Household Debt at Record 12.7 Trillion!

Due to a significant surge in non-housing related debt (student loans, credit cards, auto loans, and other), households in the U.S. have amassed a record debt level now topping $12.7 trillion.  Since the great financial crisis it has been student and auto loans that have fueled this growth. Yet, few seem to worry about the long-term implications from this debt hangover, one that a nap and a few asprin won’t cure!

We have seen GDP growth in the last 15 months (1.6% for 2016 and 1.2% for Q1’17) fall below the average growth rate during what has been an anemic recovery since the GFC.  Given that we are a consumer lead economy, it is likely that the debt burden is beginning to impact consumption.Expectations for a robust second quarter seem to be fading, as one weak report after another is released.  US employment would suggest that our economy is performing on all cylinders, but more than 600,000 workers left the labor force last month. We could see a dramatic reduction in the unemployment rate if that pace were to continue.

Expectations for a robust second quarter seem to be fading, as one weak report after another is released.  US employment would suggest that our economy is performing on all cylinders, but more than 600,000 workers left the labor force last month. We could see a dramatic reduction in the unemployment rate if that pace were to continue.

However, my greatest concern is the impact that this debt has on one’s ability to fund a defined contribution plan. Given that real wage growth has been stagnant since roughly 1999, while the cost of medical, housing and education have ratched up significantly, there is little discretionary income available to the “average” worker to feed a retirement account. The failure to do so early (and often) will ahve long-term implications for the account balances that can be amassed.

We’ve frequently written about the impact that the demise of DB plans will have on our labor force. The social and economic implications of our failure to provide an adequate retirement will be grave.  The failure to create higher quality jobs with competitive wages is beginning to take its toll.

A Solution? We Think So!

For nearly six years, KCS has been banging the drum regarding a retirement crisis unfolding in the U.S., and the primary reason is the demise of the defined benefit plan. We have been railing against traditional asset consultants and actuaries given their unwavering focus on the return on asset assumption (ROA), as if it were the “Holy Grail”.

Our drumming has regrettably fallen on deaf ears! As a result, DB plans in both the public and private sector continue to be frozen and/or terminated. It is currently estimated that only about 14% of the private sector is covered by a DB plan, and many of those participants are in frozen plans. Coverage was once closer to 50% according to the DOL, while at the same time multi-employer plans are seeking relief by reducing benefits to current and future retirees. We find this practice particularly shameful.

KCS has been trying to get plan sponsors to focus more attention on the promise that they’ve made to their participants through the adoption of Ryan ALM’s Custom Liability Index, which would provide greater transparency on a much more frequent basis than the once per year actuarial report. As a reminder, the only reason that these DB plans exist is to meet the promise that was originally made.

Finally, it appears that real change may be coming. I am happy to report that critically important legislation has been drafted, which is currently being presented to members of Congress that might just “save” the pensions for multi-employer participants, without the need to dramatically slash pension benefits. Ryan ALM and KCS (thanks, Ron, for getting us involved) are working together with others to help save these plans. I am not currently at liberty to share more details but will be happy to do so as progress is made in Washington.

It is one thing to bang the drum (many others believe that a crisis is unfolding), but it is an entirely different kettle of fish to actually get involved in creating a unique solution. Both Ron and I are confident that the Ryan ALM implementation is the way forward for Pension America. We need DB pensions in this country because the social and economic consequences of our failure to preserve them will be devastating. However, following the same 50-year-old strategy has proven a devastating failure! Change is needed now!

KCS June 2017 Fireside Chat

We are pleased to provide you with the latest edition of the KCS Fireside Chat series.  In this article, KCS’s DC Practice Leader, Dave Murray, discusses several DC related events, with particular focus on the DOL’s Fiduciary Rule likely to take effect on June 9th.

As always, we encourage you to reach out to us with any questions that you might have related to this article.  Furthermore, we stand ready to assist you with any of your investment-related needs.


Understanding the “Entitlement Crisis” – The Problem – The Solution

We are always so pleased to be able to share with you articles from Charles DuBois, an incredibly talented and tremendously experienced research analyst and fund manager, with whom I had the distinct pleasure to work with and learn from during my tenure at Invesco.  I’m very pleased to say that I continue to learn so much from him on a regular basis.  Chuck’s focus today is on the “entitlement crisis”.

We hear and read, it seems on a daily basis, about the dangers of the Federal public debt.  We are reminded about the looming fiscal crisis.   We are told we are broke, that we are “leaving a burden to our grandchildren” and that we could even become the next Greece.  These views are widely believed not only because of their constant repetition but also because they appear to reflect straightforward accounting as well as our common sense. 

The primary culprit for these concerns is the projected growth of “entitlement spending” as, according to projections, such spending will be consuming an ever increasing share of federal outlays.  With the baby boomers now retiring, this “threat” is now upon us and the situation is usually described as “unsustainable”. Should we worry?

Please click on this link for the balance of Chuck’s excellent article.

Cut Spending by $3.6 Trillion??

“The White House is seeking to slash federal spending by $3.6 trillion over the next decade through steep cuts across most agencies and tough new restrictions on aid to the poor — a dramatic rethinking of the role of government in the American economy”, wrote Ylan Mui, CNBC Corespondent.

The goal of the White House’s 2018 budget is to slash the deficit, but what are the ramifications to the U.S. economy should these budget cuts become reality?

If you are a disciple of MMT (Modern Monetary Theory) you scoff at the suggestion that a draconian reduction in government spending will be a springboard for economic activity.  Charles DuBois, a former colleague of mine while at Invesco, would tell you that “a reduction in the deficit will dramatically reduce private sector income”. Unfortunately, most people think that a reduction in private sector spending “frees up” private sector resources, but, according to Chuck, ” they don’t explain how that exactly works. Worse, no one asks!”

Michael Norman wrote in MMT Trader Update, that the proposed budget is “ridiculous if this is true”. He further explained, “that’s 2% subtracted from GDP each year for 10 years COMPOUNDED!! Do the math…that could be like a 40% contraction in the economy.”

We already have an economy working on only half its cylinders.  How would dramatically reducing government spending, especially in light of the fact that the private sector isn’t reinvesting in new plants, equipment, and/or inventory, be an economic catalyst?

Another recession/depression would crush the stock market, and potentially be the final nail in the coffin of defined benefit plans that cannot afford a significant hit to the asset side of their asset/liability equation.

Americans Doing Better? The Sequel!

As a follow up to our recent blog post on the current financial state of the American worker, we want to share the following information that was provided by Keith Jurow, a wonderful real estate analyst whose insights we’ve shared before.  According to Keith and the NY State Department of Financial Services, the number of pre-foreclosure notices (since 2010) sent out by mortgage servicers to residents in NYC and Long Island has exceeded the one million mark and greater than 2 million state-wide. UGH!

This, of course, is occurring in an NYC real estate market that is ridiculously priced. According to The Elliman Report: Manhattan Sales, the number of resales in Manhattan rose 7.7 percent from last year to 2,429, while the median sales price of resale apartments remained unchanged at $950,000.

In addition, the median sales price for luxury listings—listings priced over $4 million—hit a record of $6,975,006 and median sales prices on new development increased 4.9 percent to $2,734,510.

Lastly, “for all renters who feel left out, Apartment List happened to release its monthly rent report. No big surprises there, as NYC remains one of the most expensive cities for renters in the country, with a two-bedroom boasting a median rent of $4,100 and one bedrooms costing $3,200. Chelsea was the most expensive neighborhood for renters over the past month, with a two-bedroom costing $6,500 and a one-bedroom at $4,400. The West Village experienced the fastest-growing rents, at a 3.1 percent increase over last year. There, the median rent for a one-bedroom was $3,800.”

Since most of us aren’t following the real estate market to the extent that Keith is we are likely shocked to read about the massive pre-foreclosure data, especially since all we hear about is the current state of the “exciting” NYC real estate markets. Although it often appears that we are trying to touch the heavens with the height of our buildings, I can assure you that prices cannot continue to skyrocket for too long, while outpacing wage growth!  We’ve seen this story before, and the ending was pretty gruesome!

Americans Doing Better Says The U.S. Federal Reserve – Really?

Do you agree that you are “doing better” financially? In a WSJ article, titled “Americans Doing Better Financially, Except For Non-college Educated”, 70% of 6,643 respondents indicated that they were “living comfortably” or “doing okay”. Really?

How is it possible that 70% are okay or better when 44% of the survey participants responded that they couldn’t meet a $400 emergency medical or car expense without borrowing or selling something.  They clearly aren’t doing okay!

Furthermore, according to the article, the median out-of-pocket medical expense is about $1,000, and 24 million Americans currently have a medical debt as a result of an expense in the last year alone.  By how much would the 44% grow if they were asked about the $1,000 expense, as opposed to the $400, which seems somewhat arbitrary.

In addition, roughly 28% said that they hadn’t saved anything for retirement. In many cases, these are current workers that have no access to a pension plan. We also know that the median defined contribution balance is <$10,000.

Can we please have surveys conducted and results presented that actually ask appropriate questions related to the current economic status of the American worker? Someone living paycheck to paycheck is not okay economically.  Americans that have no pension or retirement savings are not okay, especially if they are age 40 or older.

The social and economic consequences of our collective failure to provide quality jobs, living wages, and adequate retirement benefits will be devastating. I often repeat myself, but I will not apologize.  We have a crisis unfolding in our country, and neither kicking the can down the road nor burying our heads in the sand is an appropriate response at this time.