Is U.S. Growth Sustainable

The recent release of second-quarter GDP growth (4.1%) revealed the strongest quarter in four years. But, is that growth sustainable? Given that U.S. growth is still dominated by personal consumption, how are our households doing? The following chart would suggest that total indebtedness is growing much faster than wage growth.

Source: FRBNY publication and Bill Mitchell’s blog

Total household debt is at $13.21 trillion, which is $561 billion greater than the previous peak established in 2008. Couple this with the fact that nearly 80% of U.S. workers are living paycheck to paycheck (Robert Reich), and you have a growth story that is tenuous, at best.

If you are a plan sponsor of a DB plan counting on outsized market returns based on the perception that the economy is working on all cylinders, you may want to rethink that strategy. Equity valuations are inflated, and it wouldn’t take much of a slowdown in economic growth to create negative headwinds.


Caveat Emptor

The following data (source: Satis Group) speaks volumes (thanks, Chris, for sharing it!). I am sharing it with you because I’m concerned that there are DB pension sponsors still considering cryptocurrencies as an “investment” in their pension plans. Please be very careful, as only just over 5% of the Cryptocurrencies are showing any promise at this time.


The SOA on Multiemployer Pension Funding

There is a new report out by the Society of Actuaries (SOA) that is putting into focus the massive funding challenge facing the multiemployer defined benefit plans designated as in “Critical and Declining” (C&D) status. These pension systems are funded at less than 65% and are likely to become insolvent within the next 20 years, but unfortunately, many are anticipated to have fewer than 10 years to insolvency.

According to the report, there are more than 1,200 multiemployer DB pension systems covering roughly 10 million active employees and 4 million retirees. Of the roughly 1,200 funds, more than 100 are designated as critical and declining, and the list continues to grow. These 100+ funds cover more than 1.4 million participants, with roughly 50% retired. Importantly, they receive benefits of more than $7.4 billion per annum. That is a lot of economic stimulus for the participants’ local economy.

Utilizing a mark-to-market discount rate (2.9%) produces an unfunded liability of nearly $108 billion. Why is outside assistance necessary, such as the Butch Lewis Act? Because the SOA forecasts that 68 of the C&D plans would still fail even if they were to generate a very unrealistic 10% / annum for the next 20 years! Regrettably, the PBGC’s multiemployer insurance fund would be overwhelmed with the failure of just a couple of these larger entities.

Given the fact that many of these plans are already nearing or are at the point of no return, Congress needs to act now! The Joint Select Committee cannot let the September 30th deadline come and go without the support of some government intervention.  We certainly prefer the loan program under the proposed Butch Lewis Act, as we feel that the provisions in the Act force good behavior on both management and union trustees and their asset consultants.

“Multiemployer pension plan insolvencies will obviously be harmful to the participants and beneficiaries of the plans in question, but the loss of the significant economic momentum provided by retirees spending their pension plan assets could also harm the wider economy.” This is not a union crisis, but potentially a national economic crisis. If these plans are allowed to fail, the fallout will be huge, and we are going to pay one way or the other.

Why Is Anyone Surprised?

Employee Benefit Advisers is out with an article titled, “Millennials Are Making A Costly Investment Mistake”. In a study conducted by, nearly 1 in 3 Millennials (18 to 37-year-olds) believe that “investing” in cash instruments is the best place to invest for the long-term (>10 years). This compares to 21% for older generations, which is only slightly better.

Greg McBride, Chief Financial Analyst at believes that the millennial generation was scared (scarred?) by their experiences through the Great Financial Crisis. The Millenial generation is in a tough financial situation, as wage growth has been muted, student loan debt is escalating, as are home prices, etc. Saving for retirement isn’t their number one priority.

Furthermore, we are putting too much faith in the ability of individuals to handle the funding, managing, and disbursing of a retirement fund. Why does anyone believe that the “average Joe” is capable of this responsibility.  We require our professional electricians, plumbers, carpenters, etc. to be trained and licensed. Most recent graduates will not have taken any investment class in either high school or college. Managing one’s retirement is not an innate behavior.


A number of public pension systems moved aggressively into hedge funds following the Great Financial Crisis. What they were hedging is anyone’s guess given that cheap beta could be obtained at a 50% discount. But, allocate they did.

We aren’t proponents of using the return on asset assumption (ROA) as the primary objective for a pension plan preferring that plan’s specific liabilities, but it certainly is a good objective for the asset-side of the equation. Ten years ago the “average” ROA for a public system was certainly in excess of 7.5% (today it is estimated at 7.25%). Have hedge funds kept pace?

According to HFRI’s Hedge Fund Composite, the universe of hedge fund managers has produced a 3.6% annualized return for the 7 years ending June 30, 2018. If you go back 10 years, that return is only 3.5%. If you go all the way back 20 years, which would include two significant bear market environments, this collection of funds has produced a 4% return. Fairly consistent, but certainly anemic.

If you think that maybe the HFRI data has some quirks associated with it, the Credit Suisse and Barclay hedge fund composites produced 7-year returns of 3.6% and 4.5% respectively, while 10-year returns came in at 3.2% and 4.3%, respectively. Still ugly!

One saving grace is the fact that these are net returns. Unfortunately, the only thing that has been “hedged” during this period of time is return, as much of the reallocated capital flowed from traditional equity exposures. Oh, and the S&P 500 for the 7- and 10-year periods produced 13.2% and 10.2% annualized returns.

It is time to stop focusing on the ROA as the plan’s objective.  Managing a pension system is about meeting the promise at the lowest cost and not the highest return. Trying to “guess” how markets will perform and correlate with one another is a fool’s game. This approach hasn’t worked and it won’t work going forward. Manage your plan against your liabilities, especially the retired lives, which are known and manageable!

S.805 – Just Say NO!

Senator Bernie Sanders has sponsored S.805, the Inclusive Prosperity Act of 2017. The intent of the bill is to ensure that Wall Street pays their “fair share” to support the U.S. Middle Class. Sanders’ Bill would “impose a tax on certain (nearly all!) trading transactions to invest in our families and communities, improve our infrastructure and our environment strengthen our financial security, expand opportunity and reduce market volatility.” Wow, that’s a lot in one piece of legislation.

Among the plethora of reasons cited for this legislation, Congress finds:

“The global financial crisis was caused by financial firms taking great financial risks without disclosing those risks to their investors or their regulators, and by regulatory failures to adequately police the financial services markets for crime, unfair or deceptive practices, fraud, lack of transparency, and mismanagement.”

Furthermore, “nurses, teachers, public safety officers, and other public sector workers have faced drastic funding cuts, harming our long-term public safety and prospects for economic growth.”

This last point is very interesting because the very people this bill is intended to help may, in fact, get hurt. How? According to Kirsten Wegner, CEO Modern Markets Initiative, whose study looked at the impact of this tax on pension plans estimates that the cost could be “startling”. Their analysis suggests that California and New York City funds would pay $1 billion and $500 million, respectively, in additional annual fees. The analysis further estimates that a hypothetical $2 billion pension fund would incur additional transaction costs of roughly $4 million per year. It is highly unlikely that Wall Street would absorb these fees, but would rather pass them on through higher commission rates.

In an environment of already challenging funded ratios and contribution expense, the last thing that our public pension systems need is another tax that could dramatically impact their solvency. As laudable as it might be to want to provide access to college for all, student loan relief, enhanced access to medical care, etc, the unintended consequences from this bill may far outweigh any benefit.