Quotulatiousness

January 31, 2012

Andrew Coyne on the sudden appearance of Stephen Harper’s “hidden agenda”

Filed under: Cancon, Economics, Government, Politics — Tags: , , , , — Nicholas @ 12:19

We’ve been waiting for it to appear since the 1990’s, so it’s about time that it finally put in a cameo:

At last, the hidden agenda, and not a moment too soon. Vague, indirect and overseas as it was, Stephen Harper’s Davos speech was perilously close to a vision statement, of a kind the prime minister has seldom made until now, and will henceforth have to make often.

It would be nice if he had shared with us his concerns about the ageing of the population, and the threat it poses to our long-run social and economic health, sometime before the last election, rather than joining in the all-party consensus that there was nothing wrong with Canada that could not be fixed with more and richer promises to the elderly.

[. . .]

How serious is the cost side of this conundrum? The president of the C. D. Howe Institute, Bill Robson, has projected the “net unfunded liability” implied by this unprecedented demographic shift — that is, promises to pay benefits out of public funds for which we have made no provision in taxes, “net” of any savings from having fewer children about — at about $2.8-trillion. With a T, ladies and gentlemen: about 160% of GDP. (That’s in addition to the $800-billion unfunded liability in the Canada Pension Plan and its Quebec counterpart — yes, they are pulling in enough each year to meet their current obligations, but that does not mean they are “fully funded,” the prime minister’s claims to the contrary — to say nothing of the $600-billion national debt.)

January 12, 2012

QotD: When a figure is too high to be repaid, it won’t be repaid

Filed under: Bureaucracy, Economics, Government, Quotations — Tags: , , — Nicholas @ 15:31

It’s hardly news anymore that public-sector pension promises will be made good (or not) on the backs of taxpayers, but I still think that the average private-sector packmule has no idea of the amount they’re going to have to pony up to vouchsafe the various municipal, state, and federal pension promises. The amount required over the next several decades beggars the imagination. In fact, the amount is preposterous: there’s no way the money is ever going to be paid out as promised. Even if it were mathematically possible (which it isn’t), taxpayers would revolt over the massive increases that would be required. If I were a public-sector worker, I’d be making a point of saving every dime of my own money that I could, because that fat public sector pension is unlikely to ever be paid out in full. (And I’m not even getting into the healthcare benefits, which are even more onerous than the pension benefits.) Basically, the bedrock truth is this: money that can’t be paid out, won’t be, no matter what agreements were signed or what the courts say.

Monty, “The Daily DOOM”, Ace of Spades HQ, 2012-01-12

December 27, 2011

Retirement age will have to rise: The Economist

Filed under: Economics, Government, Health — Tags: , , , — Nicholas @ 10:38

In a development that should surprise nobody at all, governments around the world are slowly, reluctantly, grudgingly starting to make changes to their state pension systems:

Put aside the cruise brochures and let the garden retain that natural look for a few more years. Demography and declining investment returns are conspiring to keep you at your desk far longer than you ever expected.

This painful truth is no longer news in the rich world, and many governments have started to deal with the ageing problem. They have announced increases in the official retirement age that attempt to hold down the costs of state pensions while encouraging workers to stay in their jobs or get on their bikes and look for new ones.

Unfortunately, the boldest plans look inadequate. Older people are going to have to stay economically active longer than governments currently envisage; and that is going to require not just governments, but also employers and workers, to behave differently.

November 1, 2011

Long Island Rail Road: “The scandal isn’t what’s illegal — but what’s legal

Filed under: Law, Politics, Railways, USA — Tags: , , , , — Nicholas @ 12:37

Nicole Gelinas points out that the Long Island Rail Road (LIRR) pension scam is only part of the problem:

Last week, the feds indicted 11 Long Island Rail Road retirees and their alleged associates in a “massive fraud scheme” to steal a billion dollars through fake disability claims. But the bigger outrage is that for decades the LIRR has held state taxpayers and riders hostage — thanks to outdated Washington labor laws.

The first inkling of the scandal came in 2008, when a press report noted that nearly every LIRR worker retired early, getting an MTA pension and a federal benefit. Looking into the anomaly, federal prosecutors unearthed evidence that at least two doctors and other “facilitators” had for years signed off on fake injuries and ailments so that workers could take their pensions.

[. . .]

The state’s fear of an LIRR strike helps drive up the railroad’s costs. Last year, the Empire Center reported, the average LIRR worker pulled in $84,850 — not including benefits.

That’s more than anywhere at the MTA except headquarters — and 23 percent more than subway and bus workers make. Seven of the top 10 people who made more in overtime than they did in regular wages hailed from the LIRR — including one conductor who tripled his $75,390 salary. Plus, workers pay nothing for health benefits.

October 27, 2011

Postponing retirement: late Boomers and Gen X’ers face reality

Filed under: Cancon, Economics — Tags: , , — Nicholas @ 00:04

Jonathan Chevreau shows that those of us getting a bit closer to retirement will have to wait longer than the previous generation before retiring:

The “double whammy” of falling stock prices and low interest rates has impacted members of DC pensions and RRSPs, who must cover the deficit through reduced personal spending and/or deferred retirement.

Towers Watson has issued its first quarterly DC Retirement Age Index, which it describes as a pension freedom tracker. It tracks the performance of a balanced portfolio of a DC plan member who has contributed to the plan from age 40 to 60. At that point, an annuity would be purchased but its value and monthly payout would depend on the performance of the plan over those 20 years.

[. . .]

With recession threatening, ongoing market volatility and falling interest rates, Towers Watson expects the Pension Freedom Age could move up to 67, or two years after the traditional retirement age (when Old Age Security and full Canada Pension Plan benefits commence).

September 11, 2011

The Canada Pension Plan and moral hazard

Filed under: Cancon, Economics, Government — Tags: , , , , — Nicholas @ 11:37

An interesting post at Worthwhile Canadian Initiative looks at the overlooked failure in pension markets. I found this bit of information to be quite interesting, as it addresses a conversation I had with Dark Water Muse a few months ago:

Governments provide pensions in one of two ways. Pay As You Go (PAYG) plans use current contributions to fund current benefits. The Canada and Quebec Pension Plan were, when they were first introduced, PAYG plans. The moral hazard risk a worker faces with these plans is political: a politician will design the plan so as to maximize his or her chances of re-election.

The design of Canada and Quebec Pension Plan has created large benefits for the first generation of recipients (current voters) and a much lower rate of return for future recipients (future voters). Now those gainers were the generation that entered the labour market in the Great Depression and fought in World War II, so one could argue that the windfall gain they experienced was merited on equity grounds. The point here is merely that the design of PAYG pension plans reflects the interests of the designers (for re-election) as well as the interests of the contributors and recipients.

The Canada and Quebec Pension Plans are now transitioning into fully-funded plans. The Canada Pension Plan Investment Board was, as of June 30th 2011, managing $153 billion in assets. Some is managed directly by the board, the rest is managed by “partners” ranging from Istanbul-based Actera Group to New York-based Welsh, Carson, Anderson & Stowe. I suspect that the CPP, roaming the world with billions to invest, is able to negotiate low management fees, and there must be savings associated with economies of scale in investing. But the possibility of moral hazard — someone getting rich by diverting away a tiny percentage of the return on $153 billion, or a politician exerting pressure on the CPP investment board to make electorally-sound investments — remains.

In sum, while private pension markets suffer from moral hazard, it’s not clear that governments can solve the problem.

In my discussion with DWM, I claimed that the CPP was a PAYG system (in extreme examples, like the US social security system, this can be compared to a Ponzi Scheme), while DWM — claimed that the system was fully funded from investments. As the quoted section above shows, we each had part of the answer.

It’s hard to believe that the CPPIB (the organization that handles the investments of the CPP) can remain immune to government meddling — buy this company’s stock, invest in that company’s risky-but-located-in-a-marginal-riding new venture, etc. As long at the CPPIB can remain independent of political pressure, the system might work.

July 17, 2011

Federal government to unveil new retirement scheme

Filed under: Cancon, Economics, Government — Tags: , — Nicholas @ 12:09

Jonathan Chevreau looks at the federal government’s plan to introduce Pooled Registered Pension Plans (PRPPs):

This is a giant potential opportunity for the nation’s banks, mutual fund companies, insurance firms and a growing number of manufacturers of exchange-traded funds. Pension consultants, actuaries, financial planners and investment advisors will also see various business opportunities created as PRPPs catch on — primarily with small- and medium-sized businesses that never before offered its workers a pension plan. Mr. Menzies, the cabinet minister responsible for PRPPs, says he’s travelled the country consulting with the provinces.

“When the concept of the pooled RPP was shared with the provinces and territories they all came together to agree this makes sense.”

[. . .]

PRPPs will be (hopefully) low-cost defined contribution schemes run by the private sector where ultimate benefits will depend on how financial markets perform. The PRPPs would resemble the United States’ 401(k)s or Australia’s superannuation scheme.

They will be administered by financial institutions rather than employers, which is why Bay Street views them as a potential bonanza. As the “pooled” part of their name suggests, assets are co-mingled for investment purposes to keep down costs.

The original idea was that PRPPs would be mandatory for employers that don’t offer their own registered pension plan but Mr. Menzies says that decision would be up to the provinces. “We’re putting it out there that there is an option for the employer and for the employee. I’ve spoken to many small businesses that said ‘finally here’s a low-cost affordable plan I can enroll my employees in.’ It will be a retention and enticement tool.”

Employers won’t be forced to make contributions, but may choose to do so. Employees will be automatically enrolled at a base contribution rate, but they can opt out.

There will be two types of members: Employed and individuals. The latter include the self-employed and employees of organizations that do not offer PRPPs. Benefits are portable. Employers offering PRPPs can move to a new plan if they wish. There are fewer portability restrictions for individual members, making them convenient if they later change jobs and want to take their pension with them.

That portability is key: I’ve wondered for years why unions have not been hammering on that aspect in their negotiations with big employers (although unions generally pay most attention to the needs of current union members at the expense of both retired and future members). By the time you’ve worked at a company long enough to qualify for their pension scheme, you’re often locked in due to the lack of portability of your pension. If you leave the firm, voluntarily or not, you lose much of the potential return on the pension contributions you’ve already made (if you don’t lose them altogether).

This proposal may well solve much of that problem.

June 10, 2011

With extended lifespans . . . will come later retirement dates

Filed under: Economics, USA — Tags: , , , — Nicholas @ 16:49

For all of us who’ve spent our working lives assuming that 65 was the age of retirement (or 55 for those of you who paid closer attention to retirement planning 20 years earlier than the rest of us), you won’t like this:

Americans better get used to working longer, even until they are 80 years old, according to a study by the Employee Research Benefit Institute (via Robert Powell at MarketWatch).

Naturally, those with lower incomes will need to work longer.

Here’s how it breaks down (via MarketWatch):

  • If you make around $11,700 dollars a year you have to work to age 84 to have a 50% chance of affording retirement.
  • If you make between $11,700-$31,200 a year you have to work to age 76 to have a 50% chance affording retirement
  • If you make between $31,200-$72,500 a year you have to work to age 72 to have a 50% chance of affording retirement.
  • If you make $72,500 or more a year you have to work to age 65 to have a 50% chance of affording retirement.

This study does point out one bright spot for those working past 65 though. If you are putting your money into some kind of retirement fund, your chances of saving enough increase substantially.

May 13, 2011

QotD: The financial legacy of the Baby Boomers

Filed under: Economics, Quotations — Tags: , , , , , — Nicholas @ 00:05

Greg Mankiw links to a WSJ piece about our negative bequest to our children. It’s a point I’ve made many times myself (and am sometimes accused of bashing the elderly because of this). A good quote from the WSJ piece:

     [R]egardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.

It is morally wrong to force young people to make good on false promises made before they were even born. It is an outrage, a scandal, a shame on our society. A society that invests in the old at the expense of (actually, to the large detriment of) the young cannot survive. A caring and kind society cares for the weak and elderly and helpless; a dynamic and just society allows the young to grow and prosper on their own merits. If America is to prosper as a nation, the young must be given room to build families and careers. To build lives, without the onerous, crushing burden of debt run up by their forebears.

Never mind questions of ethics or “fairness”: it’s just math. The numbers do not, cannot, and will not ever even up, no matter what accounting tricks the government uses. Until we fundamentally change how the Big Three entitlement programs (SS, Medicare, Medicaid) work, we will continue to load up our young people with a crippling load of debt they had no hand in accruing.

“Monty”, “A hot cup of DOOM!, no cream, no sugar”, Ace of Spades H.Q., 2011-05-12

April 28, 2011

Kevin Milligan: Corporations are not really people

Filed under: Cancon, Economics, Law, Politics — Tags: , , , — Nicholas @ 12:02

The notion that corporations are “legal persons” is useful for legal purposes, but terribly misleading when politicians are trying to formulate tax policies:

Pretending that corporations are people leads to tax policies with perverse consequences; some can even produce the opposite of what the policy is intended to do.

[. . .]

Some people want to tax corporations heavily because the corporations are ‘rich.’ But, if corporations are not people, they can’t be rich. The owners or employees of the corporation can be rich, but not an artificial legal entity. As my Economy Lab colleague Stephen Gordon wrote, “Claiming that ‘wealthy corporations’ pay [corporate taxes] makes about as much sense as claiming that ‘rich buildings’ pay property taxes.”

This is not an obscure debate. The owners of corporations do not all wear top hats and monocles like the fellow from the Monopoly game. In reality, Bay Street IPO-mongers quake in fear of two large stockholders. One is the Ontario Teachers Pension Plan. The other is the Canada Pension Plan Investment Board. These two pension plans are the largest holders of corporate equity in Canada, and their stakeholders are broadly middle income. Tax policy that hurts the dividends of Canadian corporations has a direct impact on the vast Canadian middle that hold pensions through these two, and similar, pension entities. Of course, many high-income Canadians also own corporate equities. But, if we desire to change the tax burden on high income individuals, though, it is best to do so directly through the personal income tax rather than taxing things high income people may or may not own.

April 13, 2011

Delaying retirement: expect to see lots of articles like this

Filed under: Britain, Economics — Tags: , , , — Nicholas @ 07:57

This Guardian article is a pattern for lots to follow in the next few years, as would-be retirees discover that they can’t afford to retire when they’d hoped:

Two-fifths of people who intended to retire this year will have to work for an extra six years because they cannot afford to stop working, according to a study by Prudential.

The pension provider’s Class of 2011 report found that 38% of people are delaying their retirement, and 40% of those say they will have to work until they are 70 to have a comfortable income.

It also shows that 22% of those delaying retirement are doing so because they can’t afford to stop working, up from 15% last year. They had intended, on average, to retire at 62, but now believe they will be at least 68 before they can draw a pension.

Governments in the western world are slowly moving the mandatory retirement age (where it exists), but even in some unionized environments, the benefits workers depend on start to phase out before retirement age. The expectation is that government programs would be there to cover older workers, but governments have little chance of expanding programs during tough economic times.

March 14, 2011

Government debt: “U.S Treasuries increasingly look like Wile E. Coyote running in midair; they’ll keep selling only as long as nobody actually looks down”

Filed under: Economics, Government, USA — Tags: , , , , , — Nicholas @ 16:17

To borrow a phrase from Monty at Ace of Spades HQ, here’s a hot steaming bolus of DOOM for you, courtesy of Eric S. Raymond:

Insolvency is no longer a sporadic problem, it’s become pervasive at all levels of government everywhere. This is why the recent brouhaha in Wisconsin was so surreal. The public-employee unions weren’t just rearranging the deck chairs on a sinking Titanic, they were fighting to preserve their right to bore more holes in the hull.

When these are the objective conditions, what point is there in arguing that the whole system is corrupt and that middle-class entitlements have to go on the scrap-heap along with every other big-government program? It’s going to happen anyway soon enough. A year ago the U.S. government was only taking in a third of what it needed to cover annual outlays; today it’s so much worse that individual monthly deficits are larger than the entire Bush administration’s. The money’s all gone. Our options are closing down to default or hyperinflation.

It’s going to get ugly out there. A lot of old people are either not going to get their pensions and Social Security at all or get them in hyperinflated dollars that won’t be worth anything. Anyone else dependent on government transfer payments will be similarly screwed. Urban poor, farmers, veterans, the list goes on. Imagine the backlash when that really hits — when it sinks in that the promises were lies, the bubble has popped, the Ponzi scheme is over.

March 4, 2011

A model of how government pension schemes work

Filed under: Economics, Government, USA — Tags: , , , — Nicholas @ 12:04

It’s all so immense that it’s hard to understand, so Karl Denninger reduces it to an easy-to-comprehend model:

Let’s start with the model but take it into the real world. We’ll use you and I.

You set up a business. I’m a “trustworthy guy.” You have employee who you wish to provide a pension.

So every week when you pay them, you take out $100 from their paycheck. You have 10 employees (including yourself) and you come to me with your $1,000 every week and give it to me. I take it.

But instead of sticking it in an account somewhere with your name on it (as a trustee would) I instead give you a piece of paper. It says I owe you $1,000. But it’s not a debt security. You cannot negotiate it like a check, nor can you sell it to anyone else — it’s only valid if you bring it back to me. It says so right on the face. I promise that if you bring it back I’ll give you the $1,000.

Here’s the problem — as soon as you leave I call up my 10 stripper friends and the local liquor store and throw a party. Guess what I use for the money? Your $1,000.

Now here’s the rub — I don’t have any other money. At all.

In fact, I’m in hock up to my neck. I earn $100,000 a year but I spend $170,000. And how do I do this? Well, among other things I have people like you giving me money to “save.” I also have a bunch of credit cards, and everyone thinks I’m a great guy — kind of like an uncle (just call me “Sam”) and so they keep raising my credit limit.

It’s a wonderful life, isn’t it?

Well, maybe for a while.

But there is a problem with this model. First, this isn’t a “Trust.” A Trust can hold funds for someone, and can even invest them in something, but the funds cannot be converted to the trustee’s use. They must be held segregated and not inure to the benefit of the trustee. Further, the trustee must act solely in the best interest of the beneficiaries of the trust, not their own interest. That’s black-letter law.

Then there’s the second problem — I didn’t invest the money. I blew it, and all of the rest of my money.

One day you come and ask me to redeem one of your $1,000 IOUs. I don’t have any money, but I have a cash advance available on the credit card — or at least I think I do. So I go to the local bank and pull a $1,000 cash advance, giving you ten crisp $100 bills.

Notice what just happened: As soon as you showed up, your IOU, which in fact had no legal status as debt, had to be turned into actual debt at that point in time. Now there really is $1,000 in debt out there — it’s on the credit card.

This is exactly what happened with Social Security and Medicare since Reagan’s “reform” of the systems in the 1980s. Every single Administration since has taken all the money and immediately blown it. There is no money.

December 23, 2010

Prichard, Alabama defaults on civil service pensions

Filed under: Economics, Politics, USA — Tags: , , — Nicholas @ 12:12

The town failed to fully fund the pension plan for their employees, and it ran out of money in 2009. In spite of state law, they stopped paying the pensioners:

Since then, Nettie Banks, 68, a retired Prichard police and fire dispatcher, has filed for bankruptcy. Alfred Arnold, a 66-year-old retired fire captain, has gone back to work as a shopping mall security guard to try to keep his house. Eddie Ragland, 59, a retired police captain, accepted help from colleagues, bake sales and collection jars after he was shot by a robber, leaving him badly wounded and unable to get to his new job as a police officer at the regional airport.

Far worse was the retired fire marshal who died in June. Like many of the others, he was too young to collect Social Security. “When they found him, he had no electricity and no running water in his house,” said David Anders, 58, a retired district fire chief. “He was a proud enough man that he wouldn’t accept help.”

The situation in Prichard is extremely unusual — the city has sought bankruptcy protection twice — but it proves that the unthinkable can, in fact, sometimes happen. And it stands as a warning to cities like Philadelphia and states like Illinois, whose pension funds are under great strain: if nothing changes, the money eventually does run out, and when that happens, misery and turmoil follow.

Prichard is only the start: far too many local governments are approaching the same situation.

December 20, 2010

“The typical budgeting strategy of most Canadians is 1. Get paid 2. Spend it all 3. Borrow more.”

Filed under: Cancon, Economics, Politics — Tags: , — Nicholas @ 07:50

Kelly McParland looks at the efforts of the Canadian and provincial governments to come to some sort of agreement over pension reform:

If you want a hint of the difficulty of winning agreement on an issue like Canada’s creaking pension system, consider this carefully considered statement from Finance Minister Jim Flaherty:

“It’s a multi-jurisdictional challenge to get a consensus on the CPP,” he said.

If you speak politics, you realize that “multi-jurisdictional challenge” means that getting the country’s federal and provincial leaders to agree on anything beyond what time to quit for lunch is beyond the power of mere mortals. It is especially hopeless on an issue as fraught with electoral danger pensions, which, after all, are all about old people and their money. Who votes in far bigger numbers than any other demographic? Old people. What gets them more excited than half-price fares to Florida? Their money.

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