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    Thoughts from the Frontline

    How Not to Run a Pension

    February 13, 2013

    “The government is the prisoner of the bureaucracy. We have 4,021 associations and 6,200 codes. You simply cannot change things. There are 600,000 tax elements. No one really knows who pays what.”

    – A journalist in Greece

    For all the focus on the unfunded liabilities of Social Security and Medicare, there is another unfunded crisis brewing, and this one is in your own back yard. It’s coming to you even if you live outside of the US; it just might take a little longer to get there. I wrote ten years ago that state and local pension funds might be underfunded by as much as $2 trillion. It turns out that I was being overly optimistic. New government research suggests that the figure might be as high as $3 trillion. But what if you take into account that retirees are living longer? An IMF study that we’ll look at in a few minutes does just that. And if we live a lot longer? Oh my. The problems are not universal – some cities and states will do fine, while others are already in deep kimchee – but it’s a big problem and getting worse.

    At the end of the letter, I’ll add a personal note on housing. Longtime readers know that I was bearish on housing well before the bubble. I sold my home (for personal reasons) and decided to lease until things became more settled. I have said several times that I would tell you if and when I decided to buy a home. Now, I have put an offer in on an apartment and it has been accepted. But it’s more complicated than that. (Isn’t it always?)

    Before we get rolling, though, I want to announce the speaker lineup for my 10th annual Strategic Investment Conference, May 1-3. Here they are, in alphabetical order: Kyle Bass; Ian Bremmer; Mohamed El-Erian; Niall Ferguson and his wife, Ayaan Hirsi Ali; Lacy Hunt; Charles and Louis Gave; Jeff Gundlach; Anatole Kaletsky; David Rosenberg; Nouriel Roubini; and Gary Shilling. The noted geopolitical analyst Ian Bremmer (a professor at Columbia and founder of the Eurasia Group) has now been added to the list. I heard Ian last year speak on his theme of a G-Zero World and was blown away. You have to hear this one. We subsequently met in NYC and compared notes. I am really happy we could get him.

    Seriously, where else can you find a roster like that? And the attendee list has a who’s who” feel to it, as well. Those who come regularly know that the real value is in meeting the other attendees. David Rosenberg noted last year that this is the top investment conference he has ever addressed. The speakers all seem to bring their “A” game. The attendees agree, and this year we will have more interaction than ever.

    The conference is cosponsored by my longtime partner Altegris Investments. All the credit for hosting a first-class conference goes to the staff at Altegris, who do a massive amount of work to pull off an event of this size and scope. All I do is get a few friends to come and speak. Oh, and this year Bloomberg will cover the conference live.

    The conference always sells out, so I suggest you register at your earliest convenience. Invitations have been sent out to past attendees and those who are members of the Mauldin Circle. Registration is now open. Because of security regulations, we do have to limit attendance to accredited investors and those in the securities/investment business. You can start the process by going to the Strategic Investment Conference page. There is a significant early-bird registration discount.

    How Not to Run a Pension

    It is almost too easy to pick on California and Illinois, but I am going to do it anyway in order to create a teaching moment. Plus, this sorry tale will make us think about the nature of the social contract and the fabric of society. It would be almost be funny if it were not so serious.

    Let’s start with a few paragraphs that…

    Discuss This

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    Comments

    Alain V Fontaine

    Feb. 18, 2013, 2:16 a.m.

    I just read the “How not to run a pension” installment of Feb. 13. My personal opinion is that we will soon start to see and hear “publicity” from our governments “encouraging” the older baby boomers to get voluntarily euthanized a la “Soylent Green”... Think about it, that would reduce the average life expectancy if enough people participate and would therefore reduce the pension plans and other social services (medicare, social security, etc.) liabilities…

    Ronald Nimmo

    Feb. 16, 2013, 3:30 p.m.

      I sincerely hope that Melissa is not suffering from metastasis of her thyroid cancer.
      The retired librarian in San Diego making $234,000 a year was a former department head who worked for the City for about 45 years. I think about 40% of her pension is from her DROP money, which she paid to SDCERS upon her retirement in exchange for a 20 year annuity in which the principal is paid out as well as interest. After 20 years, that part of her pension will disappear because the DROP money will be used up.

    Glossary:
    DROP: Deferred Option Retirement Plan. For complete explanation, Google SDCERS DROP.
    SDCERS: San Diego City Employees Retirement System.

    Douglass Pratt

    Feb. 16, 2013, 11:42 a.m.

    The states and cities are bankrupt. Nothing will be done until more than one major pension plan just can’t pay the retired workers. But that is too late to save the other retired public workers. Anyways there probably isn’t enough state, city or county net domestic product to pay for all the pensions.

    James Mullins

    Feb. 15, 2013, 1:03 a.m.

    John I am wishing your daughter all the best. Jim Mullins

    Douglas Reif

    Feb. 14, 2013, 9:55 a.m.

    One reason the pension funds are in so much trouble is that they are designed to ratchet benefits higher and higher.  Starting in the 1980’s and continuing into the 2000’s (until the tech bubble burst), pension fund investments were doing well.  Investments was growing and estimated future rates of return were increased.  A pension fund is either overfunded or underfunded.  When pension funds are overfunded due to increases in estimated rates of returns, politicians hand out pension goodies because “it won’t cost anybody anything, the money is already there!”.  We know how the story will play out, but it doesn’t matter to them, they got theirs.  And if by some miricle due to higher taxes and a strong stock market pension funds end up overfunded again, you can expect the cycle to repeat.