When It Rains…

Seniors seem to be getting whacked from all angles these days.  First, it was the reality for most that they would be retiring on Social Security alone, and now they are finding out that the long-term care insurance that they secured years ago may not be as secure as they thought, at least at the rate they thought that they were getting it. The WSJ published an article today regarding the state of the insurance market for long-term care in the U.S.

It appears that the industry is in deep trouble caused by financial turmoil that is causing angst among the roughly 7.3 million long-term policy owners.  According to the Journal, this cohort is equal to about 20% of the senior population (those over 65 years-old). Steep policy rate increases are forcing many to either pay up or pull out of the program.

At one time, there were about 100 firms selling long-term care policies.  Today that group numbers roughly 12, and many of them are not on steady footing.  In fact, GE has announced that it is taking a $9.6 billion charge that is mostly attributable to their long-term care business.  In addition, more than $10 billion in additional charges have been taken by insurance companies in this space since 2007.

Long-term care often costs more than $100,000 / year for an individual and it is estimated that long-term care was over $200 billion last year. Most individuals don’t have the resources to meet this expenditure, especially given the lack of a DB pension, anemic DC balances, and weak personal savings rates. A collapsing long-term care industry is just another sad event for many of our senior citizens.

This scenario just further solidifies for me the likelihood that we will have multiple generations living under the same roof sooner than later.

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4 in 10

For a while now, we’ve speculated that the demise of traditional DB plans and the significant increase in student loan debt ($1.5T) would combine to adversely impact housing markets, as Seniors would not be able to remain in their homes, while those 18-30 would defer family unit creation and the purchase of their first homes. We believed that we could once again have a society with 3-4 generations living under one roof reminiscent of the late 1800s to early 1900s. The economic impact of that development could be startlingly negative.

Well, we just might be seeing this development materialize, and faster than we would have imagined. In an article published in Newsday, it was reported that Long Island’s housing costs are so high that four in 10 young adults live with relatives, and incredibly, seven in 10 say they’re likely to move to a less-expensive region within five years, a new survey shows.

Specifically, of Long Islanders 18 to 34 years old, 41 percent live with parents or other relatives, according to the survey to be released Wednesday by the Long Island Index, a project of the Rauch Foundation. These young adults are finding it difficult to find affordable housing and quality jobs that will permit them to stay in the region, and this is happening before the tax law changes take effect that will likely negatively impact long island’s real estate market.

Trouble Brewing In River City?

Actually, River City is probably fine right now, but there may, in fact, be some trouble brewing in New York City’s real estate market.  Why you ask? Well, it seems that nearly 1.1 million owner-occupants in NYC and Long Island have received a pre-foreclosure notice from their mortgage servicer.  Yes, that’s right, 1.1 million owner-occupants.

But, we all know that foreclosures and auctions are down, how could this be? You would be correct if you focused exclusively on foreclosed or auctioned properties, but for some strange reason, mortgage servicers are reluctant to foreclose. According to PropertyShark, only 2,000 properties within NYC have actually been foreclosed and auctioned in 2017, and only 731 are currently scheduled as we begin this year.

The real issue here just may be the impact on the local economy. Clearly, most of these 1.1 million delinquent owners are struggling with their monthly payments. That doesn’t bode well for the local economy that depends on the consumer to demand goods and services.

Amazingly, this issue is occurring even before the impact of tax policy changes that will significantly reduce one’s ability in places like NYC to deduct property taxes.  We can only imagine how many more will join this growing list of pre-foreclosure notice owner-occupants.

 

It’s Getting More Difficult

The U.S. retirement industry is fast becoming a one-trick pony, as defined benefit plans (DB) quickly disappear in favor of defined contribution plans.  We, at KCS, have stated for a long time that asking untrained employees to fund, manage, and disperse a defined contribution retirement program is an incredibly difficult task that will likely lead to a social and economic disaster.  Well, here is further proof that asking individuals to do this in today’s economic environment is increasingly challenging.

Despite “record low” unemployment (we seem to forget about the LPR at 62.7% and 95 million age-eligible workers on the sidelines), wage growth remains muted, and has recently fallen.

Furthermore, there is a certain level of income that is needed just to survive these days, and given the decades of modest real wage growth, we have a significant percentage of our citizens who just don’t have the disposable income needed to meet basic living expenses.

Furthermore, the following chart reflects some rethinking on the part of economists with regard to the actual level of disposable income in the U.S. and the effect of healthcare costs on this measure. Historically, healthcare costs have been considered discretionary, but in reality they are not. If one adjusts disposable income to reflect this observation, the percentage of debt to disposable income ratchets up significantly (see the chart below).

With wage growth lower and housing and healthcare costs rising, do most of our citizens really have the financial wherewithall to fund a retirement program?

CA Pension Decision Not Supportive of Long-term Funding Success

Randy Diamond, CIO Magazine, is reporting that the California Appeals Court has ruled that the use of unused vacation days to enhance retirement benefits is not a “right”, but it would not be “equitable” to take it away. The decision has likely paved the way to a review by the California Supreme Court.

The mission at KCS is to preserve and protect defined benefit plans. However, we are not supportive of provisions, such as the use of unused vacation days, to “spike” benefits that have not been actuarially funded. These practices are destabilizing, and subject the entire plan and all of the plan’s participants to greater risk.

We seek to keep DB plans as the core of one’s retirement portfolio, but not at any cost.  We need to fund these critically important benefits based on one’s salary, and we prefer that it be based on the last 3-5 years, at a minimum.  DB plans function best when benefits are actuarially funded based on anticipated growth in an individuals lifetime earnings, a formula, which cannot possibly factor in the spiking of these benefits through the inclusion of overtime, sick pay, vacation time, and hazard duty pay earned in one’s final year of employment.

Butch Lewis Act Gaining Critical Support

We are thrilled to read that Representative Peter King (R-N.Y.) has agreed to co-sponsor the Butch Lewis Act of 2017. As we’ve been reporting, this legislation is critical to protecting and preserving the promised benefits to millions of participants in multi-employer pension plans. The announcement by Rep. King clearly demonstrates that this legislation will not be burdened by partisan politics.

We applaud Rep. King’s action and hope that others from both sides of the aisle will quickly realize that providing these benefits will not only allow the participants to retire with dignity but equally important that they will remain active participants in our consumer-driven economy.

Here is the article from Teamsters.org

Today, Rep. Pete King (R-N.Y.) joined Sen. Chuck Schumer (D-N.Y.) at a press conference at Teamsters Local 707 in Hempstead, N.Y. to announce his co-sponsorship of the Butch Lewis Act of 2017 (H.R.4444/S.2147), legislation that will assist pension plans facing insolvency. Rep. King is the first Republican member of Congress to join the bill as a sponsor.

The Butch Lewis Act of 2017, which was introduced by Sen. Sherrod Brown (D-OH) and Rep. Richard Neal (D-MA) on Nov. 16, would provide a path to fixing the country’s growing pension crisis by providing the financial support the plans need to avoid insolvency.

“I am proud to support the Butch Lewis Act and I commend Jim Hoffa for his leadership,” Rep. King said. “Protecting retirees who worked hard for their pensions should not be a partisan issue. Republicans and Democrats should work together to allow workers to live their retirement years in dignity. It’s time to get started.”

The legislation would establish a new agency that will be called the Pension Rehabilitation Administration (PRA) within the U.S. Treasury Department. The PRA would be authorized to issue bonds in order to finance loans to pension plans in financial distress.

Kevin McCaffrey, President of Teamsters Local 707 joined Rep. King and Sen. Schumer to voice his support for the legislation.

“Like many other workers, our members have unfairly been the victims of failed government policies which have threatened their way of life and plans of retiring with dignity,” McCaffrey said. “I am proud to stand with these two elected officials who are stepping up to make a difference in the lives of working families.”

“The Teamsters Union thanks Rep. King for his leadership in co-sponsoring this bill,” said Teamsters General President Jim Hoffa. “This legislation is too important to be delayed by partisan politics. The pension crisis must be addressed now, and the Butch Lewis Act is the best option. We must protect the retirement security of hundreds of thousands of active and retired workers across the country.”

PBGC To Be Protected Under Butch Lewis Act

We continue to see on a weekly basis opinion pieces deriding attempts to rescue “critical and declining” status multi-employer defined benefit plans. Here is another one from Tom Schatz that appeared in the January 3rd edition of The Hill.  The author goes as far as comparing any future bailout of pensions to the sub-prime crisis that led to the great financial crisis, fearing that taxpayers will once again have to bail out a failing institution.

We don’t see it that way. In fact, we believe that it is imperative that these plans be rescued, as millions of U.S. workers are counting on the promised benefits to fund their retirements.  Furthermore, these workers have contributed to this future benefit through deferred wages. Does the author not realize that with failure comes the need to support all of these workers through very expensive Federal and state social safety nets?

The best proposal that we have seen (The Butch Lewis Act) provides low-interest rate loans to the multi-employer defined benefit plans that are currently the poorest funded (critical and declining status).  The proceeds from the loans must be used to immunize all of the retired lives so that those benefits are absolutely secured. The remaining assets in the plan will be used to meet future liabilities, as well as the repayment of the loan in 30 years.

By taking care of all of the retired lives, each plan has bought time for the remainder of the assets to outperform liability growth.  In the process of securing current retirement benefits, the pension funds are far less likely to need assistance from the PBGC that is currently in no position to support these funds.

Our economy has chugged along with <3% annual growth since 2005.  We need growing consumer demand to stimulate economic activity. The failure to support millions of U.S. workers will not do anything to provide them with the financial independence that they need to remain active consumers. Wake up, folks! Pension benefits are critically important to the future of our economy, especially as our labor force continues to age.

These are well-deserved benefits and are by no means hand-outs. Let’s stop with the pension envy that exists throughout the private sector and start to think of ways to increase the number of participants who have access to DB plans so that everyone benefits from the enhanced economic activity, including the tax-payer!