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12/20/19 by Jennifer Christiano Jennifer_christiano@During the past several years, the question of whether Idaho workers should join unions has gotten a lot of press. On the one hand, union advocates tout the benefits of union membership, including generous pensions for union members when they retire. On the other hand, union foes point out numerous problems with unions, including coerced membership and the mandatory payment of dues by some workers who don’t actually belong to the union or receive benefits from it. If the question about unionizing has arisen in your workplace and you’re not sure which side to take, here is some information that may help you come to a decision.Most Pension Plans Are In Deep Fiscal TroubleA collective $2 to $6 trillion dollars’ worth of debt trouble, to be exact. That’s how much our private and public pensions (of which unions have the lion’s share) are in the hole for their current pension obligations. This means that millions of retirees and future retirees who are counting on nice union pensions to pay for their “golden years”, are very likely to be in trouble, themselves. Eventually, their problems become local, state and Federal problems, too.How Did This Happen?The long and short of the issue is that, prior to 2001, most pensions actually enjoyed nearly full funding or more than full funding simply from collecting the high rates of interest they earned on risk-free investments in U. S. Treasury bonds and savings accounts. Helping pensions to keep their books balanced was also the fact that the major wave of Boomer retirements hadn’t started in earnest. After the economic crash of 2001, however, the Federal Reserve dropped Treasury interest rates to 50-year lows in an effort to re-stimulate the economy. Of course, as Treasury rates dropped, so, to, did interest rates on savings accounts, bonds, and all manner of investments, including the “safe” investment vehicles that pension funds were obligated to keep their clients’ funds in. For a variety of reasons, pension funds didn’t keep up with changes in yield income funding projections. In some cases, fund managers simply refused to accept -or perhaps even understand – the new reality of a long-term low yield future. The prevailing belief, ironically fostered by the Fed, who set the low interest rates, was that the low interest rate environment was an economic aberration that wouldn’t last. But it did. Then, in 2008, after the second economic crash, the Fed smashed interest rates down even further to historic lows in a desperate bid to re-boot the American economy. Several years later, they also unleashed $4 trillion in “free money” as a supplementary boosting measure. While all this “free money” did create monstrous stock and real estate bubbles, it didn’t help pension funds keep up with their growing obligations while staying in risk-free investments. To make matters worse, while the economy was trying to recover from the crashes in 2001 and 2008, more Boomers started retiring yet the Federal government just kept spending as though the nation’s output and taxable income would simply rise and rise indefinitely (due to what, exactly?), making payment of a ballooning Federal debt forever manageable. Uncle Sam’s largesse has now increased so greatly that even with a supposedly healthy economy employing everybody in sight (or so we’re told), the continued operation and solvency of the government depends upon keeping interest rates on the debt forever low. Were interest rates to rise even to the historical average that prevailed for the 1960’s through 2001, taxpayers wouldn’t be able to finance the national debt and its interest payments. The net effect of taking away most of the income that was historically available from safe haven assets and destroying the foundation of risk-free growth, was to eventually force pension funds into taking on far greater risks without any guarantee that those risks will come with commensurate rewards. Today, savings accounts and Treasury bonds make up a minority of pension fund investments. Stocks, corporate bonds (many of which have slid to nearly junk status), real estate (which is in a bubble) and “alternative” investments together comprise the majority of most pension fund investments.A Sample ExampleMexican Government Bonds are an example of the alternative investments to which pension funds have turned in their hunt for yield. They also illustrate the difficulties pension funds are having in achieving needed returns on investment even when investing outside of the United States. Even if relatively good investments can be found beyond our borders, competition to get that yield can be fierce and there’s no guarantee that the system producing the returns will deliver its promised rewards.In the case of the Mexican Government bonds, or MGB’s, the pension funds might have found a decent deal, but they apparently didn’t get what they thought they were promised. The funds contend that they’ve been cheated out of millions of dollars of expected MGB yields by the collection of banks that, by Mexican law, are required to act as intermediaries (known as “market makers”) between the Mexican Government (the seller of the sovereign Government bonds), and the pension funds (the buyers of those bonds). In a legal battle currently underway, a group of public pension funds ranging from the Oklahoma Firefighters Pension and Retirement System to the Manhattan and Bronx Surface Transport Operating Authority, the Boston Retirement System, the United Food and Commercial Workers’ Union and Participating Food Industry Employers Tri-State Pension Fund, the Southeast Pennsylvania Transportation Authority, and the Government Employees’ Retirement System of the Virgin Islands, among others, allege that a cluster of international banks colluded to deliberately (and illegally) fix the number of Mexican Government (MGB) bonds being sold to the pension funds. The suit also claims that the “market making” banks artificially raised the cost of the MGB bonds they sold directly (as “market maker” intermediaries) from the Mexican Government to the pension funds, and also artificially widened the gap, or spread, between the prices the banks paid to purchase MGB’s on the secondary market, and the prices they turned around and sold those bonds to the pension funds for. These practices would all have created profits for the banks at the expense of the pension funds. Ultimately, the costs would have come at the expense of the retirees those funds were meant to support. Now, the “market maker” banks we’re talking about weren’t small, struggling regional enterprises trying to survive against larger competitors. We’re talking about some of the largest, and supposedly wealthiest, international banks in the global banking system - Deutsche Bank, JP Morgan, HSBC and Bank of America, among others.The alleged collusion among these banks was said to have taken place between January 1, 2006 and April 29, 2017. That’s a rather lengthy stretch which covered the crash of 2008 and our subsequent economic “recovery”. It’s also a period of time notable for its nearly unbroken stretch of the lowest average interest rates - and therefore lowest risk-free Treasury bond yields - in American history. It would have been sufficient time for the pensions to lose considerable funds, which apparently they did. While we’re not here to determine who’s right and who’s wrong, logic dictates either that there was a great amount of money to be gained from gaming the pension funds, which is why the banks engaged in these practices and kept them up for so long, or the pension funds lost so much money during this time for other reasons that they needed a scapegoat to take the blame. (It might be worth noting that bond trading is an important source of income for most investment banks.) Whatever happened, a great deal of potential money that was expected to be available to pay off pension obligations thanks to Mexican Government bonds, never materialized.In a move that surprised the pension fund managers, a U.S. judge from the District of Manhattan dismissed the MGB manipulation case in September, 2019, despite considerable evidence against the banks. In other words, the judge denied the pension funds the money they claimed to have lost to the banks. So what are the practical implications of this decision? Ultimately, either the pensions must now make up their shortfall somehow, or the pensioners must accept some reduction in their “guaranteed” benefits. The “how” of the shortfall closure will most likely be some combination of reducing costs (most likely through cuts to existing staff, salaries, services or infrastructure now supported by the entities that owe the pensions); assigning new or higher fees to existing employers and employees, and/or applying for Federal bailout assistance through the (already inadequate) Pension Benefit Guaranty Corporation (PBGC). (The PBGC is like an insurance backstop for failing pension funds. We’ll be talking more about them later). Rescuing failing pension funds via a Federal insurance program sounds reasonable until you ask – so who funds the PBGC? The answer: the taxpayers do! Retirees (both union and non-union) are taxpayers. So are workers (both union and non-union). And if retirees are subject to reduced benefits or workers get slammed with higher required contributions, given that Idaho is already a mecca for retirees and workers who can no longer afford the cost of living in union-friendly, higher-pension states, how many might decide to migrate to Idaho? This isn’t a theoretical question, as polls from high-pension states reveal that millions of Americans are either already fleeing or planning to flee to lower cost of living areas (like Idaho) within the next few years. Simply driving around Boise will now regularly turn up license plates from Massachusetts, New York, Illinois and other pension-heavy states that were only rarely seen or heard from as little as ten years ago. How much might “pension flight” be pushing up our population and exacerbating our growing problems from taxes to crime to water shortages?As a side note, there is still some hope that the pension funds may not have lost all in the battle over the Mexican bond prices. While the U.S. judge ruled that the banks “won” because the pension funds failed to prove collusion, an investigation into the situation is currently being conducted by the Mexican Watchdog COFECE (Federal Commission for Economic Competition). The sad part is that if the banks are found guilty and convicted by Mexico, while that would be a victory for the pension funds, it would also result in a downgrade of the banks’ credit ratings. Their stock prices would almost certainly decrease, causing the entire U.S. stock market to sag. Expenditure reduction measures such as streamlining operations (think potential layoffs and more pension cuts, ironically), would likely follow, and investors in the stocks of those banks -including a lot of retirees who are counting on income from the eventual sale of those stocks – would be hurt. On a very sobering note, the combination of downgraded credit ratings , plus the loss of the funds already counted as income on the banks’ balance sheets during a time when banks are under increasing financial pressure and regulatory scrutiny, may further threaten the stability of the already fragile global banking system. There would be grave risks to almost everyone (except the higher level bank managers themselves, sadly). What would happen if one or more of the world’s largest banks suddenly couldn’t be counted on to repay the loans they routinely make to each other in the overnight intrabank lending (known as the “repurchase”, or “repo”) market? Just look at what’s happened in the repo market since September 16 of this year (2019) to get an idea of the crisis that would explode and devour the markets and economy if theFed weren’t papering it over with billions in money created out of the nothingness. What if one or more of these banks had to suddenly tighten their lending standards and raise their interest rates on loans in order to reduce risk and make up for lost revenue? What if lenders to these banks decided that the other banks, hedge funds or multinational corporations were unlikely to be solvent enough to pay back their debts? The global banking system would quickly freeze, and the trillions of dollars in derivatives debt would wipe out big banks, small banks, individuals and entire nations. This isn’t to imply, of course, that losing the money the pension funds claim that the banks owe to them would, by itself, be capable of bringing down the global financial system, although such losses could be quite substantial. As of 2019, for instance, several banks including Deutsche Bank, Credit Suisse and Credit Agricole, could face fines of up to 10% of their annual world-wide revenues if found guilty of collusion to rig a multi-trillion dollar European government-backed bond market (A). And this is due to just one suit being levied against international banks by American pension funds! There are numerous such suits currently pending in both the U.S. and abroad. If even a portion of the collective fines aren’t themselves fatal, they do constitute one more not insubstantial straw that would be loaded onto the back of an increasingly beleaguered financial camel who’s not seeing much potential for relief in a low interest rate yield world.Is investing entirely within the United States Itself Any Safer?Realistically, the answer is “probably not”. Many pension funds have tried searching for instruments that provide better yield than Treasury bonds or savings accounts right here in America. To date, results have been about as questionable as they got from investing in Mexico, or Europe. Many pensions have tried investing in Auction Rate Securities (ARS), Collateral Debt Swaps (CDS), and other exotic financial derivatives promising to pay a little more interest than Treasuries or bank deposits, but with mixed results. Why? Likely for the same reasons that investing elsewhere has proven problematic. Unfortunately, the arenas in which the pension funds have been trying to find yield have been described as “… relatively opaque markets that are accessible mostly to designated market makers (institutional investors). Banks and securities brokerages hire traders from each other, and they can easily collude to rig ARS and/or CDS markets and underlying bond markets.” (B) Can we therefore cut the pensions (and unions) some slack and assume that at least some of the blame for the pension funds’ poor performance is due to factors beyond their ability to foresee or control? At the same time, would it therefore be wise to allow them to expand into new worker markets, so to speak, until they can find reasonable solutions to the problems they’re currently fighting?The challenge is that pension funds are as much at risk at home as abroad. As an sample of the forces that pension funds are fighting, in December 2017, thirteen of America’s largest banks, including Barclay’s, Bank of America, JP Morgan Chase and others, agreed to pay a combined $337 million to settle a bond rigging lawsuit brought by the Pennsylvania Treasury Department and a contingent of pension funds as well as government agencies. The suit claims that, from January 1, 2009 until January 1, 2019, the banks had conspired to fix the price of bonds and overcharge buyers on the cost of the bonds issued by two of the largest government agencies: Fannie Mae and Freddie Mac. The preliminary settlements, which total $386.5 million, are currently awaiting the approval of a judge in a Federal court in Manhattan. Interestingly, the Manhattan court is home to an array of private litigation accusing banks of conspiring to illegally influence various bond, commodity and currency markets. So what are the odds that the banks were NOT cheating the pension funds?The overall message here is that when yields across multiple asset categories are all low or all uncertain all at the same time, the fight for financial growth -or even just survival - pits the multiple players in the economy against one another as they each try desperately to meet their own needs by whatever means necessary (or available). Yes, while greed is often a factor in financial malfeasance, greed is made worse when chronic resource scarcity (low yield) either breeds uncertainty about future viability, or heightens “the thrill of the kill”. At the time of this writing, if the banks involved in the Mexican Government Bond rigging scheme mentioned earlier ultimately are convicted by Mexico (and remember that most of them are also facing other lawsuits and fines for alleged fiscal malfeasance), their financial future would likely take a hit, but the amount of restitution that would actually be awarded to the pension funds in any of these cases is unclear.A Look Into The Future By some estimates, the pensions that are currently still making all or nearly all of their payouts will be unable to meet their payment obligations within the next ten to twenty years, assuming no recessions or catastrophes such as war between now and then. By other calculations, many pensions, including large multi-employer pension plans, could become unable to pay their obligations as soon as 2025. With the sheer number of Boomers currently retiring and expecting to live on their pension benefits, this is a national nightmare in the making.So what can be done about it? Congress is considering one way to deal with the problem. In August 2019, with little media fanfare, the U. S. House of Representatives passed the Rehabilitation for Multiemployer Pensions Act (H.R. 397) with lopsided (mostly Democratic) bipartisan support. At the same time, the U.S. Senate reintroduced comparable legislation that was first introduced in 2017. So far, the Senate bill has only Democratic support. These bills would fund a pension bailout via creation of low-interest U.S. Treasury loans made especially for purchase by troubled pensions to cover their outstanding expenses. A special new department within the United States Treasury would be created just to handle this loan program. Supportive Democrats pointed out that the loans would allow pensions to cover their obligatory payments for many years to come. Some Republicans pointed out that the loans would only kick the can down the road and do nothing to fix the structural problems that got pensions into their current predicament. What, apparently, nobody pointed out (or what the media may have kept quiet) is that such a bailout would require an increase in pension funding to the tune of -you guessed it - $4 to $6 trillion dollars or more. If Congress does create a loan program to bail out the pensions and the pensions take it, the question then becomes, how will the pensions get the money to pay off those loans in an environment of very low (maybe negative) interest rates, increasing real estate asset purchase prices, a volatile stock market, increasing taxes that eat into stock market returns, and possible cheating by the banks? There are several possible answers, and none of them are good. Following are seven different possibilities:Pension funds may use the proposed Treasury loans, if they come to pass, to pay pension benefits in full for a while, then take out even more loans to continue payment when the first ones are used up. The eventual effect of paying off loans with more loans will be an unavoidable catastrophic pension default when investment income drops too low to cover more than the repayment of multiple rounds of principal and interest. Not only will pension recipients then be finally, fully out of luck, but should Congress then choose to forgive all the loans, taxpayers and the pensioners themselves will be collectively on the hook for repayment. According to Olivia Mitchell, Director of both the Pension Research Council and the Boettner Center on Pensions and Retirement Research, if we assume a “split the difference” figure of $5 trillion pension shortfall and divide that by the roughly 158 million workers in America’s current labor force, that works out a current deficit of $32,000 per worker. Now here is the question for us: many Idahoans can afford to lose $32,000 from their savings? And how many Idaho workers can continue to pay from their savings every future year that pensions continue to operate in the red?An alternative to taking loans to continue paying out full pension benefits, would be for the pension funds to simply cut benefit payments. This is already happening in some states including New York, Ohio, Pennsylvania and Oregon. Theoretically, states experiencing shortfalls could use the difference between what is owed and what is being paid, to slowly decrease their debt to zero. Such a move would allow pensions to continue to exist and at least partially fulfill their obligations while fundamentally retooling for the new economic realities. Of course, benefit cuts are extremely unpopular with current pension holders and are likely to damage the credibility of the organizations (unions or other) that promised their workers lifetime income beyond work. It’s therefore an option most pension funds don’t want to engage in unless more politically palatable options simply don’t exist.As Idaho’s population swells with immigrants from other parts of the nation, it’s worth asking how much of this population shift is being driven by retirees fleeing from higher-cost states that have cut pensions, to lower cost states? It’s not unreasonable to ask whether underfunded and failing pensions may be helping to drive both business and population booms and inflation in Idaho. In other words, are failing pensions exporting inflation to Idaho? The surprising reality is that, whether they realize it or not, Idaho residents facing rising taxes and prices for labor and consumer goods may be indirectly paying part of the price for failing pension funds elsewhere.A third alternative to solving the national pension crisis would be to rob Peter to pay Paul. In at least one state, lottery proceeds are being partially re-directed to shore up pension deficits. This not only cheats lottery winners and programs that are supposed to benefit from the lottery, but sets a very bad precedent. Environmental programs? Road and bridge repair? Public school modernization? Local parks? Police and fire coverage? Will we kiss these lottery-funded programs all goodbye to pay pensioners their due?States (including Idaho) could simply raise taxes across the board and use the revenue to fill the gap. Alternatively, states could shift existing revenues from currently funded programs and use them to shore up pension payments. According to a study by J. P. Morgan, even if pensions could assume a (rather optimistic) steady 6% return on investments, half of states would still need to devote 10% of their total current tax revenue to make pensions whole! Is this a realistic option for Idaho?Pension funds may also attempt to close their funding gaps by investing ever greater portions of their assets into ever more more risky investments. Accepting more risk of loss is the only way to potentially acquire more gain in the absence of a reasonable risk-free yield. The net effect of so many institutions all simultaneously taking increasingly desperate chances to chase yield, is the raising of the risk that some or all of them may fail, while tanking the stock, bond and housing markets at the same time. In essence, the cure may be worse than the disease.It is worth noting that, at present, one could realistically argue that the rates of return being paid on current Treasury bonds are lower than the honest inflation rate, meaning that holders of “ultra safe” bonds (including pension funds) are even now getting a negative real rate of return on their investments. This loss by negative real returns will only increase if nominal interest rates also turn negative. What the bond market is currently telling us is that our government, like all the other major Western governments, is in default in real terms. Therefore, the only hope of earning the positive real rate of return necessary to keep pensions afloat is for them to invest in exceptionally high-yield corporate bonds, real estate flipping, or other risky non-traditional investments. With approximately one-third of all corporate bonds now rated in the BBB range or lower “junk” status and the national housing market slowing, how realistic is it that pensions will find steady salvation in these areas?Yet another way to get a handle on the problem, and one being tried in a few places, is to employ a simultaneous cut in pension payouts to beneficiaries with mandatory increases in pension contributions and retirement age for current workers. This strategy seems a bit more fair in that it requires everyone to sacrifice and feel some pain together, but because it’s painful, it’s not likely to be readily embraced by anybody.A last, and very sneaky, desperate measure that unions could take to boost their current cash flow, would be to expand into areas where union presence is currently sparse. New members might be recruited with relative ease in virgin territory if unions sow dissatisfaction with current employment norms and promise a “better deal” for workers (something for nothing!). This would constitute a type of Ponzi scheme in which the dues of the new members could be used to pay the pensions of more senior members. Such an arrangement would allow unions to fulfill their obligations -for a while – and delay the problem of how to pay current workers when THEIR pension is owed, for years, or possibly decades. In the meantime, the odds of the pension funds being able to make the money needed to pay your pension are likely to be dropping as the growing Federal debt keeps interest rates low and continues to push stock and real estate markets into unstable bubble territory. What will happen to the Idaho retirees of tomorrow, and indeed the future Idaho economy, if the bubbles burst and most of the money being put into Idaho pension funds was continually being drained away to shore up workers elsewhere?PBGC to the rescue?Pension supporters may point to the Federally chartered Pension Benefit Guaranty Corporation (PBGC) to assuage any doubts that pensions will be able to fulfill their obligations for many years into the future, even as pensions actively struggle today. The purpose of the PBGC is to insure the nation’s pension funds much as the FDIC exists to insure bank deposits. The reality, however, is that the PBGC is racing towards insolvency, itself. Indeed, the PBGC may become defunct by 2025. According to the 2018 PBGC annual report, the agency has so far taken over 58 failed single-employer pensions and paid out over $150 million in financial assistance to 81 different multiemployer pension sponsors. In the meantime, PBSC’s increasing need to generate cash to cover the costs of failing pensions comes with some scary hidden side effects. Its increasing need to generate yield forces the PBGC, like the pension funds it covers, to go further and further out on the limb of risk to generate yield income. In the process, the giant insurance company becomes an important source of systemic risk that could crash the entire stock market. What will happen then?An example of the challenges in which the PBGC finds itself can be illustrated by the recent pressures to bail out the McClatchey Newspapers pension fund. This is an example of direct relevance to Idaho as McClatchey owns the Idaho Statesman newspaper. Although McClatchey froze its pension fund and stopped offering pensions to new employees in 2009 because of fiscal issues, a number of increasing pressures, including the massive debt accrued from the acquisition of the Knight -Ridder news corporation, made payment of pension obligations too great for its current cash flow. The company is currently searching for a new buyer. While the complete end of The Idaho Statesman is unlikely, instability within the already shrinking newspaper industry should be no cause for joy among taxpayers. Newspapers do seem to play a role in keeping government finances within bounds and communities more fiscally and socially stable. Indeed, there is some evidence that local governments, as well as community life, may be negatively impacted by a decrease in print newspaper coverage within the community. In an interesting research paper entitled “Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance”, university investigators found that when communities lose print newspaper coverage, municipal borrowing costs increase by .05 - .1% (5 to 11 basis points) over the long run. At the same time, government inefficiencies and government worker wages increase. Communities with little or no local print newspaper coverage tend to have to offer higher yields on municipal bonds to attract buyers, apparently because lenders have more difficulty judging whether the communities are likely to be able to pay back their obligations and whether local officials are capable of properly managing the projects. As print newspaper coverage declines in a community, there are social effects, too: voters tend to be less informed and overall voter turnout decreases. Level of community income doesn’t seem to significantly affect these results. Interestingly, substituting electronic media for print newspapers doesn’t seem to have the same positive effects as print media does. While chances are low that the McClatchey newspaper empire will fail to find a buyer, or that most Idaho communities will completely lose this valuable resource, the more relevant question for Idahoans is, will the quality of news reporting increase or decrease, given the further level of consolidation that the newspaper industry will now be subjected to as McClatchey goes under?Not All Doom And Gloom, Though - MaybeFortunately, for all the problems going on in the pension world, there do seem to be a few bright spots. Time will tell whether certain recent changes will be able to reverse the pension crisis trend. In one story of hope, just this year (2019), KRS, Kentucky’s pension for state workers in non-hazardous jobs and the worst-funded pension plan in both the state and the nation, has begun to turn around. At the beginning of 2018, KRS reported that it had only 12.9 percent of the assets required to pay future benefits and other known obligations and was buried under a whopping $13.6 billion in unfounded liabilities. A change in legislation, however, required employers in Kentucky to begin making huge increases in contributions to the fund beginning in the 2018-19 fiscal year. As of late August 2019, it appeared that KRS had stopped sinking further into debt and is projected to increase coverage slightly to 15% in 2020 and 19% in 2022. Could such intervention also work elsewhere?It seems like a simple fix and a desirable future. However, the devil is always in the details. Yes, the Kentucky plan could serve as a model for rescuing other failing pensions. It does appear to be working. The challenge is that these gains must be paid for somehow. Interestingly, in an era when the American economy is supposedly booming, there appears to be a notable lack of presumption that general economic growth by itself will be of sufficient speed and depth to replenish the pension coffers. What about if there’s a recession? In Kentucky, the main source of rescue funding isn’t seen to be coming from massive growth in the state’s overall revenues, but rather it’s been mandated to come from a mandatory increase in contributions to KRS by Kentucky public sector employers to the tune of greater than $200 million per year. Is the Kentucky economy really expected to grow by $200 million per year for as long as the pensions must be paid out? It seems that making the Kentucky Government increase its expenditures by $200 million annually would add a not insignificant increase to the cost of living and doing business in that state. A member of the Kentucky Senate and chair of the state’s a Budget Committee emphasizes that long term discipline on both the benefit and contributions sides of the issue will also be required if this funding gambit will work. Human nature being what it is, how likely is that to happen? The same legislator also called upon other Kentucky lawmakers to explore tax reform and developing new ways of raising revenue, as supplementary means of insuring full pension funding indefinitely. To put this plainly, the rescue and stabilization of this one state pension fund will rest upon directly and indirectly funneling more money away from everyone who currently earns an income or pays any sort of taxes in Kentucky (possibly including taxes yet to be invented!). In even simpler terms, an increasing portion of the wealth of currently productive labor and of consumer spending will be stealthily redistributed away from today’s families to pay yesterday’s workers.If Idaho experiences a similar dilemma – and, as of March, 2018, the Idaho Signatory Employers – Laborers Pension Plan was certified by both the U.S Department of the Treasury and the Plan’s own trustees as being in “critical and declining” status with less than 65% funding – will Idaho citizens be willing to take money away from today’s families, many of whom are starting out under debt burdens greater than those of previous generations, to pay for generous benefits for retirees? Will Idaho’s non-pensioned retirees, having worked in a state that offered both low wages and a low cost of living until the last fifteen years or so of rapid and expensive development, be willing and able to pay higher taxes to support union pensioners? Or will current union pensioners bear the brunt of making up for fiscal deficits in Idaho’s pension plans? Under current law, the Idaho Signatory Employers – Laborers Pension Plan is allowed to attempt to regain solvency by reducing, or even eliminating, adjustable benefits promised to workers. These benefits include disability benefits (if the employee is not yet in pay status), early retirement benefits or benefit-type subsidies, benefit payment options other than a qualified joint and survivor annuity (I.e., guaranteed lifetime payouts to retirees and surviving spouses) and similar benefits, and other rights or features offered by the plan, including pre-retirement death benefits. In addition, under certain conditions, the law also permits pension plans in critical and declining status to also temporarily or permanently reduce benefits that are legally mandated under the plan. Ouch! When contracts no longer bind because fiscal promises made cannot be kept, what sorts of financial and social effects will ripple throughout Idaho communities?To Where Might This All Lead?As home prices rise beyond reach; as “safe haven” assets like bonds, savings accounts and CD’s fail to provide worthwhile interest income (or even guarantee fiscal loss to inflation over time), and as communities see their safety and quality of life recede even while taxes increase and lottery payouts decrease, both those who pay taxes and those who subsist on shrinking government largess will become increasingly frustrated and angry at a system that no longer works for them. “The rich” will be blamed for amassing “too much” wealth and failing to pay “their fair share” of taxes, when a real, massive culprit isn’t “the rich” at all but the combination of millions of increasingly long-lived pensioners to whom the trillions of dollars in pensions are flowing; the “welfare and warfare” recipients and their co-dependents who demand a continual expansion of Federal largesse to the point that taxpayers can no longer cover the Federal debt; the union bosses and accountants who made pie in the sky promises to members and then failed to figure out how to keep those promises (or adjust their members’ expectations downwards); possibly the major global banks who may have been gaming the system to cheat pension funds out of legitimate revenue, and certainly the Fed, who held interest rates far too low for far too long, starving the entire global financial system (as well as Mom and Pop) of yield. Had the Fed simply normalized interest rates within a few years of the 2001 financial crisis and if the voters demanded sensible reductions in both welfare and warfare expenditures, sure, there would have been temporary pain -recessions are part and parcel of the business cycle that drove the economy until 2001 - but we most definitely would not be facing the pension, and by extension, the “everything”, crisis that we’re staring at today. Valiant “Hail Mary” efforts aside, the sad reality is that, despite some Congressional support for structural reform of the pension system, there is probably no way to fix pensions at this point short of dismantling the lion’s share of the pension system and starting over. If nothing is done (which is a real possibility), the most likely outcomes of this dilemma are either a) outright default on many (not all, but many) pensions; b) severe reductions in many pension payouts; c) massive tax hikes (via either direct taxation or inflation) to fund the pensions so they can make their promised payouts, or d) some combination of all of the above. Unless the system is wiped clean and “rebooted” with more realistic expectations on earnings and payouts in a persistently low-interest, high debt, increasingly inflationary fiscal environment full of retirees who are living ever longer, there is probably little hope of saving the pension dream.ConclusionAs Congress finally decides to get serious about “fixing” the pension crisis, what would happen in the best case scenario? In other words, what if Congress DOES choose to bail out pensions by creating a separate class of low-interest Treasury bonds for pension funds to purchase, how would that affect YOU as a taxpayer? While Uncle Sam is unlikely to ask you to your face for money to bail out union pensions, he and the pension fund managers WILL use stealth tricks to part you from your money and funnel it to the unions without you ever knowing what happened or why. The hard reality is that, as long as our national debt keeps rising, the pressure to keep interest rates low, even to go negative, will remain intense. This means that you’ll continue to earn next to nothing, or even LOSE money, in traditional safe haven investments such as Treasury Bonds and bank savings accounts. The government knows this perfectly well and is actually counting on you to become frightened and disgusted, take your money out of the bank, and pump it into more risky ventures such as the stock market and real estate in order to increase the earnings on your savings. When considering inflation, capital gains taxes and sequence of risk returns, the sad and amazing fact is that few people actually earn much money from risking their savings on stocks even when the market is going up pretty steadily. They just don’t know it. When the market is volatile, as it is today, most people are actually losing money in the market. Between the hidden wealth robbers of inflation, which papers over any losses by showing gains that aren’t actually created by rising value, and taxes, which are blind to inflation and therefore eat ever more deeply into capital gains the higher inflation rises, they don’t see their profits being eroded away. Real estate may be profitable as long as interest rates are low, because low mortgage rates free up money for buyers to spend on the homes themselves, but beware of holding onto property when interest rates rise or recessions hit! While well-capitalized, sophisticated investors can often weather economic storms, the average guy or gal with a couple of rental properties poorly selected or purchased at the wrong time in the economic cycle, is likely to get cleaned out. So, one effect of the pension crisis is that whether or not you’re a union member, your ability to save for your own retirement is being degraded by the inflation, tax increases and risky hunt for yield that are the indirect, but very real, consequences of the need to pay off pension obligations.And this may be the primary reason why unions wish to expand in Idaho: not to protect the financial well-being of today’s and tomorrow’s workers, but to protect the unions from their own malfeasance, cheating by the banks, and the righteous wrath of former union workers who see their promised benefits potentially disappearing before their eyes. The relatively good news for Idaho is that, as of the latter part of 2016 ( the latest data I could find), the Pew Charitable Trusts reported that Idaho was the seventh best state in terms of pension funding coverage. Idaho came in at 88% covered (I.e.,as having “only” a 12% shortfall). While that could be better, it’s almost certain to get worse if the number of pension-heavy jobs increases in Idaho. Absent a sustained increase in interest rates (unlikely because of the increasing Federal debt) a simultaneous return to a relatively healthy and growing stock market (again unlikely due to the Federal debt), and restitution if indeed the banks were cheating pension funds out of securities yields, it’s difficult to see how pension administrators will be able to make good on pension promises to new workers when they can’t service existing beneficiaries.The takeaway is that if you’re thinking of supporting a union in your Idaho workplace, just be aware of the fiscal issues that unions are currently wrestling with. The dues paid by current workers for their “protection” may not be going to fund their retirement, but someone else’s. Then when it’s your turn to retire, the money the union so dutifully took from you may not be there to give back to you. However, the legacy of increased inflation and tax burdens required to make good for those in the union line ahead of you, will probably be with you for the rest of your life.SOURCES: Wall Street Journal, , as reported in Nwogugu, M. I. C., Complex Systems, Multi-sided Incentives and Risk Perception in Companies, Google Books, p. 273Curtis, Q. and Morley, J., “The Flawed Mechanics of Mutual Fund Fed Litigation” Yale University Faculty Scholarship Series, 4919 , as reported in Nwogugu, M.I.C., Complex Systems, Multi-Sided Incentives and Risk Perception in Companies, pp. 273-5Adams, Nevin J.D., “Senate, House Move On Multiemployer Plan ‘Crisis’- But Not Together”, , 7/25/2019Schramm, Stone & Dolan, LLP, “Mexican Government Bond Market Manipulation Manipulation”, posted July 30, 2018Maudlin, John “The Coming Pension Crisis Is So Big That It’s A Problem For Everyone” , 5/20/19Malito, Alessandra “The States Where Pensions Are Safe – And Where They’re In Trouble” , 12/23/2018McPartland, Tom “Banks Agree to $337M Settlement in Price-Fixing Case”, New York Law Journal (), 12/17/2019Stamped, Jonathan “Big Banks Settle Fannie Mae, Freddie Mac Bond Rigging Litigation In U.S.” Reuters, Business News article/us-Fannie-Mae-Freddie-Mac-bonds-lawsuit/big-banks-settle-Fannie-Mae-Freddie-Mac-bond-rigging-litigation-in-u-s-idUSKBN1YL1RK 12/17/2019Sokoloff, Kiril “The Growing Threat of a Corporate Bond Meltdown: ‘These Things Don’t Happen Overnight For Companies. They Happen Overnight Only For Investors’” 8/14/19 “The Time Bomb Inside Public Pension Plans” knowledge.wharton.upenn.edu, 8/23/18Loftus, Tom “Kentucky Pension Official Says Worst-funded State Plan May Have Finally Turned Around” Louisville Courier Journal, 8/27/19Notice of Critical and Declining Status for Idaho Signatory Employers –Laborers Pension Plan, , listed in 2018 Critical and Declining, Endangered Status Notices, U.S. Department of Labor Employee Benefits Security AdministrationCopyright, Jennifer Christiano, 2019. All rights reserved. May be quoted with attribution. Jennifer_christiano@yahoo.cm ................
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