The Coming Era of Pension Poverty

By: Gordon Long | Sat, Jun 20, 2015
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The Coming Era of Pension Poverty

With Charles Hugh Smith & Gordon T Long

27 Minutes - 20 Slides

Charles Hugh Smith and Gordon T Long discuss what they see as the Coming Era of Pension Poverty.

To show why this happen, Charles and Gordon attempt to answer two questions:

  1. Why are the pensions and benefits promised to public employees unsustainable?
  2. Why is the Social Security System at risk?

Pension Deficits


Why are the pensions and benefits promised to public employees unsustainable?

1. Demographics: back in the day, there were 10 workers for every retiree. That slipped to 5 to 1, and it is now around 2 to 1: only two full-time workers for every retiree.

2. Low Yields in a ZIRP economy. Pension funds were based on a minimum annual investment return of 7% or more. Returns of 3% or less mean the promised pensions cannot be paid out of investment earnings -- they must be paid by higher taxes.

3. Increased risk of pension fund investments. Pension managers have compensated for low yields by shifting more of the fund's capital into high-risk investments such as junk bonds as a way of capturing higher yields. This strategy has paid off in a 'risk-on" environment but has the potential to yield catastrophic losses in a "risk-off" downturn.

4. Many public unions have exploited the system by buying political favors. Many retire at 55 and game the pension plans to retire with 90% pay based on their last year of service, which includes huge overtime pay; questionable disability claims that make their pensions tax-free, etc. This has changed the public employee pension plans from models of modest payouts to cash cows in which employees rake in $250,000 payouts upon retirement, are hired back as consultants (double dipping) and a host of other abuses.

5. Voters squeezed by stagnant incomes and steep increases in healthcare and educations costs cannot afford to pay higher local government taxes without crimping their consumption. Forcing voters to pay for public pensions with sharply higher taxes will trigger a self-reinforcing recession as consumption declines lower consumption/sales taxes, lowering local government revenues despite higher taxes.


Why is the Social Security System at risk?

1. Social Security is "pay as you go" -- the Trust Fund is a fiction, IOUs that are empty promises, not tradable securities. The deficits in Social Security must be paid with higher taxes or by selling Treasury bonds, i.e. increasing Federal debt.

2. Demographics: there are only 2 full-time workers for every Social Security/Medicare recipient.

3. Social Security is already running deficits:

Social Security Ran $47.8B Deficit in FY 2012; Disabled Workers Hit New Record in December: 8,827,795

http://cnsnews.com/news/article/social-security-ran-478b-deficit-fy-2012-disabled-workers-hit-new-record-december

4. Social Security is supporting an increasing number of non-retirees, i.e. disabled.

5. Demographics: the number of baby Boomers who qualify for Social Security and Medicare is set to soar--60+ million Boomers are entering these programs while the economy only supports 115 million full-time jobs.

6. Faulty actuary assumptions. When Social Security was established, it was assumed there would always be 5 workers for every retiree, people retired at 65 and that the average age at death was mid-to-late 60s. The system was not set up for people retiring at 62 and living into their 80s.

 


 

Gordon Long

Author: Gordon Long

Gordon T. Long
Publisher - LONGWave

Gordon T. Long

Gordon T. Long has been publically offering his financial and economic writing since 2010, following a career internationally in technology, senior management & investment finance. He brings a unique perspective to macroeconomic analysis because of his broad background, which is not typically found or available to the public.

Mr. Long was a senior group executive with IBM and Motorola for over 20 years. Earlier in his career he was involved in Sales, Marketing & Service of computing and network communications solutions across an extensive array of industries. He subsequently held senior positions, which included: VP & General Manager, Four Phase (Canada); Vice President Operations, Motorola (MISL - Canada); Vice President Engineering & Officer, Motorola (Codex - USA).

After a career with Fortune 500 corporations, he became a senior officer of Cambex, a highly successful high tech start-up and public company (Nasdaq: CBEX), where he spearheaded global expansion as Executive VP & General Manager.

In 1995, he founded the LCM Groupe in Paris, France to specialize in the rapidly emerging Internet Venture Capital and Private Equity industry. A focus in the technology research field of Chaos Theory and Mandelbrot Generators lead in the early 2000's to the development of advanced Technical Analysis and Market Analytics platforms. The LCM Groupe is a recognized source for the most advanced technical analysis techniques employed in market trading pattern recognition.

Mr. Long presently resides in Boston, Massachusetts, continuing the expansion of the LCM Groupe's International Private Equity opportunities in addition to their core financial market trading platforms expertise. GordonTLong.com is a wholly owned operating unit of the LCM Groupe.

Gordon T. Long is a graduate Engineer, University of Waterloo (Canada) in Thermodynamics-Fluid Mechanics (Aerodynamics). On graduation from an intensive 5 year specialized Co-operative Engineering program he pursued graduate business studies at the prestigious Ivy Business School, University of Western Ontario (Canada) on a Northern & Central Gas Corporation Scholarship. He was subsequently selected to attend advanced one year training with the IBM Corporation in New York prior to starting his career with IBM.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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