Researchers Ann Case and Angus Deaton have discovered that death rates have been rising dramatically since 1999 among middle-aged white Americans, and the economists believe that they have a better understanding of what’s causing these “deaths of despair” by suicide, drugs and alcohol.

They attribute the premature demise of 45-55-year-old, non-college educated white people to shrinking opportunities in the U.S. labor force, which leads to despair, broken marriages, and ultimately, substance abuse.  With the rapid advancements in technology likely replacing many more jobs, this tragic situation will likely become worse.

Couple this development with the loss of traditional DB plans that provided financial security, and you can imagine the profoundly negative social and economic ramifications that will follow. For those of us, and today it is most of us, in a defined contribution plan, the build up of assets in our accounts tends to occur later in life when many of those expenses related to having children or paying for our educations are no longer impacting our incomes.

Job losses for those in their late 40s and 50s can be devastating, as individuals often have to tap into their “retirement” account to help bridge the employment gap. If you are fortunate to find employment, this strategy may be temporary and not devastating, but for a significant percentage of those that find themselves out of work, this can be a financial death knell.

As a nation, we must once again find a way to offer pensions that provide a monthly annuity and survivor benefits, while taking out of the equation the investment management responsibility by those least capable of performing this task. In addition, we need to provide job retraining for those workers who have been displaced.

My son, Ryan, has suggested that there should be a late-in-life Americorps-type program where displaced workers take classes for a year.  He suggested that these workers should be retrained in those sectors likely to benefit from technology’s advances. Importantly, if you have the good fortune to spend two years working for a public entity, your program costs are forgiven.  I like the idea.

We cannot afford to write these people off.  As a country generating weak growth already (GDP at 1.6% for 2016), forcing millions of potential workers to the sidelines won’t do anything to jumpstart demand for goods and services. Getting people re-trained, working, producing goods and services, and earning wages for their effort is far more ideal than having our social safety net stretched beyond our wildest imaginations.

Jacksonville (Fla.) Police and Fire Pension Fund might close to new hires later this year following approval from the city’s police and fire unions of a proposal from Mayor Lenny Curry’s office.

This development should be a wake-up call to all the public DB pension systems that think that their plans are perpetual. Poor funded status and escalating contribution expense will get the attention of the taxpayer.  DB plans must be preserved, but they need a new focus and direction (see the KCS website and blog for our many thoughts on this subject). Clearly, the all-out pursuit of the return on asset assumption (ROA) has failed, as many pension plans continue to struggle despite 8+ years of a bull market in equities and nearly 35 years in bonds!

The move by Jacksonville to push new employees into a defined contribution plan might ultimately reduce the City’s liability, but it isn’t in the best interest of their future hires.  Although the proposed employer contribution of 25% is quite generous, DC plans still must be managed by the individual employee, who in most cases doesn’t have the financial literacy to execute a successful program.

Furthermore, with a vesting schedule that allows full vesting after just 3 years, Jacksonville should expect far greater turnover in its ranks.  We appreciate that there is a financial burden to fund these systems, but closing them isn’t the answer.  We believe that there are strategies that can be deployed that will help stabilize both the funded status and the contribution expense while beginning to de-risk the plan so that it remains a viable option.

A retirement system solely dependent on a defined contribution plan is no retirement system!  DC plans are glorified savings accounts.

Regular readers of the KCS blog will know that we have occasionally shared real estate updates provided to us by our friend, Keith Jurow.  Here is a brief note that he recently shared with us.

“Yesterday, Fannie Mae announced the winning bidders in its ninth non-performing residential loan sale. The fourth group was composed of 2,427 loans with an average loan size of $211k. It also had an average unpaid principal balance of $511k.

Wait a minute. How is that possible? Let me explain. It confirms what I said in my latest article:
https://www.advisorperspectives.com/articles/2017/02/20/cash-out-refinancing-during-bubble-years-will-lead-to-disaster

These are bubble-era loans which were modified and then re-defaulted. The interest arrears were tacked on to the unpaid principal (called capitalization) and apparently averaged about $300,000. These loans are so far underwater that I wonder how the new loan owners will ever see a nickel when they are liquidated.”

We suggest that you pay heed to Keith’s concerns.

The WSJ is reporting on an annual study conducted by the Employee Benefit Research Institute (EBRI) that claims that 60% of workers are very confident or somewhat confident in their ability to retire.  This figure is down 4% from last year, and 10% since 2007, but up slightly from 2012.

The report also goes on to say that current retirees are more confident (79%) than workers in their ability to retire.  That leaves 21% of current retirees who must be struggling in their retirement.  It makes sense to us that current retirees are more confident than future retirees, especially when one considers that roughly 50% of the private sector once participated in a DB plan, while private sector participation is only about 14% today.

Furthermore, the study of 1,671 participants indicated that 47% of households reported having less than $25,000 in savings and investment, when not including one’s home.  How is it that 60% feel confident in their ability to retire when 47% have less than $25,000, and nearly 50% of those had less than $1,000 saved?

We’ve frequently expressed our concerns about the impending retirement crisis in the U.S.  The social and economic ramifications will be grave, and there is nothing in this recent study that diminishes our concerns!

The WSJ today published an article, titled “Your Pension Check May Soon Be Coming From An Insurance Company”.  The article highlights the growing trend in the off-loading of pension liabilities to insurance companies.  These pension-risk transfer efforts have been going on for some time, with Prudential Insurance Company being a leader in this space.

As the article highlights, private pension funds are happy to off-load these liabilities, as the volatility associated with funding plans can play havoc with income statements through annual contribution expense.  However, the transfer of the liability is no free lunch, and the cost to transact often results in a sizeable premium being paid by the company.

According to Ron Ryan, risk is best defined as the “uncertainty” of meeting the client’s objective.  For a plan sponsor, the pension plan’s objective should be to fund liabilities in a cost effective manner such that contribution costs remain low and stable. Since the pension objective is a cost objective, then solving for cost while matching the liability payment schedule would be the ideal way to de-risk a pension plan.

KCS, through its affiliation with Ryan ALM, can assist you in de-risking your pension plan without having to transfer assets and cash to an insurance company at a significant premium to the present value of that liability (usually retired lives).  By retaining the assets and establishing a cash-matching strategy, we believe that a 30% savings can be achieved versus standard de-risking approaches.

Please don’t hesitate to reach out to us to learn more about the Ryan ALM / KCS pension de-risking strategy.

In May 2013, KCS produced a Fireside Chat on the state of U.S. fixed income.  We are re-publishing it today, as it is still very much relevant, especially our thoughts regarding the primary sources of inflation.

We were very much correct in 2013 when we argued that U.S. rates would continue to decline, and we still believe today that the U.S. economy’s modest growth profile and global geopolitical risk will temper U.S. interest rate increases.

We look forward to hearing from you, especially U.S. public fund and multi-employer pension sponsors, who have positioned their portfolios for significant rate rises. Asset allocation should be driven by the funded status of a DB plan, and not the return on asset assumption. But, that is not the common practice among asset consultants.  We are here to change that antiquated thinking.

In an article that appeared on Wednesday, March 1st in the NY Daily News, writer Ginger Adams Otis presented a frightening update on the current landscape for the Pension Benefit Guaranty Corporation (PBGC).  According to Otis, the PBGC’s “limited liquidity is part of the spiraling U.S. pension crisis that threatens to wipe out the retirement savings of more than a million Americans”.

The PBGC addressed its funding issues, as it announced that it is now officially making pension payouts for Teamsters Local 707, which joins a growing list of 70 bankrupt union pension plans and a host of private companies.

With only $2 billion in assets, the PBGC is expected to run out of funds in the next 8-10 years. The company makes its money through premiums charged to unionized multi-employer pension funds.  Premiums have grown substantially during the last several decades.

DB pension payouts provide significant economic stimulus to the local economies of the recipient. Without these monthly checks, participants will have to rely solely on Social Security payouts that barely keep an individual above the poverty line.

Infrastructure “investment” seems to be on everyone’s radar screen, and for good reason, but protecting the benefits from multi-employer plans should be a priority, too.  There is no way that premium increases can support the financial needs of the PBGC in coming years. We should further deficit spend to sure up the finances of this important organization before millions of Americans lose benefits that they worked very hard to earn.

KCS is happy to share with you the latest edition of the Fireside Chat series. This article, written by Dave Murray, speaks to issues related to the defined contribution world. As you will read, plan sponsor liability was a big reason why traditional DB plans have been frozen and/or terminated, but the liability associated with DC plans, although different, may be equally challenging, as it comes in many forms.

Please don’t hesitate to reach out to us with any comments or questions.

Finally, we would like to point out that the KCS team continues to grow. We have recently added more senior talent. We now have 8 senior members of the KCS team with a combined 285 years of investment/pension experience. This amounts to an average of 36 years per consultant. The consultants’ experience ranges from a minimum of 28 years to as many as 48 years (congrats, Mr. Zielinski). Unlike your car, we get better with each year of experience. Why not test-drive us today!

Members of both political parties are deeply worried about the unfolding U.S. retirement crisis, according to a new study by the NIRS. Key findings include:

Across Party Lines, Americans Support State Efforts to Enable Savings for Workers Lacking Retirement Plans

Americans’ retirement prospects: Work Longer, Spend Less

77 Percent agree that the disappearance of traditional DB Pensions killing the American Dream

71 Percent Say DB Pensions better than 401(k)s for delivering retirement security

WASHINGTON, D.C., February 28, 2017 – America faces a deep political divide, but not when it comes to economic security in retirement. A new report finds that 76 percent of Americans are concerned about their ability to achieve a secure retirement, with that level of worry at 78 percent for Democrats and 76 percent for Republicans. Some 88 percent of Americans agree that the nation faces a retirement crisis, and the concern is high across party lines.

These findings are contained in a new study, Retirement Security 2017: America’s View of the Retirement Crisis and Solutions.  The research is published by the National Institute on Retirement (NIRS) and is based on a poll of 800 Americans conducted by Greenwald & Associates. The findings will be reviewed today at the NIRS annual retirement policy conference in Washington, D.C. The full report can be found on the NIRS website.

We are pleased to share with you another excellent article/analysis by our friend Keith Jurow. This article discusses the potentially negative ramifications from “cash-out refis”. Here you go:

Nearly all analysts who write about the housing bubble have focused on the purchasing madness that occurred. While this is important, it overlooks the refinancing insanity of 2004-2007. This refinancing lunacy will devastate mortgage and housing markets for years to come.

You may wonder why I choose to focus on bubble era refinancing. After all, refinancing happens all the time.

Here is why: California was the nation’s epicenter for the refinancing madness. During the bubble years, roughly five times as many refinanced first liens were originated there as were purchase loans.

Millions of homeowners refinanced once, twice, even three times or more while their homes soared in value. These became known as “cash-out refis,” where the borrower refinanced for a larger amount than the previous loan. A California home that may have been purchased for $200,000 in 1997 could easily have had a $600,000 refinanced loan in 2006. When home prices began to tumble, they found themselves trapped in a badly underwater property.

There were roughly 20 million homeowners who refinanced during the bubble years.