Monthly Archives: April 2018

04.10.18
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Did you know?

As a follow-up to our blog post from this morning on expanding U.S. deficits being good for future growth, my former Invesco colleague, Charles DuBois, has shared the following:

There have been over 100 government defaults on public debt in the past couple of centuries.  However, for nations with their own free-floating currency and no foreign debt – there have been none. This fact is, of course, overlooked and not mentioned when you hear about the coming ‘fiscal crisis”.  As you know, since at least the 1930s, we have been told the crisis (in the U.S.) is “right around the corner”.   Ha ha.  Chicken Little is alive and well.
Thank you, Chuck, as always!
04.10.18
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Wider U.S. Deficits To Be Good For Growth

The WSJ is reporting today on a Congressional Budget Office (CBO) study indicating that this year’s budget deficit will be 43% greater than originally forecast.  Furthermore, future deficits beginning in 2020 will exceed $1 trillion per year.

According to the WSJ article, “economic growth will jump above 3% this year thanks to the fiscal stimulus, the CBO said, but the agency predicted the acceleration will prove largely fleeting. Larger deficits will add to the national debt: Debt held by the public will hit $28.7 trillion at the end of fiscal 2028, or 96.2% of the gross domestic product, up from 78% of GDP in 2018.”

“Such high and rising debt would have serious negative consequences for the budget and the nation; in particular, the likelihood of a fiscal crisis in the United States would increase,” CBO Director Keith Hall told reporters (as reported by the WSJ).

We disagree with Mr. Hall’s forecast that the benefit of the stimulus will be fleeting, believing that the additional fiscal boost will remain an economic catalyst well into the future provided that the additional demand for goods and services created from this deficit spend will be met by the economy’s ability to meet that demand.  If production can meet this heightened demand then we should witness above-average economic growth.  If not, then inflation will likely reappear in earnest.

One must remember that the Federal deficit is a liability of the U.S. government, but an asset of the private sector. Our economy (and citizens) has benefited tremendously from the Federal Government’s ability to deficit spend, especially during those periods when the private sector is incapable of stimulating growth.

 

 

04.06.18
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What’s The Issue?

There are many deniers within the U.S. retirement system that would have you believe that there isn’t a retirement crisis unfolding. The demise of the defined benefit plan has been most notable within the private sector, but multiemployer and public pension plans are certainly not immune to the problem, and the situation is likely to get worse before too long.

Let’s just take a look at the current environment within the multiemployer landscape:

  • 130 multiemployer plans projected to be insolvent over the next 20 years (there are roughly 1,300 plans)
  • 200 additional plans in PPA critical status (<65% funded)
  • 3.5 million plan participants with pension benefits at risk
  • PBGC financial exposure to multiemployer plans at $65 billion as of 2017
  • PBGC multiemployer insurance program projected to be insolvent in 2025
  • Even with a solvent PBGC their maximum guaranteed benefit still results in major benefit cuts to participants
  • Multiemployer Pension Reform Act of 2014 (MPRA) has failed to arrest the multiemployer funding crisis

This situation is deeply concerning, but not impossible to overcome if we act now. As we’ve discussed on many occasions within this blog, Federal legislation (The Butch Lewis Act) is being considered that would provide low-interest loans to “Critical and Declining” status plans that would help protect the promised pension benefits for the millions of plan participants. Our failure to act will create profoundly negative social and economic implications.  This legislation needs to be enacted.

04.05.18
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Omaha Public Schools POB Denied

The Nebraska Legislature on Wednesday rejected authorizing the Omaha Public Schools (OPS) to issue $300 million in bonds to shore up its poorly funded pension fund. The pension obligation bonds (POBs) would have sought to take advantage of the margin between interest rates and the return on asset assumption (ROA).

According to Henry J. Cordes, writer, Omaha World-Herald, “proponents said the bonds could spare cuts in the classroom while also saving district taxpayers millions.” But they could not overcome concerns that the “bonds could prove a risky investment, would limit the district’s financial flexibility, and would not have required voter approval.” The legislation fell three votes short of the 25 needed to advance, failing 22-17.

Without assistance from the POB, OPS must cut its schools budget by $18 million — roughly 3% — and divert those dollars into the underfunded pension fund. That figure is projected to escalate annually, reaching $27 million by 2022.

Some in the Legislature questioned the wisdom of borrowing money with the hopes of making more on the margin between interest rates and investment returns. “I don’t think borrowing money to make money is ever a good idea,” said Sen. Lou Ann Linehan of Omaha.

According to the article, the vast majority of the shortfall “developed over the past decade due to a combination of poor investment decisions, poor economic conditions, benefits for retirees that were more generous than those for other school employees in the state, and the district’s failure to make extra payments into the fund.”

At KCS, we are favorably inclined to use POBs to close funding gaps in DB plans, provided that the proceeds from the bonds are used to defease the plan’s retired lives. We, too, believe that injecting these assets into a traditional asset allocation is risky. There are too many examples of POBs that are now underwater further damaging the funded status of those plans.

Utilizing a defeasement strategy is the foundation of the Butch Lewis legislation that is currently before Congress. Managing a pension plan should be about providing the promise (benefit) at the lowest cost and not the highest return.  Injecting more risk into the process guarantees volatility in returns, but not funding success.

04.03.18
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The Bottom 50% Hit Hardest

The following chart was extracted from an article from ReLab’s Backgrounder, The New School’s Schwartz Center For Economic Policy Analysis.

CoverageAs one can clearly see, no near-retirement income group is in great shape when it comes to funding a retirement account, but the bottom 50% of older income earners are in terrible shape.

The move from defined benefit plans to defined contribution plans has crippled the lower income cohort. Why should we have expected any other outcome? Many of these near-retirees in the lower income category don’t have access to a retirement plan at all.  Furthermore, DC plans, as we and others have reported, are asking too much of untrained workers when it comes to funding, managing, and dispersing this retirement “benefit”.

REAL change is needed, and fast. Asking employees to work longer is not always in the cards, as employers frequently have a different objective. It is estimated by ReLab that 40% of the roughly 21.5 million older workers (ages 50-60) will be downwardly mobile upon retirement, with incomes <200% of the poverty level.  This is both shocking and shameful.

It doesn’t take a rocket scientist to understand the impact that this downward mobility will have on our consumer-driven economy.