to increase in others that have more pressing needs?  No!  They continue the profligate spending habits they have become addicted to and add on top of that the oceans of cash dedicated to the pandemic stimulus effort.  Instead of trying to contain the fire and save the building; they are instead pouring fuel on the fire and increasing the blaze.

It is bad enough that our elected officials, both Republican and Democrat, pay no heed to our federal debt and continue to load up this ticking fiscal time bomb.  But if, as it appears quite likely they will do, they bail out these even more irresponsible (yes…as incredible as it seems…that is possible) state governments and their unicorn pension plans; then we will have reached a point of federal fiscal ineptitude that is simply beyond comprehension.  At some point, a reckoning will arrive. 

If there is any semblance of financial reason to be found in our WDC governmental complex, that reckoning will begin to dawn soon.  Uncle Sam may not have to declare bankruptcy like John Q; but at some point, all mechanical devices wear out and chickens will come home to roost.  The United States cannot continue to endlessly print money to cover for its insatiable generosity in federal programs spending and assume, without any reasonable basis whatsoever, that future generations will figure out some way to balance the ledger.

In the mid-1980’s, the government cut off new employee entry into their Civil Service Retirement Plan (CSRS); this was the pension plan for federal employees.  They did this for two reasons.  First, they recognized that the Plan was not fiscally sustainable and had to be structurally revised if it was to continue.  Secondly, many in government wanted to tap into the large pool of federal employee retirement contributions in order to prop up the Social Security Administration.  You see, prior to that point, federal employees in the CSRS did not contribute to nor draw from the Social Security system.  The addition of new federal employees to the Social Security pool of contributors no doubt helped to stabilize the system. 

The government replaced the CSRS with the Federal Employees Retirement System (FERS).  While being a solid and reliable retirement system that was immensely fair to federal employees, it shifted the funding obligation more towards the employee and away from the employer.  It required more sacrifice from the individual to fund their own future retirement.  It required that all participants have some skin in the game.  This is the hard decision that many states and organizations need to make regarding their troubled retirement plans.  It requires courage from leaders; it requires sacrifices from members; and it requires common sense and fairness.  And it also requires a firm approach from the government that makes it clear that these unsustainable pension programs must first help themselves by instituting responsible structural changes before they go begging to the federal coffers for a bailout.