I feel like local governments are going to be the first to really be affected by significant pension overlays that are not properly accounted for -- a lot of pension funds assume rates of return that are historically farcical. I think the industry average used to be about 8%.
"During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually."
It doesn't auger well for the future of stable financial markets. Weak localities will fail, and eventually the states that have to support them. Puerto Rico is the canary in the coal mine.
It's largely pointless to talk about inflation-unadjusted average-rate-of-return for long time periods. A 12% YoY return when inflation is at 15% is terrible. A 5% YoY return when inflation is at 0% is amazing.
You're overfitting. This is exactly the problem I'm describing. Case in point, you've omitted 2000-2010.
Real (CPI as inflation) averaged annualized return on the DJIA 2000-2010: -2.219%
This is with relatively mild inflation.
Of course, 1960-2000 looks better when you literally put in the apex of the software bubble when P/E ratios shot skywards...part of which corrected over the decade following.
Expecting a 8% nominal or real return is simply nuts in my opinion because you are staking yourself on a really small sample size with crazy inflation to boot. Nominal or real is a nuanced distinction to what is plainly just bad overfit thinking. The introduction of just one decade with low inflation and bad returns can wreck you -- case in point: Dallas Firefighters/Puerto Rico ($43bn + of unfunded pension obligations)/Detroit etc. etc. etc.
Also, to add another wrinkle to this discussion, most pension funds won't weight themselves 100% in stocks (corresponding positions in cash/bonds average much lower real or nominal return), and most pay significant management/consulting fees on top...
The answer to pension problems is real socialism. Produce in bulk, provide in bulk, eliminate the waste and middle-person profit by providing as much of the pension as possible directly so that the allowance for other items can be of a much smaller serviceable size.
Which is why Cuba, Venezuela, and North Korea are doing so well. I'm astounded people still think the idea of central production control has any juice left in it after such a thorough debunking in the 20th century.
Which is why Norway, Denmark and Sweden are doing so well with all their socialist programs.... so what now...?
I personally feel the right answer is in the middle. Socialise whats required like health, education, emergency services, roads, pensions, etc And leave the luxuries of life as free market.
As an extra touch, I would make politicians and civil servants required to use public services rather than private alternatives. Because when they and their families have to use public schools and hospitals etc they will care a bunch more about how they run than if they are choosing private alternatives, which is common in Australia at least.
All three of the mention countries have pretty much free, capitalistic enterprise - which is the total opposite to what mjevans suggested.
That said, there is a huge government ("public") sector and the taxation is high on most things. Especially income and consumption.
Basically, all of the socialist programs that's currently going on in the Nordic countries rely heavily on taxing free enterprises (private sector) and would work a lot less without them.
(Keep in mind Norway has the fortune of benefitting greatly from oil revenues. Since the price of oil collapsed the economy there hasn't been doing very well. Still, I adore the place, and the people.)
Venezuela tried petro-socialism, backing their welfare state with a single resource that they happened to be swimming in. Price of that resource false -> no more monetary value -> money is worthless and welfare state fails.
Indeed. Yet the price of oil going down at some point is hardly an unforeseeable scenario, right? They're not stupid people. They were led to believe that it would never end, or that basic economic principles didn't apply to them.
Socialism works great until you run out of other people's money. Whether it's because the price of oil dropped, your most productive tax payers moved out, or your currency hyperinflates until it's worthless: somehow it's never socialism's fault. Reality eventually does set in, though.
I'm not sure why you are being downvoted (probably for ideological reasons). You are totally correct. Socialism hasn't really been tried in countries with diverse, abundant resources and powerful economies.
Venezuela was having serious issues even before the price of oil took a nose dive. One example is the food shortages. They were happening well before the crisis. Centralized food markets with price controls always creates shortage. It's simple economics.
If your economic system can't efficiently feed people, more complex industries will be even harder. Not to mention building new industries.
The failures of their socialist experiment go far deeper than simply a non diversified industry. The drop in the petro industry showed immediately how fragile the massive spending schemes and nationalization was.
As Thomas Sowell said (paraphrasing), the problem with redistribution is that you can only take someone's money/property once, you can't take their ability to continually produce goods. So when that well dries up the cracks in the system become apparent.
The wikipedia article on the Venezuelan economy is a good read about the risks of centralized planned economies.
Post WW2 UK elected a socialist government which created the welfare state, comprehensive schools, state pensions and the National Health Service and nationalisation of some industries.
Not sure what you mean. The "socialist" programs, such as Social Security and Medicare, have been massively successful. But they are the tip of the iceberg in terms of what is possible. We're talking things like Medicare for All and, at the extreme end of the spectrum, Unconditional Basic Income.
it's not clear from your comment what real socialism even means. You seem to be advocating for some sort of planned economy? (that's a horrible idea) Then whats this about allowance for other items?
> and the federal government will backstop the states
I think it's unlikely the federal government will be backstopping pension problems in IL and CA anytime soon, without a dramatic congressional shift.
I think you underestimate how much taxes will need to raise to cover these liabilities. The federal government already has its hands full with SS + Medicare commitments it can't handle.
I'd rather see failures and bankruptcies at a local level, which will maybe convince other municipalities to reform before they collapse. I don't want everything centralized into one giant US federal government default. That's not a better plan.
> I think it's unlikely the federal government will be backstopping pension problems in IL and CA anytime soon, without a dramatic congressional shift.
Agreed. That shift is going to happen though. Seniors are not a cohort you can ignore. They vote like clockwork.
> I think you underestimate how much taxes will need to raise to cover these liabilities. The federal government already has its hands full with SS + Medicare commitments it can't handle.
I don't, but we should've been setting aside these funds. We didn't, and we'll still need to pay out even at a reduced benefits level.
> I'd rather see failures and bankruptcies at a local level, which will maybe convince other municipalities to reform before they collapse. I don't want everything centralized into one giant US federal government default. That's not a better plan.
Reform will not happen. That's code for "cutting benefits". As long as the US government maintains the ability to tax, it will not default. Social Security keeps a third of seniors out of poverty. 45 percent of Puerto Rican's are already in poverty. Cutting benefits further? That's not tenable.
No one held government accountable over the last several decades, and now we're stuck with the fallout.
EDIT: Because of ye olde' HN throttling limits:
Most seniors don't pay taxes, due to marginal tax rates. Seniors will vote all day to keep their benefits intact. I don't blame them.
Unless the brinks of defaults will happen in close successions in > 20-30% of the country, what are the incentives for MPs to vote yes on the backstopping for jurisdictions far from their own?
> Reform will not happen. That's code for "cutting benefits".
The benefits to be cut will happen in a few small areas given the size of the US, thus will not affect the majority of lawmakers. If the GOP controls the Congress, that doesn't seem like a large enough impact for them to change their overall ideology towards pension subsidies.
Sure, seniors vote. Don't assume that the seniors in, say, Texas are going to be in favor of higher taxes in order to rescue pensions in California and Illinois, though.
Texas (at the time of writing) only appears in this page the once ... which is surprising in this context given its history. [1]
A country / protectorate defaulting is not necessarily something that can't be recovered from, and in some cases is the only sensible (or indeed feasible) course of action.
Well that's not the precedent. When these mismanaged governments finally throw in the towel and hand the reins over to grownups what happens is the pensions and retiree benefits get cut. Detroit just had this happen after the state stepped in and dealt with that mess. Cleveland is in the process of cutting benefits before it goes bankrupt. CalPERS cut pensions last December for retirees from Loyalton. Same thing in the private sector; GM cut retiree benefits with the help of the Federal Government. Last year the Iron Workers union saw huge pension cuts. USPS is going to have this happen as well, probably very soon; you can be very, very sure Trump and the Republicans aren't going to bail out that hot mess.
We're actually getting pretty handy at cutting retiree pensions and benefits. The deals negotiated decades ago predicated on fantastic rates of growth aren't really plausible and they eventually have to be reworked. That means cuts. That's reality and reality has, at long last, arrived for Puerto Rico.
So expect cuts. Don't believe there is some pot of gold out there filled with untaxed entities that just need to be tapped to fix everything. Its fiction and it won't happen like that.
The big reckoning after Puerto Rico is going to be Illinois. Producers are straight up evacuating IL while the state government just keeps digging itself deeper into the hole. That situation is going to set all sorts of precedents for how this nonsense gets resolved.
I've been paying attention to the situation in Illinois. All signs point towards things getting worse.
More people are moving out of Illinois than any other state. In polls residents of Illinois are most likely to say they're planning on moving to a different state. The state hasn't passed a budget in over two years, a US record for any state. Average income difference between families moving in and out of Illinois is over $20,000. The property taxes are second highest in the nation relative to COL and everyone agrees that they need to be increased to maintain the current budget. The state cut funding for all college grants programs and the average freshman class size at state schools has shrunk an average of more than 20% in two years. Illinois is the biggest exporter of students, and many never return. Pension costs are already 25% of the state budget and this is projected to increase.
The state is so deeply corrupt that bankruptcy seems inevitable. If not for the whole state at least Chicago. Madigan literally runs the state from the shadows and gov. Rauner has no real power.
The budget problems are accelerating at a frightening pace as anyone that can afford to leave the state does. The most severe issue is brain drain of the most bright and educated young people. Illinois will experience the fallout from this for decades.
If I had any money invested in Illinois I would watch this case closely. If Puerto Rico is allowed to proceed with bankruptcy to shed pension obligations Illinois will follow
> When these mismanaged governments finally throw in the towel and hand the reins over to grownups what happens is the pensions and retiree benefits get cut.
What makes it appropriate to cut obligations to creditors we call pensioners, but inappropriate to cut obligations to creditors we call 'bondholders'?
(The answer is, obviously, that our politicians are quite happy to push our elderly under the bus, in order to protect wealthy investors.)
"but inappropriate to cut obligations to creditors we call 'bondholders'?"
The part where I said bondholders should be held harmless is a fiction inside your head. When the gears finally strip the bondholders in these cases (Detroit, GM, etc.) take epic baths, and I don't shed any tears for them either. $7 billion in bondholders’ obligations in Detroit were erased, for example.
So I suppose there is little difference between supposed "creditors we call pensioners" and actual creditors; everyone gets wrecked.
My biggest concern and issue with the federal government backstopping pensions is that the vast majority of people would now be paying for benefits for people who rendered services in areas they didn't live. Because the populace of one city voted to give certain benefits to public sector employees why should I be held accountable for that decision? I neither had a vote nor partook of their services.
I am sure I am being very naive here but this seems to me to be the essence of taxation without representation.
To me, there's a difference between something you need to live that was made poisonous by the government requireing aid and former managers pulling pensions of $200k+ a year. If I lived in Michigan, I'd have a big problem bailing out the FDNY pension fund when I heard that. It's endemic too, look up "LIRR Disability abuse".
I am fine with bailouts as long as systems are being put in place to avoid repeating it in the future. That's for Flint, pensions or banks. Obviously the prevention step never happens....
Neighboring towns near Flint took care of the problem at their own expense. Is it fair to them that Flint doesn't have to pay? Perhaps we should pay those neighboring town back, with interest, for the work that they did? Aren't we encouraging irresponsible behavior if we pay for Flint but not the other towns?
"During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually."
http://davidgcrane.org/?page_id=702
It doesn't auger well for the future of stable financial markets. Weak localities will fail, and eventually the states that have to support them. Puerto Rico is the canary in the coal mine.