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Coming to a Pension Fund Near You?

On July 12, 2011, in Debt, Our Culture, by Tim

The current woes and future course of public finances in Central Falls, Rhode Island could be a sign of things to come in other parts of the U.S., that is, unless the overly optimistic assumptions about pension fund returns actually come to pass (another argument for why higher rates of inflation and a commensurate surge in asset prices could be seen as a blessing in disguise for policy makers). Details are in this New York Times story today.

A Small City’s Depleted Pension Fund Rattles Rhode Island

The small city of Central Falls, R.I., appears headed for a rare municipal bankruptcy filing, and state officials are rushing to keep its woes from overwhelming the struggling state.

The impoverished city, operating under a receiver for a year, has promised $80 million worth of retirement benefits to 214 police officers and firefighters, far more than it can afford. Those workers’ pension fund will probably run out of money in October, giving Central Falls the distinction of becoming the second municipality in the United States to exhaust its pension fund, after Prichard, Ala.
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The last American state to default on its bonds, Arkansas in 1933, got in over its head by trying to help struggling municipalities.More recently, when local governments have veered toward bankruptcy — Orange County, Calif., in 1994; Cleveland in 1978 — neighboring municipalities have found it harder to sell their own debt. During the New York City fiscal crisis of 1975, New Jersey suddenly found its bonds harder to sell.

“That type of contagion is what you’re trying to avoid,” said James E. Spiotto, a bankruptcy specialist at the law firm Chapman & Cutler, who is not involved in Rhode Island’s problems.

The word “contagion” is one that we might be hearing a lot more of here in the U.S…

There are lots of details in this report and it seems that all municipalities and states are going to face their own unique set of financing troubles. But, more likely than not, areas like Central Falls, where public sector workers are promised generous disability pensions and early retirement during which they get free health care will be the first to have problems.

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No Wonder Teachers are Striking in the U.K.

On June 30, 2011, in Europe, Our Culture, by Tim

I don’t know what the figures are for school teachers in the U.S. (though, I’d bet that they’re not too much different in many states), but recently calculated equivalent “pension pots” for public sector employees in the U.K. show just how big a gap there is in the retirement prospects between the public and private sector. This Telegraph story provides all the stunning details that, for private sector workers, might be difficult to read.

Unions representing the 750,000 employees involved in the strike say their members are being unfairly treated. But Treasury figures released today expose how public sector retirement funds dwarf their private sector counterparts.

The calculations show that a mid-ranking teacher on £32,000 a year will receive a final salary pension that is the equivalent of having built up a £500,000 pension pot.

This is 20 times higher than the average private sector scheme, according to figures from the Office for National Statistics. Private sector workers would have to save more than 20 per cent of their salaries for 40 years – more than £500 a month for a similarly paid person — to amass the same amount in a defined contribution pension.

A well-paid London headmaster will retire with a pension scheme worth £1.5  million, the Treasury figures show. A chief constable retiring at the standard age of 55 would have a scheme worth more than £3 million.

My guess is that California’s public retirement system (that now includes 9,111 members in the not-so-exclusive $100K Club) would put the British pensioners to shame.

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Income Lags for Late Baby Boomers

On June 9, 2011, in Economy, by Tim

Bloomberg’s Chart of the Day offers more evidence that life in America is not getting any better as the empire ages, declining real income for each successive generation making their financial futures increasingly difficult, one that surely gets much, much worse for the post-Baby Boomers that are not shown in the graphic below.

While the differences above are not large, they are significant and dubious changes to how inflation has been calculated over the years make the advantage of the pre-baby boom generation larger than it appears.  Small consolation for the younger baby boomers comes in the knowledge that many of the older baby boomers have failed to save as much as they should, making their retirement prospects little better than their own.

Bottom line – a declining standard of living is something the nation should get used to.

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80 Percent Expect to Work in Retirement

On June 3, 2011, in Economy, Our Culture, by Tim

Speaking from experience, there is absolutely nothing wrong with working part-time during retirement at something you rather enjoy doing. In fact, if I didn’t have this little ‘ol blog and the companion investment newsletter Iacono Research (that, incidentally, is doing quite well so far this year), I think I’d get terribly bored from time to time. I mean, there’s only so much travel, yard work, home improvement, and outdoor sports activities that you can do before it begins to get old and virtually none of this can be done at 5 AM every morning.

Anyway, it seems that a growing number of Americans are resigned to working during retirement and this Gallup survey provides a pretty good summary of how much and why.

A combined 8 in 10 American workers think they will continue working full or part time after they reach retirement age. Proportionately more of these workers, 44% to 36%, say they will do so because they “want to” rather than because they “will have to.”

Overall, most workers expect to work part time after retirement age (63%), rather than to work full time (18%) or stop working altogether (18%). Those who expect to work full time are twice as likely to say they will do so out of need rather than as a choice. In contrast, those who expect to stop working overwhelmingly say it is because they want to. Workers who expect to work on a part-time basis are more likely to say they will want to work than will need to do so.

The key here, at least in my view, is to do something that you enjoy, rather than continue doing something that you don’t particularly like in a part of the country where you don’t particularly want to live. And if you enjoy greeting customers at a WalMart in a densely populated part of the country then, hey, more power to you.

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Home Prices, Recession, and Retirement

On May 25, 2011, in Housing, Our Culture, by Tim

The AARP surveyed(.pdf) over 5000 American workers aged 50 or older and confirmed what many have believed to be true for some time now – that the Great Recession has radically changed the financial situation for many aspiring retirees and that the outlook for their golden years now looks grim. It seems that counting on your home equity to finance a life of leisure didn’t exactly work out as planned in our bubble economy.

The recession seems to have eroded confidence about the retirement years. Overall, more than half (52.6 percent) of those surveyed were not too or not at all confident that they (along with their spouse or partner) will have enough money to live comfortably throughout their retirement years.
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Moreover, the 50-plus population—at least those surveyed in October 2010—were worried about managing in retirement, and a variety of money matters concerned them: retirement income that might not keep up with inflation (44.8 percent very concerned), not having enough money to pay for long-term care (44.3 percent very concerned), depleting their savings (39.3 percent very concerned), and not having enough money to pay for health care (39.2 percent very concerned) (figure 11).

But not being able to maintain a reasonable standard of living in retirement was the one item they were most concerned about, with 26.5 percent of respondents citing this as their top concern. Not having enough money to pay for adequate health care was a distant second. Few placed leaving money to children or other heirs at the top of the list. Nor was a surviving spouse or partner’s ability to maintain the same standard of living of most concern to many (figure 12).

I’ll never forget that look on my dentist’s face in 2006 in California when I suggested that home prices might not continue to go up and that, they just might fall. And they might fall a lot. Echoing the view of many at the time, he said, “They better not fall, my retirement is depending on it”. He’s probably had to juggle his plans at least a little bit…

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Hopes Dim for Some Baby Boomer Retirees

On April 5, 2011, in Housing, Personal, by Tim

The outlook gets more grim in the latest survey of aspiring Baby Boomer retirees, a full 25 percent now discounting the entire notion of a conventional retirement, in no small part due to the fact that they have little or no retirement savings and don’t expect that situation to change anytime soon. Details are in this story at the Associated Press.

The 77 million-strong generation born between 1946 and 1964 has clung tenaciously to its youth. Now, boomers are getting nervous about retirement. Only 11 percent say they are strongly convinced they will be able to live in comfort.

A total of 55 percent said they were either somewhat or very certain they could retire with financial security. Yet a substantial 44 percent express little or no faith they’ll have enough money when their careers end.
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Excluding their homes, 24 percent say they have no retirement savings. Those with nothing include about 4 in 10 who are non-white, are unmarried or didn’t finish college.

At the other end, about 1 in 10 say they have banked at least $500,000. Those who have saved at least something typically have squirreled away $100,000, with about half putting away more than that and half less.

It would be interesting to see what that “Money from the sale of your house” response in the graphic above was five or six years ago. My guess is that the “Extremely/Very Important” response would have been some multiple of the current 17 percent.

I’ll never forget that time back in about 2006 when I raised the possibility of home prices falling significantly with my dentist as he was about to put both hands in my mouth. He pulled back and said, “They better not. My retirement is depending on it”. He’s probably had to rethink his golden years at least a little bit.

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