City of New Haven Contemplating a POB

The City of New Haven, CT, is contemplating a pension obligation bond (POB) to sure up the City Employee Retirement Fund. The proposed ordinance allows the city to issue up to $250 million in pension obligation bonds next fiscal year to help pay down some of the unfunded liabilities.

CERF, along with the Police and Fire plan, is one of two defined pension plans that the city pays for each year to cover retirement benefits for city employees. The P&F covers pensions for public safety personnel like police and firefighters; CERF covers pensions for all other unionized city employees.

According to Acting Budget Director Michael Gormany and City Controller Daryl Jones, CERF and P&F are each currently funded at around 40 percent. But, we aren’t sure if this is based on GASB accounting or a true mark-to-market basis.  If the former, the funded status could be a lot uglier.

CERF and P&F were each funded at 60.6 percent in June 2008. That number has decreased precipitously over the past decade as the city has struggled to deposit, invest and earn enough money to keep up with the ever-increasing pool of retirees and beneficiaries.

The city is expected to contribute $21.9 million in CERF and $34.6 million in P&F, which are the same as last year, but since 2012 the combined contributions have grown by more than $16 million.

The proceeds from the potential POB would flow to CERF and not P&F.  It is anticipated that the funds would bring the funded status to 85%.  However, as we’ve witnessed on many occasions, the proceeds would be injected into the same asset allocation, and the goal would remain to achieve the return on asset assumption (ROA).

Given where equity valuations are, we believe that injecting this money into a traditional asset allocation is foolish. A better strategy for CERF would be to determine the amount of money necessary to retire all of the retired lives and to then immunize those lives. This strategy would improve the liquidity necessary to meet benefit payments and it would convert the fixed income exposure, with its interest rate sensitivity, to a cash matching strategy that eliminates this source of volatility.

Furthermore, by retiring all of the currently retired lives, the investing horizon is extended allowing for the liquidity premium to be captured from investments in equities, real estate, and other non-traditional investments (alternatives).

There are too many examples of public pension funds issuing POBs at the peak of the equity market in an attempt to capture the potential arbitrage between the ROA and the debt service. Unfortunately, most of those efforts have proved futile. Let’s stop managing pension plans against an ROA objective and start managing these assets to provide the promised benefit at the lowest cost.

The issuance of a POB is not the problem.  But, using the proceeds to fund a traditional asset allocation is! When will these plan sponsors and their consultants learn?




U.S. Retail Sales Fall Again

According to a WSJ article today, U.S. retail sales fell for the third straight month.  This seemed to generate a lot of head scratching from the article’s author, who stated, “the drop was unexpected in part because many Americans’ tax withholdings dropped in early February due to a $1.5 trillion tax break signed into law late last year.” However, a look at the beneficiaries of this tax largess highlights the fact that most of the benefit went to the top 1% (they do pay most of the taxes). Those in the bottom 60% of income receive a very modest reduction, with the bottom 20% getting an average $60/year in tax savings.

Just how much of a benefit will retailers actually see when most of the tax break goes to the very highest income earners who likely already have most of what they need? Furthermore, the U.S. savings rate is at a decades low 2.4% in 2017.  Also, total consumer debt is at an all-time high, with auto and student loan debt eclipsing $1 trillion each, revolving credit debt at more than $800 billion, and mortgage debt on one to four family homes at greater than $10.6 trillion.

As we’ve reported in many KCS blog posts, U.S. wage growth has been fairly stagnant for the past two decades. Given that U.S. GDP is driven by personal consumption (still roughly 70%), the combination of modest wage growth and higher levels of debt should constrain the average American consumer. Had the proceeds of the significant corporate tax rate cut been used to reinvest in plant, equipment, inventory, jobs, and wages, we’d likely see a significant economic pop, but early indications suggest that corporate America would rather buy-back shares than invest in their businesses or workers!

Unfortunately, It Will Get Real Easy For A Majority Of Americans!

An article by Alicia H. Munnell, Center for Retirement Research at Boston College, was published on the MarketWatch website on February 27th.  As I’ve said before, I think that she and her team do an incredible job of presenting retirement-related research, and it is certainly one of my go to sites for information on our retirement industry.

The headline of her article was “It’s Harder Than You Think To Spend Down Your 401(k) In Retirement”, and she’s attributing this difficulty to the fact that there aren’t any easy drawdown mechanisms in 401(k) plans.  According to Ms. Munnell, innovation is being stagnated because plan sponsors fear litigation, while at the same time Congress is unlikely to mandate annuity-type product for defined contribution plans.

As a result, little is being done to help guide the employee upon their retirement.  Unfortunately, those individuals are being given an cash distribution upon retirement, which requires them to manage the future drawdowns – good luck!

I don’t disagree with anything that Ms. Munnell has stated so far.  However, I do disagree with her when she states that she is “more concerned about people hoarding their retirement savings than blowing them on a trip around the world.”

I don’t believe that a majority of Americans will blow their savings on a trip or a second home or the fancy pickup truck. What I do believe is that a significant majority of American workers will NOT save enough to have a “pile of cash” to hoard. By all indications, Americans across the age spectrum are saving far too little at this time to accumulate a meaningful retirement account.  KCS produced information in an earlier blog post today that highlights the significant percentage of American workers that have less than $10,000 in retirement savings.

Ms. Munnell points out that “recent studies show that people draw down their balances in retirement much more slowly than expected. But most of today’s retirees with a retirement plan have an old-fashioned defined benefit plan, so these studies have little to say about the likely behavior of those retiring entirely dependent on 401(k) plans.” That’s the rub! We are entering a new paradigm in which most Americans (>80%) in the private sector are not participating in a traditional DB plan.

The expectation that these workers would all of a sudden fund, manage, and then disperse a retirement benefit with little education is simply poor policy, and the social and economic impact will likely be quite grave. I’m much more concerned about the ability of Americans to save in the first place, which is proving to be a nearly impossible task for many workers, than I am about their “inability” to drawdown a retirement benefit fast enough. It really won’t be difficult to spend an account balance that is as meager as those that have been accumulated to date.

It Is Much Worse Than The Headline!

GoBankingRates is out with their annual survey on retirement readiness. They reported that ONLY 42% expect to “retire” broke, which is down from 55% last year.  However, retiring broke means that you’ve saved less than $10,000.  Really? That is the metric that we should use to measure the preparedness of our workforce?

Did you know that adults 65 and older spend about $46,000 / year? Did you also know that the average Senior Citizen spends approximately $275,000 in out-of-pocket health care expenditures? Saving $10,000 for retirement will buy you less than 3 months of average annual expenses while covering less than 4% of your likely out-of-pocket medical expenditures.

Yes, those closest to retirement (aged 55-years-old and up) are doing better than the younger generations, but not by much. Roughly 23% have saved more than $300,000, but another 33% have saved $10,000 or less. My gosh!

At KCS, we continue to believe that the lack of wage growth is impacting a worker’s ability to save more than an employee’s need for immediate gratification, as many in the media would like us to believe.  GoBankingRates asked the roughly 3,000 participants to indicate why they aren’t saving enough for retirement.  Their answers shouldn’t surprise anyone.

Seventy-nine percent of the survey responders indicated that they either don’t make enough, are currently struggling to cover basic living expenses, are paying down debt, or had to use “retirement” funds for an emergency. Only 10% blame their employer for not offering a plan, while the remaining 11% said that they don’t need to save for retirement – must be nice, unless they are planning for an early demise!

The loss of employer-sponsored defined benefit pension plans is placing a tremendous burden on the average American family, and it will only get worse as the remaining DB plans get shuttered. If a 9-year long equity bull market (happy anniversary) can’t positively impact the retirement savings of our workforce, what happens when we invariably have another bear market.

A Lucrative Lost and Found

When I was growing up, I frequently misplaced items either at school or at a ball field/court, much to the chagrin of my parents.  Fortunately, I wasn’t the only one to do so, and as a result, the school had a table located in the hall by the main entrance that was for all the items that were lost by my classmates and me.  I really didn’t own anything of value, as this was long before cell phones, headphones and Ipads, and my sneakers were usually PF Flyers or Keds – Nike hadn’t been discovered yet. So I was not devastated if one of my items didn’t turn up, but certainly grateful when one did.

Just today, I was reading about the fact that between 2004 and 2013 (and I can’t imagine things have improved) plan sponsors failed to identify the owners of 25 million 401(k) accounts.  As you can imagine, the failure to reunite an account with an employee has gotten the attention of the powers that be in Washington DC.  In fact, the Government Accountability Office (GAO) recently outlined challenges that could be inhibiting workers from keeping track of their “multiple” accounts along with concerns about a lack of guidance with regard to reuniting plan participants with unclaimed property.

Here are a few of the challenges identified by the GAO, including; 1). individuals who accrue multiple accounts over the course of a career may be unable to consolidate their accounts by rolling over savings from one employer’s plan to the next, 2). maintaining communication with a former employer’s plan can be challenging if companies are restructured and plans are terminated or merged and renamed, and 3). key information on lost accounts may be held by different plans, service providers, or government agencies, and participants may not know where to turn for assistance.

The 25 million accounts total $8.5 trillion in assets! Unfortunately, 16 million of the 25 million accounts have balances that are <$5,000, which under current guidelines might just see these balances lost. How? According to the GAO, “accounts with a balance of $1,000 or less can be cashed out of a plan without participant consent; account balances can be reduced by tax withholding and early distribution taxes, or conditionally forfeited by the plan sponsor until the participant emerges to make a claim.” In addition, the GAO reports that “accounts with balances under $5,000, and sometimes those with larger balances, can be forcibly transferred to an IRA, where the account balances may decrease over time as the fees outpace low investment returns.”

The onus isn’t squarely on the plan sponsor’s shoulders, as employees have a responsibility to keep current and former employers up to date with a current address so that retirement information can be shared as needed, while also being responsible for responding when contacted by the plan sponsor.  There is no mandated frequency or method with regard to communicating with former employees, and no obligation to chase down unresponsive former employees.

Unfortunately, neither the DOL nor IRS has set up a “lost and found” for misplaced 401(k) accounts, so it would behoove you to review your work history to evaluate the possibility that you just might have one or more abandoned accounts before your misplaced account is permanently lost.


Most Women To Work After Age 65

A recent article in highlighted findings from the Transamerica Center for Retirement Studies that a majority of women (53%) plan to remain in the workforce after the age of 65, and 13% plan to never retire.  The reasons for remaining in the workforce are not surprising, and they include the need to supplement income, fear that Social Security won’t be there or will be diminished when they need it, and the lack of retirement savings.

According to TCRS, these fears are not unwarranted, and there perceptions of the issues may be more realistic than their male counterparts.  Regrettably, women earn only 80.5% of the salary that males earn. Furthermore, they are more likely to work part-time at some point during their careers and to also be out of the labor force for parenting or caregiving responsibilities. Only 12% of women are confident that they will be able to retire while maintaining a “comfortable lifestyle”.

Here are some other notable statistics from the study:

While 82% of men are saving for retirement, only 73% of women are. Both men and women started saving for retirement at the median age of 27.

While 75% of men are offered a retirement plan, only 66% of women are.

While 28% of women work part time, only 14% of men do so.

While 77% of women who are offered a retirement plan participate in it, 84% of men do.

Men contribute an average of 10% of their salary, while women contribute 7%. However, while 31% of men have taken an early withdrawal, loan, or hardship withdrawal from their retirement plan, only 27% of women have done so.

While fully two-thirds of men are saving for retirement outside of their workplace retirement plan, only 52% of women are doing the same.

Women say their total retirement savings median is $42,000, and men say it is $123,000. Thirty-eight percent of men say they have saved $250,000 or more, but only 20% of women can say the same.

In fact, 21% of women and 12% of men have less than $10,000 in retirement savings.

In celebration of International Women’s Day (3/8), let’s remember the women in our lives who have sacrificed so much during their careers and, as a result, have likely negatively impacted a financially sound retirement.

Problem? Maybe. But It Isn’t The Federal Debt!

There is an article in today’s WSJ reporting on a recent study by two Harvard economists claiming that the recent tax legislation will not pay for itself but in fact, will lead to a $1.2 trillion increase in the Federal debt during the next 10 years.

On March 5th, there was an article in the NY Post debating the “morality” of adding $1.5 trillion to the national debt, while neglecting to discuss the “$82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades”.  The author, Brian M. Riedl,  claims that “future historians — and taxpayers — are unlikely to forgive our casual indifference to what has been called “the most predictable economic crisis in history.”

We continue to be amazed at articles such as these that claim that the U.S. economy will collapse under this debt burden as if it were household debt. The U.S. benefits from having a Fiat currency. With this currency comes the ability to meet all of our future obligations.

Furthermore, anyone who has studied Modern Monetary Theory (MMT) appreciates the fact that the liabilities highlighted above (SS and Medicare) will produce income for the private sector if the government deficit spends. I was introduced to MMT by Charles DuBois, a former partner of mine at Invesco, who has spent years studying these economic concepts.

According to Mr. DuBois,  “the problem is not the federal debt, but whether all of this “income” will make the economy too strong – causing inflation”. Hopefully, we will create a robust economy that will continue to meet the enhanced demand for goods and services created by this significant stimulus. So as the title of this article suggests, the Federal Debt isn’t the issue, but the stimulus that results from it just might be.