CalPERS Is Unsustainable

The mainstream, U.S. media continue to ignore a steadily worsening pension crisis, most likely because it is one more huge contradiction of all their “U.S. economic recovery” propaganda. Unlike the $70 trillion or so in “unfunded liabilities” which is certain to bankrupt the U.S. federal government – but not today, the U.S. pension-crisis is already here.

When the chief actuary of the nation's largest, state pension plan (CalPERS) bluntly states, “We are facing decades...of...unsustainable pension costs”, this should have attracted the attention of journalists across the U.S. Unfortunately, they all appear to be much too busy handing out their “U.S. economic recovery” party-hats to be paying attention.

Some people may not see a direct connection between the health of U.S. pension plans and the health of the overall economy, however the connection is clear – and has never been greater than it is today. The huge, demographic bulge known as “the baby-boomers” are beginning to retire.

After plundering government coffers for their entire lives by demanding exorbitant social programs which they were unwilling to pay for with their own taxes, they have literally mortgaged the futures of their own children and grand-children. But the “plague” these “locusts” have inflicted on the U.S. economy goes well beyond that.

These are the same baby-boomers who dismantled the U.S. manufacturing sector, and shipped it to Asia – so that they could pay less for the ever-increasing hoard of consumer-goods which they have accumulated with manic zeal. In the process, they have also eliminated most of the well-paying jobs which they benefited from, but which they have taken away from their children and grandchildren.

Despite the baby-boomers having the best-paying jobs of any generation in history, and ridiculously low taxes (relative to the gold-plated social programs they demanded), these pampered prima donnas have been so recklessly irresponsible with their own spending that this generation has less in savings than previous generations.

As a result, this bloc of selfish spendthrifts is more dependent on lavish pensions (and pie-in-the-sky medical benefits for seniors) than their own parents. The problem is that this group has mismanaged their own pension-plans just as badly as they have mismanaged the overall economy and government finances. In other words, just as they have doing all their lives, U.S. baby-boomers are planning on spending money they don't have all through their retirements – in order to fund their lavish lifestyles.

However, having squeezed all of the wealth out of the U.S. economy, and squeezed all the wealth out of their children and grandchildren, there is no money to top-up their mismanaged, under-funded pension plans (along with the equally generous retirement medical plans which accompany them). The bottom line is that this generation of financial-failures is already facing a multi-trilllion dollar shortfall - which is totally separate from the $70 trillion funding-gap in Social Security and Medicare (see “U.S. Pension Crisis: the $3 TRILLION question”).

This is a crisis which is developing from the bottom up. Vallejo, the one-time state capital of California, was already forced into bankruptcy due to the unsustainable retirement benefit plans of its municipal workers. Meanwhile, on the opposite coast, municipal leaders lament that they only have enough funds to pay for either the pension/medical plans of their former police officers and firefighters, or the salaries of the current police and firefighters.

Further aggravating this crisis at the local level, many municipal governments were severely “burned” through being conned into various forms of “exotic financing” by Wall Street scam-artists. Municipalities and public institutions not just in the U.S., but all over the world, have been crippled by countless billions in losses – while paying these financial predators fat fees to ruin them.

It is within this context that we can begin to examine the problems of the pension-plans, themselves. To start with, the “financial model” (and solvency) of most of these pension funds is based on the premise of a rate of return far in excess of the historical, average rate of return in the U.S. economy. This is despite the fact that the U.S.'s steadily growing mountain of never-to-be-repaid debt requires an ever-greater percentage of the U.S.'s GDP just to service the interest payments on this debt.

As a matter of elementary arithmetic, this steadily increasing financial drain on the U.S. economy mandates that future growth must be below historical averages. Thus, most of the entire U.S. pension system is dependent for its solvency on a rate of economic growth which cannot possibly exist.

The perfect example of this is Wall Street. Despite bearing their own crippling burdens of debt, these “financial geniuses” thought that they could outperform the broader economy (by a wide margin) through taking the excessive, ten-to-one leverage of their existing business model, and ratcheting it up to an insane average of 30:1 (across the entire sector), while individually such leverage often reached 50:1.

As we have seen, this wasn't a “business model” at all, but rather a massive Ponzi-scheme perpetrated against the entire world. Mesmerized by the inherently fraudulent business-practices of the Wall Street crime syndicate, the supposedly conservative managers of these pension plans began to chase higher returns through purchasing riskier and more leveraged investments – including loading up on the over-leveraged, Wall Street fraud-factories, themselves.

Many of these Ponzi-scheme operators have already gone “belly-up”, with their shareholders (such as U.S. pension plans) seeing their holdings go to zero (or close to it). Meanwhile some of those who only survived through government nationalization (such as AIG and Citigroup (C)) will never recover to their former market caps (even if they can be subsidized to the end of this crisis) because they have been forced to liquidate vast chunks of their assets.

As if this still wasn't bad enough, the same rampant corruption which saturates the U.S. government has also thoroughly “infected” U.S. pension funds (see “U.S. pension-fund criminals fight to protect crime empire”). These pension funds pay fat salaries to their administrators – supposedly so that they would use their business acumen to buy the best assets available for the pension funds they were operating.

Instead, these corrupt opportunists allowed “lobbyists” (i.e. Wall Street bag-men) to “persuade” them to buy what the lobbyists told them to buy – through financial inducements which would be called “bribes” anywhere outside the United States.

In short, large pension funds all across the United States have the same financial nightmares in front of them as the U.S. government (at all three levels), and the Wall Street crime syndicate.

Unless the Obama regime wants to write a cheque for trillions of dollars to restore health to pension funds across the U.S., the only alternative is gigantic reductions in benefits. However, as with many facets of the U.S. economy, the degree of insolvency is so great that almost certainly these pension plans will require large, government hand-outs, while still being forced into large reductions in benefits.

With greedy, baby-boomers having hogged all the spending-power in the U.S. economy to themselves (and having exhausted that spending power), the implications are obvious for the U.S.'s consumer economy: decades of greatly reduced spending. The consequences of this generational change in spending habits are equally obvious (see “The Death of the U.S. consumer economy”).

Reduced spending, persisting over decades, will hammer the earnings of the retail-based economy. This, in turn, means depressed valuations (and endless lay-offs) for these companies for decades – which will aggravate the insolvency of U.S. pension plans even more (meaning more government hand-outs, and more reductions in benefits).

Desperate for money, retiring baby-boomers will be forced to dump their only remaining assets: U.S. real estate. Needing to try to raise at least $1 or $2 trillion just to come close to maintaining their standard of living, this means an endless line-up of “motivated sellers” which will also exist for decades.

As of today, there is no indication that anyone in the U.S. government is paying attention to this crisis. This is hardly surprising. The same “leaders” who have managed to ignore their own future, funding-crisis until it has soared to a total which exceeds global GDP can hardly be expected to act on a similar crisis, but less than 1/10th of that size.

Like lemmings racing for a cliff, the vast majority of Americans remain completely oblivious to their pending “financial suicide”. For this, the pseudo-journalists of the U.S. propaganda-machine bear most of the blame.

As with all Ponzi-schemes, the U.S. economy is totally dependent in maintaining “confidence” in this massive con-game. Thus, while a plethora of U.S. financial crises continue to worsen (including the pension-crisis) all we are likely to hear from the propaganda-machine are chorus after chorus of “Don't Worry, Be Happy”.

Disclosure: I hold no positions in AIG or CitiGroup

Comments

[Whippet:]

<<These are the same baby-boomers who dismantled the U.S. manufacturing sector, and shipped it to Asia – so that they could pay less for the ever-increasing hoard of consumer-goods which they have accumulated with manic zeal. In the process, they have also eliminated most of the well-paying jobs which they benefited from, but which they have taken away from their children and grandchildren.>>

You have a way with words, Jeff! As a Gen X/Y-er, I am simply preparing for and rooting for the entire system to collapse under its own weight. You cannot repair the foundations when the house is built of cards. Each day the Ponzi continues translates to another measure of wrath when it collapses. May God help us...

Aug 20 03:59 PM

[Desiderius ...:]

I wish I had written this -- awesome.

Aug 20 05:12 PM

[Northstar10000:]

Buy SDS

Aug 20 07:20 PM

[The Geoffster:]

Now I'm really pissed. First, I missed out on all those NINJA loans; now, I find out my peers were looting the system and didn't cut me in. I'll still get my social security and medicare, right?

Aug 20 07:22 PM

[dhansen548:]

As a baby boomer, I agree with this article. But it is too late to prevent the collapse. Let us, instead of worrying about it, devote our time to composing bittersweet aphorisms on the transitory nature of wealth. That plus a supply of anti-depressants should keep us oldsters going until The End.

Aug 20 08:02 PM

[whidbey:]

Retirement, including SS and Medicare, are the Big Con on the horizon.

If the government hopes to survive without a social upheaval, it must be willing to let many of us who can fund our own retirements and health care out of the system. Of course, that will not happen, the well-off will be kept to tax. Everyone goes down with the ship!

Currently SS has a 90 dollar a month tax on the payments regardless of use or need, just a tax. Medicare is in many cases a farce that threatens your life. And of course many public pensions will never be paid without massive inflation.

The trap is set of a total wipe-out. And with it comes upheaval, refusal to pay taxes (the jail space is limited), a general disregard for the federal agencies as local groups go into action to compete with the Fed and fix the problems. Keep your eyes open, in California it is already starting to unravel.

Aug 20 08:26 PM

[qqq fox:]

FED still fighting to prevent the Wipeout you speak of !!!
$66.6 Billion in one week. That is the amount of mortgage backed securities the FED added to its balance sheet in just one week, up to a new total of 609.5 Bil. And this new total is up over $100 Bil in the last 3wks. Additionally, they added over $12 Bil in Treasuries and Agencies. Take off some for expiring swap lines & commercial paper guarantee expirations, and the new FED balance sheet is up to a whopping $2.093 Tril. Now we know why Tsy's have been so strong in the last 2 wks while the stock mkt has been going up. The Fed creating shortages of Agency MBS drives govt paper buyers into the Treasury mkt. Once the Tsy market wakes up to this I can’t believe something won’t shake out. New lows in the dollar and Tsy’s accompanied by resurgent gold and commodities mkts.

Aug 20 09:03 PM

[danf:]

Social Security was bankrupt when it was created. The population group that benefited the most - paid the least while receiving the highest returns was not the baby boomers (my generation), but my parents. It was my parents - who made their fortunes on the back on real estate inflation that left me with a $3000/month mortgage.

When did the explosion in the growth of government begin ? It was the 60's when my parents - the parent of the evil baby boomers - were in their prime. It was my parents who the squandered 50k lives in Korea and 50k lives in Viet Nam - The baby boomers were foot soldiers in Viet Name and rose to leadership to build the invincible war machine we enjoy today and win the cold war - another gift to us from the "greatest generation".

Your generational rant simply undermines your credibility and panders to emotive thinking in general. Each generation includes weak and strong, good and bad, virtue and selfishness, wisdom and folly.

Aug 20 11:12 PM

[john2009neb:]

Great article Jeff...I wasn't aware the pension problem was that severe - thanks for helping me become more informed...of course the government doesn't want us to know when they want us all to be so glad now that the recession has ended (or so they say). I'm still predicting the stock market to climb into late October so they can show us how much good our tax payer dollars have done after 1 year - otherwise there will be public and private outcries if the markets are at or below where they were last October. Then in November get ready for reality to set it in (even on Wall Street, I know that's hard to believe) regarding rising unemployment and foreclosures and I believe we will see another major sell off in the markets. I know they keep telling me the recession has ended, and the recovery has started, but the data doesn't lie. If you take into account tax payer dollars are substituting for consumer demand, you have no economy, let alone a recovery. You would think if the recession is over they would no longer need bailouts, but I think you will see tax payer dollars in the mix for several years to come.

Aug 21 12:56 AM

[Whippet:]

Good points, completely agree. Generational criticisms should never be taken personally, but do have broad ramifications. It was actually the Greatest Generation's parents who benefitted the most and paid in the least, but that's splitting hairs. The biggest knock on the Boomers is that they are doing NOTHING to reverse the problems- they're just Paying it Forward... So now it's us Gen X/Y/Millennial crowd that are really getting bent over Barney Frank's desk. As a result, our Generational Sin could be that we're the first ones to let our parents die in destitution (or hand them a pain pill and say "Goodbye".) Again, the collective, not individuals...


On Aug 20 11:12 PM danf wrote:

> Social Security was bankrupt when it was created. The population
> group that benefited the most - paid the least while receiving the
> highest returns was not the baby boomers (my generation), but my
> parents. It was my parents - who made their fortunes on the back
> on real estate inflation that left me with a $3000/month mortgage.
>
>
> When did the explosion in the growth of government begin ? It was
> the 60's when my parents - the parent of the evil baby boomers -
> were in their prime. It was my parents who the squandered 50k lives
> in Korea and 50k lives in Viet Nam - The baby boomers were foot
> soldiers in Viet Name and rose to leadership to build the invincible
> war machine we enjoy today and win the cold war - another gift to
> us from the "greatest generation".
>
> Your generational rant simply undermines your credibility and panders
> to emotive thinking in general. Each generation includes weak and
> strong, good and bad, virtue and selfishness, wisdom and folly.

Aug 21 09:54 AM

[swaps:]

Forcefully stated. Should run in every newspaper. Let's ask Warren Buffet to buy full page ads to run this piece. Of course he will.

By the way, I am 18 months ahead of the baby boomers and I sensed them ruining my life and crowding me to the margins decades ago.They were an exuberant egocentric force of historic precedence.

Aug 21 10:49 AM

[Gregman2:]

"most of the entire U.S. pension system is dependent for its solvency on a rate of economic growth which cannot possibly exist." And so, Jeff, you've pointed to the only viable solution: radically reduced benefits all the way around. Legally, the trustees should challenge
obligations to beneficiaries based on the actuarial facts.

Aug 21 11:18 AM

[Darrell:]

One should understand what the government pension system means at the individual level: San Francisco’s police chief recently retired at age 53; her lifetime retirement income is a over $26,000 a month, and the city’s taxpayers are paying over $300,000 to her for her accumulated time off earned but not used.

One should be reminded that the San Franciscan voters had the opportunity to vote on these retirement benefits for municipal employees; these retirement packages became law and a benefit only after voter approval. The chief in no way manipulated the process to get her retirement benefits, the voters approved these benefit increases and she earned it fair and square.

Since the voters approved these benefit packages, they must now vote for more stringent benefit packages; this is how the system must reforms itself. In any case, bankruptcy should not be a way out for state and local governments to not pay for these retirement benefits; increasing taxes is the most viable option.

Aug 21 02:19 PM

[awake09:]

Did anyone read Yahoo! Finance today? "Stocks Soar, Bernake Sees End of Recession." Jeff, this wouldn't be one of those party-hat articles, would it?

The amount of deception the financial world and it's media extensions will go to must stagger the devil himself. These in-the-tank organs are so self-invested that they are incapable of seeing the cloud, only silver linings.

That is when it's a "progressive" administration in power, I should say. Yahoo! Finance also said "A New York official [?] credits the Obama stimulus for turning around New York state's unemployment figure this month." Hand me a barf bag.

Aug 21 03:39 PM

[Jeff Nielson:]

Thanks for the comments, everyone.

Yes, the parents of the baby-boomers arguably had pretty good lives, too. The one BIG difference between them and their CHILDREN is that they created a BETTER future for their offspring - rather than spending (and squandering) the FUTURE wealth of their own children.

Aug 21 04:32 PM

[dragonpaw:]

Dear Jeff;
My father died at age 70, having retired at age 59 &1/2. Born in 1921 and having served in WW II and raising (surely with mom's help) 8 children, he deserved something. At that time, however , with the social security that he and his employer had matched, within 3+ years he had "recovered" all that they had paid into the system. When I had informed him that this had been a great investment, he remarked "You're crazy!" Meaning that he thought he had put much more into the "system." But alas, he was wrong.
Being a part of the "boomers" myself, I have put 350K+ into the Ponzi scheme (270+ into SS; 80K into FICA: self -employed I paid it all).
Sorry I don't fit your mold. Hope that my kids don't have to pay my share of the Ponzi scheme. Not to worry ; Obamanomics and the new world order is sure to leave me out.

Aug 24 10:22 PM

[monmon:]

shoot those greedy B.......!!!

Sep 06 06:47 PM