Publicly funded pensions and Medicare are two examples of unsustainable systems that will go away in the decade ahead. Today we look at pensions, tomorrow we examine Medicare.
One of the few things we know with certainty is that which is unsustainable will go away and be replaced by another more sustainable arrangement. Whether we like it or not, or are willing to accept reality or not, unsustainable public pensions will go away.
Important addendum: Correspondent Y.W. provided this actuarial analysis of the numbers I projected:
I have been an avid reader of yours for a while now, and your latest titled "That Which is Unsustainable...." contains what I think is a bit of an error. You wrote that to fund a $120K cash benefit pension, a pension fund would have to sock away $6,000,000 dollars ($6 million X 0.02 = $120 thousand). However, this is only true if the pensioner lives forever, all else being equal. In the real world, the accumulated capital would be slowly drawn down to pay an increasing portion of the cash benefit over time until it was exhausted.I did a simple annuity calculation under the following conditions- retirement at 55, pension paid at $120K rate for 30 years with a fund growth rate of 2%, and came to a fund value at retirement of $2.74 million dollars. Still a healthy and disturbing sum, but significantly under the stated value of $6 million dollars.Thank you, Y.W. for this informative and insightful commentary. With this more accurate assessment, the conclusion is still staggering: to fund the senior rank public pension, the city will still need to contribute $90,000 a year, roughly equivalent to the wage of a full-time city worker ($85,000/year average), for 30 years.
Since the median pay in the U.S. is about $26,360 annually, then that means the $2.74 million that must be set aside for each senior-level pension is equivalent to three workers' entire lifetime earnings--35 years X $26,360 = $920,000 X 3 = $2.76 million. Since these workers must pay taxes and fund their own retirements, we can guesstimate that the $2.74 million is equivalent to the entire net lifetime earnings of four workers. The standard-level cash/benefit "defined benefit" pension will require the entirenet lifetime earnings of two workers.
Even reducing the total contributions by half still leaves an impossible sum of total contributions to be made: to make the promised cash/benefit payouts, every city/county must set aside the equivalent of between 5 and 10 years of the entire general fund budget.
This does not even touch on two other sobering realities: the number of public employees who are in the "pension pipeline" and who will be retiring within the next decade is exploding as the Baby Boomers exit the workforce, while at the same time the public workforce is being reduced to align with dwindling permanent-recession tax revenues. Both of these trends further exacerbate the structural misalignment of promises made, low yields, fiscal limits on how much can be contributed annually and the current size of pension funds.
Tomorrow we examine the unsustainability of Medicare.
New Max Keiser: On the Edge with Charles Hugh Smith. I was sharper in the "live in Paris" interview but Max is always worth watching:
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Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)
We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.
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