Pension Benefit Cuts Are Regular Events

by: SA For FAs

Erik Conley: Be wary of manipulators of statistics.

Cashflow Capitalist: Monetary policy has hugely benefited the wealthy at the expense of the lower and middle classes.

Thought For The Day: Pension-fund woes reflect people’s and institutions’ preferences to ease their situations today at the expense of their futures.

QE And Wealth Inequality

“QE did nothing for the average American who has little exposure to financial assets but would have greatly benefited from a hastening of falling unemployment or the kindling of GDP growth. QE did, however, boost the wealth of the already wealthy. It put into overdrive what progressive drops in interest rates have done for the past four decades.” (Cashflow Capitalist)

The Misuse Of Statistics

“Don't fall for assertions that recent market action means anything. It's just noise. In my own study, I go back to 1928. I don't suggest you do the same, but go back at least to 2000 so that you include the last two major bear markets and recessions.” (Erik Conley)

Ohio Carpenters To Take Pension Cut

“The pension fund has 5,487 participants, of which 4,312 will be affected by benefit reductions averaging 14.7%, which would go into effect in March. At the time of the pension fund's June 2018 MPRA application, it was 49.3% funded, with $227 million in assets and $460 million in liabilities as of plan year 2017. Without benefit cuts, the pension fund was projected to be insolvent by 2036.” (Pensions & Investments)

Thought For The Day

The solvency of Social Security, of states and municipalities, even of the federal government, get all the headlines, but Social Security has yet to go bankrupt and very few cities have matched Detroit’s and Stockton’s misfortunes. But quietly and with little notice, many smaller pension funds can and do go bust, a fate awaiting over 4,000 Ohio carpenters next month (see quote above). However difficult it may be for anybody to take a 15% pay cut, as they will, it is surely harder for someone who is retired and can less easily supplement his income.

This is a common problem that tends to slip under the radar because these smaller pension funds are local rather than national or statewide concerns. But the Mid-Jersey Trucking Industry and Local 701 Pension Fund; the Toledo Roofers Local No 134 Pension Plan; the Western States Office & Professional Employees Pension Fund; and the Plasterers & Cement Masons Local 94 & Pension Fund are all recent examples of insolvent pension funds whose members are enduring benefit cuts, and for the same reasons: The funds lack the assets necessary to pay their promises.

Pension funds across the land have been scandalously managed, typically using high discount rates by which they calculate the present value of future projected returns. That’s actuary-speak for letting employers and workers make smaller contributions while “assuming” the market will do all the heavy lifting. It’s a convenient fiction, but what it really does is ensure that an increasing number of pension funds down the road – and especially in the midst of a prolonged economic downturn – will similarly lack the assets to pay their workers in retirement. It’s an evasion of responsibility, an evasion of reality and a part of an esprit du temps wherein people’s and institutions’ preferences are heavily skewed to the present at the expense of their futures.


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