According to a WSJ article, today’s Seniors have loaded up on debt compared to their parents in 1989.  The debt burden represents about 80.5% of their annual income compared to just 16% four decades ago. This growth has been spawned by rapidly rising costs associated with healthcare and education (college). Incredibly, those over 60 years of age have added more student loan debt (nearly $34,000) than those under 30 ($25,000)!! Furthermore, we now have 50% of households headed by someone 75-years-old or older with debt compared to just 32% in 1992.

The great financial crisis upended the normal life cycle for Americans, and it hasn’t gotten better since.

As we close in on the Christmas season, I would like to take a few moments to wish you and your family (from my family) a wonderful Holiday season, a joyous Christmas, and an exceptional 2019 filled with abundant health and happiness. I hope that next year proves to be your best year, yet.

We are expecting our fourth grandchild in March, and are incredibly excited to welcome her into our family.

Thank you for all that you’ve done this year to support me in 2018.  I look forward to continuing to share ideas as they relate to the retirement industry, and strategies that we feel are necessary to preserve and protect defined benefit plans, expand coverage for those without access to an employer-sponsored plan, and help those with limited financial resources to still be able to work toward the dream of one day retiring with dignity.

I have from time to time mentioned Modern Monetary Theory (MMT), Bill Mitchell, and Warren Mosler in various KCS blog posts.  I was first introduced to this subject by my former colleague from INVESCO, Charles DuBois, who headed our quantitative research effort. I’ve come to truly appreciate this school of economic thought, and believe that everyone should get a better understanding of its principles.

Bill Mitchell produces an incredible blog (http://bilbo.economicoutlook.net/blog/) nearly everyday.  However, if you are going to read just one entry, I’d like to recommend that you choose the one from December 13, 2018, as it is a must read.  Why? Mitchell and Mosler recently got together to “document what we (they) considered to be the essence of MMT – as a sort of checklist for people who want a fairly precise account of the body of work.” They do just that, and more. Enjoy!

Since 2008, the universe of corporate debt rated BBB has skyrocketed from $650 billion to more than $2.5 trillion, representing nearly half of all investment-grade bonds. This >250% increase in the size of the universe has unfortunately coincided with an easing of the covenants designed to protect investors.  Despite the significant increase in the issuance of BBB debt, 70% of all issuance this year is rated BBB, rating agencies have become more accommodative. According to the folks at IR&M, more than 30% of the recent issuance has debt/EBITDA in excess 4x, which would ordinarily qualify them more as BB than BBB. Thank you to Income Research & Management for the chart below.

With the U.S. economy showing signs of weakening, we believe that it is time to become much more cautious in allocating to this part of the fixed income universe. Since the BBB universe is roughly 4Xs that of the BB universe, downgrades to BBB could dramatically impact the existing BB space.

Given how important security selection is at this time, we would highly recommend an active approach to the lower quality regions of the investment grade universe, as passive approaches will not be able to escape potential deteriorating situations.

For much of the time that we’ve been producing our blog (since 2013), we have questioned the state of employment in the U.S.  With more than 94 million age-eligible workers on the sidelines and a Labor Participation Rate of only 62.8% (down from >66% before the Great Financial Crisis), we felt that the headline unemployment number of 3.7% was misleading. Well, maybe the article today in the Wall Street Journal will finally raise some awareness to the plight of older American workers (those at 55 or older) and the long-term implications from job loss and the failure to find suitable employment opportunities.

The Journal is reporting that nearly 8 million Americans 55-years old or older are falling further and further behind in their ability to prepare for a dignified retirement.  Despite the impression that the U.S. economy is humming along with an unemployment rate of 3.7%, there are many older Americans who have not been able to get back on their feet following the Great Financial Crisis, which ended more than 10 years ago.

Roughly 5.8 million Americans over 55 are in full-time jobs that do not provide healthcare benefits. That additional financial burden was once covered in large part by Corporate America. Incredibly, the 5.8 million represents nearly 25% of the entire full-time workforce of those 55-years-old and older. Furthermore, there are more than 750,000 stuck in part-time positions for economic reasons and another 1.3 million workers who are currently unemployed or too discouraged to continue to seek employment opportunities.

Obviously, these statistics are masked by the standard unemployment calculations. Not surprisingly, it is taking older workers more than three months longer to find employment than younger workers.  Worse, wages received by older workers in new positions are 27% less while those under 30-years-old see wages grow by 7% on average when finding new employment opportunities.

Any period of unemployment can take its toll on one’s retirement savings or plans, as meager 401(k) balances are often used as an unemployment bridge to fund one’s mortgage, healthcare, and other essential living expenses. Furthermore, the demise of traditional DB plans are just compounding the issue.  According to the Center for Retirement Research at Boston College, 33% of 55- to 64-year olds were covered by a DB plan in 1992.  Today, only about 17% of this cohort are in DB plans.  I don’t know the status of those plans, but it wouldn’t shock me to find out that many of those have been frozen to new accruals.

The last thing that these 55 and older Americans want is to be a burden of any kind, but especially to their children. This is one of the primary reasons that we continue to believe that having access to a traditional DB plan is an essential part of the contract between the employee and employer. Companies once used these plans as a management tool to handle that natural aging of their labor force. Today, most American workers are on their own, and I don’t think that strategy is working.

Despite the recent 3-year fall in longevity for Americans, there are more 65+ year-olds than ever before, and it is expected that the population over 65 will be greater than those under 18 by 2035 (78.0 million versus 76.7 million), which will mark the first time in the history of the United States that this phenomenon has occurred.

As most of us have come to appreciate, predicting longevity and planning a financial future to meet those needs is not an easy math problem for most. According to the chart below (thanks Kim Blanton, Squared Away Blog), those greater than 85-years-old are most vulnerable financially with more than 12% falling into poverty.  However, as Kim points out in her recent blog post, the level to define poverty is so low ($11,757 for a single person) that many others are likely struggling, too.

As a result of the rise in poverty later in one’s life, some are calling for enhanced Social Security payments to be made once a recipient turns 85. The idea is to provide a flat $ increase, as opposed to a percentage increase, that would help the most vulnerable among us.

One of the reasons cited for the need to provide an enhanced payment is the growing medical expenditures later in one’s life, and the inability to work at that age to overcome the increased expenditure. Unfortunately, this situation falls on women to a greater extent as they have longer life spans and lower career wages impacting Social Security payouts.

One suggestion on how to pay for this enhanced benefit was to provide a lower COLA to those earlier in their retirement years, but the COLA doesn’t truly measure the inflation incurred by Seniors, so reducing this annual increase would negatively hurt many older Americans.

Perhaps there is a way to utilize a form of longevity insurance to provide this enhanced benefit for those Americans reaching 85-years-old.  For those Americans capable of deferring Social Security benefits until age-70, a portion of what they would have received might go to a longevity insurance contract that will provide an income stream later in life.

It is truly a double-edged sword for many. On one hand, so many are fortunate to be living longer lives, but the golden years are tarnished for those struggling to meet basic needs because of the lack of financial resources. Glad to see that this situation is getting the attention that it deserves.

I’ve just returned from the latest CORPaTH Crystal Globe Awards & Banquet. Kudos to Ron Auer, Jacques Loveall, and everyone else associated with this tremendous organization. For those of you who may not know about CORPaTH, their mission is to protect, promote, and perpetuate defined benefit pensions. As followers of KCS know, CORPaTH’s mission is very much like ours, as KCS was established to help retirement plan sponsors address the challenges impacting their plans and ultimately, their participants with the goal to protect and preserve defined benefit plans as the primary retirement vehicle.

It is incredibly important to understand that promoting, protecting, and preserving/perpetuating defined benefit plans doesn’t mean holding onto the status quo without regard. There is tremendous inertia in our industry, but there are many individuals and organizations that continue to challenge the status quo in an attempt to help sustain these critically important plans.  The CORPaTH conference presented an agenda filled with folks willing to share new ideas to help in this effort. We will report on some of those in coming blog posts.

The challenges to preserving these plans are many, but if pension plans are to be maintained, we must all work together to identify strategies that will help insure that the promised benefits are paid and at costs that are controllable for the sponsors. Lastly, the solution can’t be a defined contribution plan for the masses, as history (40 years now) has shown that these offerings truly only benefit higher income participants, who can afford to contribute a meaningful sum that will insure a dignified retirement.

DB pension plan funded ratios have been hurt through the last 15+ years by declining interest rates inflating the present value of plan liabilities (FASB and not GASB accounting).  With stronger economic growth exhibited earlier this year and a Federal Reserve that began tightening, the hope was that long-term rates would begin to back up fairly consistently providing some relief on the liability side of the pension equation.

But, alas, economic growth seems to have moderated, and despite the Fed’s action regarding short-term rates, long-term Treasury yields (10-years) have actually fallen about 35 bps in the last month or so (2.9% as of this morning). We got another indication that rates might not be rising as rapidly as economists had forecast, as the CPI for November was flat. When removing food and energy from the calculation, the CPI was up 0.2% on the month and 2.2% YoY, but has stayed within an annual range of 2.1% to 2.3% during the last 12-months.

Couple the declining interest rates with falling asset values, and you have an environment that is applying further pressure to the defined benefit universe’s funded status. With regard to asset values, diversification has been an impediment in 2018, as most equities outside of large-cap U.S. equities are significantly underperforming.

Most plans can’t afford a significant hit to their funded status as contribution costs have consistently escalated during the last decade-plus and many state and municipal budgets are already stretched. The volatility associated with contribution costs is one of the primary reasons that corporate America has exited this arena.

Data: Factset; Chart: Lazaro Gamio/Axios

I’m sharing this chart with you as a follow-up to our post last week. This picture tells a much better story then I can!

MarketWatch is reporting on a Federal Reserve data release related to consumer credit growth, which climbed by 7.7% (seasonally adjusted annual rate) in October 2018. The growth in consumer credit was mostly fueled by credit-card usage which advanced at the fastest clip in 11 months.  Furthermore, it is only the third time ever in which revolving credit eclipsed $1 trillion. Student and auto loans (non-revolving credit) grew at a 6.7% rate in the month, which was in line (6.6%) with the previous period.

The MarketWatch article is stated that although “credit-card usage can be perilous, economists generally welcome a rise, as it suggests a desire to spend.” Yes, consumer confidence has remained near decade highs amid a stronger job market, but “sentiment” is a concurrent indicator. Credit-card debt is only about 26% of all consumer debt, having been as much as 38% in 2008.  However, we have seen a tremendous increase in both auto and student loan debt, so the 26% isn’t likely the result of leaner personal income statements, but because total debt has grown to greater than $13 trillion (including mortgages).

I don’t know about you, but I am concerned about the growth in mortgage debt, auto and student loans, and credit-card debt, which continue to grow fairly rapidly. At what point does this stop being an engine to economic growth and instead of a major impediment to future economic activity?

All of this debt being accumulated by the “average” American worker has to be impacting their ability to set-aside funds for their retirement through a either a company-sponsored defined contribution plan or a personal IRA.