Thursday, March 26, 2015

America's Pensions in Peril?

John W. Schoen of CNBC reports, Funding shortfalls put pensions in peril:
These days, a pension just isn't what it used to be.

For generations, a defined benefit pension—a fixed monthly check for life—provided an ironclad promise of a secure income for millions of retired American workers. But today, that promise has been badly corroded by decades of underfunding that have undermined what was one of the cornerstones of the American dream.

The safety net that millions of retirees spent decades working toward has been fraying for some time. The Great Recession, and the market collapse that wiped out trillions of dollars of investment wealth, weakened the pension system further, though some of the damage has been repaired since the stock market rebounded and the economic recovery took hold.

Hundreds of billions of dollars in defined benefits are still paid out every year to retirees. State and local public pension benefit payments reached $242.9 billion in 2013, according to the most recent Annual Survey of Public Pensions. And a Towers Watson study of more than 400 major companies that sponsor U.S. defined benefit plans estimated they paid out nearly $97 billion in benefit payments last year, and another $8.6 billion went toward lump sum payments and annuities.

But that's nothing compared to the private employers' projected benefit obligations last year, which climbed 15 percent from the previous year to a whopping $1.75 trillion, while plan assets grew by only 3 percent.

Disparities like that help explain why so many pensions are in peril. Simply put: Obligations have outpaced fund contributions and growth for private and public plans. That means that even workers who have paid into pensions for several years may not get the level of benefits they expect. And many younger employees may never have an opportunity to participate in a pension at all.

The result is that, unlike past generations of Americans, many workers today bear the brunt of the investment risk that underpins their hopes of income security once they are no longer able to work.

In 1975, some 88 percent of private sector workers and 98 percent of state and local sector workers were covered by defined benefit plans, according to a 2007 report by the researchers at the Center for Retirement Research at Boston College. By 2011, fewer than 1 in 5 private industry employees was covered by a pension that paid a guaranteed monthly check, according to the Labor Department.

That historic shift has been blamed by critics for an estimated deficit in retirement savings of more than $4 trillion for U.S. households where the breadwinner is between ages 25 and 64, according to Employee Benefits Research Institute.

"You have this hole in what private sector workers have for retirement. We're coming up on this place where all these people are not going to be able to retire," said Monique Morrissey, a researcher at the liberal Economic Policy Institute.

That shift away from a guaranteed pension check has been slower to take hold among public sector workers, where some 83 percent still have access to a pension that promises to pay monthly retirement income for life after a career of service. But that's changing.

Faced with rising health costs and retirees living longer than expected, many state and local governments are failing to keep up with the annual payments. A CNBC analysis of financial data for 150 state and local pension plans collected by Boston College's research center found that 91 had set aside less than 80 percent of the money needed to meet current and future obligations to retirees. Only six were fully funded.

One big reason: State and local governments aren't making the annual contributions required to fund those liabilities. Of the 150 plans tracked by the center, 47 paid less than 90 percent of what's needed to keep pension benefits funded and 79 paid more. (There was no data available for 24 of the 150 plans.)

"People appreciate services: They want cops and firefighters, they want teachers and all that stuff," said Morrissey. "But if you're a politician in a budget crunch, the one way to not raise taxes is to just not pay your pension bill. In the states and cities where there's a big problem, it's not because they underestimated cost. They simply didn't pay the bill."

In New Jersey, which has averaged less than half its required annual contributions for over a decade, a state judge last month ordered Gov. Chris Christie to make a court-ordered $1.6 billion payment into the state's public pension system after it was withheld from his proposed $34 billion state budget. Christie is appealing the ruling.

In New York, state lawmakers plan to defer more than $1 billion in required pension contributions over the next five years. In Illinois, the state's new Republican governor, Bruce Rauner, last month proposed more than $6 billion in spending cuts—more than a third of which would come from shifting government workers into pension plans with reduced benefits.

In Rhode Island, retirees are suing the state over a 2011 pension overhaul led by newly elected Democratic Gov. Gina Raimondo during her tenure as state treasurer. The reforms, which raised retirement ages and cut cost-of-living increases, were projected to save $4 billion over 20 years. (On Monday, the retirees accepted a proposed settlement that would reduce retirement benefits.)

With state and local politicians loathe to propose the tax increases needed to fund the shortfalls, many have overhauled their pensions systems instead by increasing the burden on public workers and retirees and cutting benefits.

"Nearly every state since 2009 enacted substantive reform to their retirement programs, including increased eligibility requirement, increased employee contributions or reduced benefits, including suspending or limiting (cost of living increases)," said Alex Brown, research manager at the National Association of State Retirement Administrators, a nonprofit association whose members are the directors of the nation's state, territorial, and largest statewide public retirement systems.

Those cuts range from about 1 percent for retirees in Massachusetts and Texas to as much as 20 percent in Pennsylvania and Alabama, according to a survey of state pension reforms last year by the association and the Center for State and Local Government Excellence.

For retirees like David Jolly, 90, that's mean getting by with a little less every year.

Jolly, who retired in 1986 as public works director for Island County, Wash., now lives with his wife on a combined monthly income of $1,888 from his state pension and Social Security. "Every time they try nibbling at it, it just makes it that much harder," he said. "They don't realize what the cost of living of older people is. ... It just keeps going up and the retirement pay just doesn't."

To close the pension funding gap, many state and local governments have also cut access to defined benefit pensions for new hires or increased contributions and minimum retirement age for active workers. "New employees can expect to work longer and save more to reach the benefit level of previously hired employees," according to a survey by the retirement administrators association.

While closing plans to new members may reduce benefit liabilities decades from now, it also cuts into the contributions from active workers to support retirees. For over a decade, the ratio of active workers to retirees has been falling, placing an added strain on the public pension system.

For workers and retirees in the private sector, where defined benefit plans are much less common, funding levels are generally in better shape.

Rising investment returns since the financial collapse of 2008 helped boost funding levels for private industry plans in 2013 to 88 percent of their liabilities, according to a survey of the latest available data by pension fund consultant Milliman. But that still left the 100 largest companies surveyed with a combined pension plan funding deficit of $193 billion.

The pension funding shortfall is even worse for a handful of so-called multi-employer pension plans, which typically cover smaller companies and unions and face a different set of financial challenges. Declining union enrollments, for example, mean there are fewer active workers to cover the cost benefits for retirees, many of whom are living longer than expected than when these plans were established.

Multi-employer plans also face the added burden of their pooled pension liabilities. When one member of the plan fails to keep up with contributions, for example, the burden on the other members increases.

About a quarter of the roughly 40 million workers who participate in a traditional "defined benefit" plan—those that pay retirees a guaranteed check every month—are covered by these multi-employer plans, according to the Bureau of Labor Statistics. In the last four years, the Labor Department has notified workers in more than 600 of these plans that their plans are in "critical or endangered status."

Last year, the Pension Benefit Guaranty Corporation, the government insurance fund for pension plans that go bust, reported that its program backing multi-employer plans was $5 billion in the red. It projected that unless Congress acted, there was about a 35 percent probability its assets would be exhausted by 2022 and about a 90 percent probability by 2032. (Single-employer pension plans are covered by a separate program that is on a much more solid financial footing.)

After funding shortfalls threatened the solvency of the governments' insurance backstop for multi-employer pension plans, Congress eased the rules allowing plan administrators to cut benefits last year. Proponents of the proposed pension guaranty corporation reforms argue that they will help prevent more multi-employer plans from going under and that retirees are better off with smaller monthly payments than none at all.

That's something beneficiaries of private and public pensions are hearing a lot these days.
As you can read above, America's private and public pensions aren't in good shape. There are a lot of reasons why this is the case and my fear is the worst is yet to come.

One thing I can tell you, the attack on U.S. public pensions continues unabated. Andrew Biggs, a resident scholar for the conservative American Enterprise Institute wrote a comment for the Wall Street Journal, Pension Reform Doesn’t Mean Higher Taxes:
The Pennsylvania State House held a hearing on Tuesday about reforms that would shore up the state’s public-employee pension program. The hearing was overdue. Annual required contributions to the state’s defined-benefit plan have soared to more than 20% of employee payroll from only 4% in 2008. Legislators in the state, like many elected officials nationwide, are looking for a way out.

State Rep. Warren Kampf has introduced a bill to shift newly hired government employees to defined-contribution pensions similar to a 401(k) plan. Defined-contribution pensions offer cost stability for employers, transparency for taxpayers and portability for public employees.

But the public-pension industry—government unions and the various financial and actuarial consultants employed by pension-plan managers—claims that “transition costs” make switching employees to defined-contribution pensions prohibitively expensive. Fear of “transition costs” has helped scuttle past reforms in Pennsylvania, as in other states. But the worry is unfounded.

The argument goes as follows: The Governmental Accounting Standards Board’s rules require that a pension plan closed to new hires pay off its unfunded liabilities more aggressively, causing a short-term increase in costs. Thus the California Public Employees’ Retirement System, known as Calpers, claimed in a 2011 report that closing the state’s defined-benefit plans would increase repayment costs by more than $500 million. Similar claims have been made by government analysts in Minnesota, Michigan and Nevada. The National Institute for Retirement Security, the self-styled research and education arm of the pension industry, claims that “accounting rules can require pension costs to accelerate in the wake of a freeze.”

But GASB standards don’t have the force of law; nearly 60% of plan sponsors failed to pay GASB’s supposedly required pension contributions last year. That includes Pennsylvania, where the public-school-employees plan last year received only 42% of its actuarially required contribution. GASB standards are for disclosure purposes and not intended to guide funding. New standards issued in 2014, GASB says, “mark a definitive separation of accounting and financial reporting from funding.”

In fact, nothing requires a closed pension plan to pay off its unfunded liabilities rapidly, and there’s no reason it should. Unfunded pension liabilities are debts of the government; employee contributions are not used to pay off these debts. Whether new hires are in a defined-contribution pension or the old defined-benefit plan, the size of the unfunded liability and the payer of that liability are the same.

More recently, pension-reform opponents have shifted to a different argument: Once a pension plan is closed to new hires, it must shift its investments toward much safer, more-liquid assets that carry lower returns. Actuarial consultants in Pennsylvania have claimed that such investment changes could add billions to the costs of pension reforms.

This argument doesn’t hold. It is standard practice for a pension to fund near-term liabilities with bonds and to pay for long-term liabilities mostly with stocks. A plan that is closed to new entrants stops accumulating long-term liabilities. As a result, the stock share of the plan’s portfolio will gradually decline. But that’s because the plan’s liabilities have been reduced. Plans would not be applying a lower investment return to the same liabilities. They would apply a lower investment return to smaller liabilities.

Many public pension plans apparently believe that a continuing, government-run pension can ignore market risk, while a plan that is closed to new entrants must be purer than Caesar’s wife. The reality is that all public plans, open and closed, should think more carefully about the risks they are taking. But the difference in investment returns between an open plan and a closed one should be a minor consideration for policy makers considering major pension reforms.

Shifting public employees to defined-contribution retirement plans won’t magically make unfunded liabilities go away. Pension liabilities must be paid, regardless of what plan new employees participate in. But defined-contribution plans, which cannot generate unfunded liabilities for the taxpayer, at least put public pensions on a more sustainable track.
The problem with this Wall Street Journal article is it's factually wrong. Jim Keohane, CEO of the Healthcare of Ontario Pension Plan (HOOPP), sent me these comments:
I read the clip from the WSJ you included on your blog, and I thought you would be interested in a piece of research on the subject which was completed by Dr. Robert Brown (click here to view the paper). This is a fact based piece of research which looked at the cost of shifting from DB to DC. Proponents of a shift from DB to DC, such as this article, portray this as a win-win situation, but when Dr. Brown looked into the facts, what he found was that this is in fact a lose-lose situation. The liabilities in the existing plans are very long tailed and putting these plans into windup mode causes the costs and risks to go up, so there are no savings to taxpayers – in fact the costs go up, and the individuals are much worse off having been shifted to DC plans because they end up with much lower pensions.
When I read these articles in the Wall Street Journal, it makes my blood boil. Why? Am I a hopeless liberal who believes in big government? Actually, not at all, I'm probably more conservative than the resident "scholars" at the American Enterprise Institute (read my last comment on Greece's lose-lose game to understand the effects of a bloated public sector and how it destroys an economy).

But the problem with this article is that it spreads well-known myths on public pensions, and more importantly, it completely ignores the benefits of defined-benefit plans to the overall economy and long-term debt profile of the country. Worse still, Biggs chooses to ignore the brutal truth on defined-contribution plans as well as the 401(k) disaster plaguing the United States of Pension Poverty.

Importantly, pension policy in the United States has failed millions of Americans struggling to save enough money to retire in dignity and all these conservative think tanks are spreading dangerous myths telling us that DC plans "offer cost stability for employers, transparency for taxpayers and portability for public employees."

The only transparency DC plans offer is that they will ensure more pension poverty down the road,  less government revenue (because people with no retirement savings won't be buying as many goods and services), and higher social welfare costs to society due to higher health and mental illness costs.

And again, I want make something clear here, I'm not arguing for bolstering defined-benefit plans for all Americans from a conservative or liberal standpoint. Good pension policy is good economic policy. Period.

This is why I wrote a comment for the New York Times stating that U.S. public pensions need to adopt a Canadian governance model (less the outlandish pay we pay some of our senior public pension fund managers) in order to make sure they operate at arms-length from the government and have the best interests of all stakeholders in mind.

But the problem in the United States is that politicians keep kicking the can down the road, just like they did in Greece, and when a crisis hits, they all scramble to implement quick nonsensical policies, like shifting public and private employees into defined-contribution plans, which ensures more pension poverty and higher debt down the road.

Finally, while most Americans are struggling to retire in dignity, the top brass at America's largest corporations are quietly taking care of themselves with lavish pensions. Theo Francis and Andrew Ackerman of the Wall Street Journal report, Executive Pensions Are Swelling at Top Companies:
Top U.S. executives get paid a lot to do their jobs. Now many are also getting a big boost in what they will be paid after they stop working.

Executive pensions are swelling at such companies as General Electric Co., United Technologies Corp. and Coca-Cola Co. While a significant chunk of the increase is the result of arcane pension accounting around issues like low interest rates and longer lifespans, the rest reflects very real improvements in the executives’ retirement prospects.

Pension gains averaged 8% of total compensation for top executives at S&P 500 companies last year, up sharply from 3% the year before, according to data from LogixData, which analyzes SEC filings. But the gains are much larger for some executives, totaling more than $1 million each for 176 executives at 89 large companies that filed proxy statements through mid-March. For those executives, pension gains averaged 30% of total pay.

The gains often don’t represent new pay decisions by corporate boards. Instead, they reflect the sometimes dramatic growth in value of retirement promises made in the past. Nonetheless, they are creating an optics problem for companies at a time when executive-pay levels are under greater scrutiny from investors and the public. Companies now face regular shareholder votes on their pay practices that can be flash points for broader concerns, leaving them sensitive about appearing too generous.

New mortality tables released last fall by the American Society of Actuaries extended life expectancies by about two years. That, as well as low year-end interest rates, helped push pension gains higher than many companies had expected. The result is much higher current values for plans with terms like guaranteed annual payouts, which are no longer offered to most rank-and-file workers.

GE Chief Executive Jeff Immelt’s compensation rose 88% last year to $37.3 million. Meanwhile, excluding $18.4 million in pension gains, his pay actually fell slightly to $18.9 million.

The company says about half of the pension increase came from changes in its assumptions about interest rates and life span. About $8.8 million, however, comes from an increase of nearly $490,000 a year in the pension checks he stands to take home as his pay has risen and he approaches 60 years old, the age at which top GE executives can collect full pension benefits.

In all, Mr. Immelt’s pension is valued at about $4.8 million a year for life. The company puts its current value at about $70 million, up from around $52 million a year ago.

A GE spokesman said that much of the gain reflects accounting considerations and that Mr. Immelt’s recent salary increases reflect balanced-pay practices and board approval of his performance.

The SEC is particular about how companies report pay in their proxy statements. There is a standard table that breaks out salary, bonuses and pension gains, along with totals for the past three years, and other details. GE, encouraging investors to overlook the pension gains, added a final column to the table to show what top executives’ total pay would look like without them. The company says investors find the presentation useful in making proxy voting decisions.

Lockheed Martin is also asking investors to look past pension gains when considering its executives’ total pay.

At Lockheed Martin Corp., CEO Marillyn Hewson’s total pay rose 34% to $33.7 million last year, with $15.8 million of that stemming from pension gains. An extra column in the proxy statement’s compensation table strips out those gains, showing her pay up about 13% to $17.9 million.

Lockheed says that $5 million of the pension gains can be traced to changes in interest rates and mortality assumptions. Most or all of the remaining $10.8 million probably stems from increases in the payments she would receive in retirement: about $2.3 million a year now, up from about $1.6 million a year under last year’s proxy disclosure. Ms. Hewson’s pay rose sharply with her ascent to CEO in 2013 and chairman last year, increasing her pension benefit significantly.

Overall, the company’s obligation for future pension benefits for executives and other highly paid employees totaled $1.1 billion last year, up from $1 billion at the end of 2013.

A Lockheed Martin spokesman said the company broke out a nonpension compensation total in the proxy statement to provide more context for pay.

Executive pensions generally don’t consume the attention that pensions for the rank and file do. For years, as costs of traditional pension plans have risen amid low interest rates and longer lifespans, big companies have been closing them to new employees or even freezing benefits in place, often continuing with only a 401(k) plan for all but the oldest workers.

Last June, Lockheed Martin told its nonunion employees that it would stop reflecting salary increases in their pension benefits starting next year, and that the benefits would stop growing with additional years of work starting in 2020.

“It eliminates a lot of the variability that defined-benefit pension plans can create in our cost structure,” Chief Financial Officer Bruce Tanner told investors during a Dec. 3 conference presentation.

In 2011, GE stopped offering new employees traditional defined-benefit pensions and replaced them with 401(k) plans. At the time, Mr. Immelt cited recent market downturns and lower interest rates as being among the reasons for the shift.
In a cruel twist of irony, America's top CEOs are now enjoying much higher pension payouts while they cut defined-benefit plans to new employees and increase share buybacks to pad their insanely high compensation. I guess longer life spans are fine when it comes to CEOs' pensions but not when it comes to their employees' pensions.

Lastly, my comment on the 401(k) experiment generated a lot of comments on Seeking Alpha. Some people rightly noted that looking at 401(k) balances distorts the true savings because it doesn't take into account roll overs into Roth IRAs. When you factor in IRAs, savings are much higher.

While this is true, there is still no denying that Americans aren't saving enough for retirement and that 401(k)s are an abject failure as the de facto pension policy of America. It's high time Congress stops nuking pensions and starts thinking of bolstering and enhancing Social Security for all Americans, as well as implementing shared risk and serious governance reforms at public pensions.

Below, the pension terminator, Arnold Schwarzenegger, asks Warren Buffett his advice on how to handle unfunded liabilities of public pensions. Listen carefully to the Oracle of Omaha's reply, he understands the dire situation better than most people.

Wednesday, March 25, 2015

Greece's Lose-Lose Game?

Tom Beardsworth and Francine Lacqua of Bloomberg report, Soros Says Greece Now Lose-Lose Game After Being Mishandled:
The chances of Greece leaving the euro area are now 50-50 and the country could go “down the drain,” billionaire investor George Soros said.

“It’s now a lose-lose game and the best that can happen is actually muddling through,” Soros, 84, said in a Bloomberg Television interview due to air Tuesday. “Greece is a long-festering problem that was mishandled from the beginning by all parties.”

Greek Prime Minister Alexis Tsipras’s government needs to persuade its creditors to sign off on a package of economic measures to free up long-withheld aid payments that will keep the country afloat. Since his January election victory, he has tried to shape an alternative to the austerity program set out in the nation’s bailout agreement, spurring concern that Greece may be forced out of the euro.

The negotiations between Tsipras’s Syriza government and the institutions helping finance the Greek economy -- the European Commission, European Central Bank and International Monetary Fund -- could result in a “breakdown,” leading to the country leaving the common currency area, Soros said in the interview at his London home.

“You can keep on pushing it back indefinitely,” making interest payments without writing down debt, Soros said. “But in the meantime there will be no primary surplus because Greece is going down the drain.”

Soros said in January 2012 that the odds are in the direction of Greece leaving the euro region.

“Right now we are at the cusp and I can see both possibilities,” he said in Tuesday’s interview.
Aid Payment

Tsipras is meeting with German lawmakers in Berlin on Tuesday after Chancellor Angela Merkel encouraged him to follow the path set out by Greece’s creditors. European Parliament President Martin Schulz said in an interview with Italian newspaper Repubblica that he expects a deal by the end of this week that will allow the release of at least some money.

The start of quantitative easing by the ECB at a time when the U.S. Federal Reserve is considering raising interest rates “creates currency fluctuations,” said Soros, one of the world’s wealthiest men with a $28.7 billion fortune built partly through multi-billion dollar trades in currency markets, according to the Bloomberg Billionaires Index.

“That probably creates some great opportunities for hedge funds but I’m no longer in that business,” he said. Soros, who was born in Hungary, said the war in eastern Ukraine between government forces and rebel militia supported by Russia’s President Vladimir Putin concerns him the most.

Without more external financial assistance the “new Ukraine” probably will gradually deteriorate and “become like the old Ukraine so that the oligarchs come back and assert their power,” he said. “That fight has actually started in the last week or so.”
Soros is no longer managing money himself but his family office, Soros Fund Management, is alive and well and I can guarantee you it's been shorting the euro aggressively. You can listen to his exclusive Bloomberg interview here (his thoughts on Ukraine and Russia scare me because he and U.S. politicians are playing a dangerous game).

Is Soros right? Could Greece go "down the drain"? It sure looks hopeless but let me take a step back here and offer some additional thoughts, ones that his hedge fund eminence, Soros, chooses to ignore (as he does with his myopic and antiquated views on Russia and the Ukraine).

Kimon Valaskakis, former ambassador of Canada to the OECD and now president of the New School of Athens Global Governance Group, published a comment on LinkedIn, Greece and Europe: The Real Choice Is Win-Win or Lose-Lose:
Greece and Europe are contemplating divorce. In the first of a two part series which I published on March 17 2015 in the World Post, the global division of the Huffington Post. I have argued that this would be a masochistic lose-lose outcome when alternative win-win solutions exist.

The present essay is an expanded version of the World Post article which can be found here. It's also permanently listed in my author archive:

Following the recent Greek election where a new government was elected on an anti-austerity platform, an attempt to renegotiate the Greek Debt under the supervision of the so-called Troika (EU, Euro Zone and IMF) has, so far, been inconclusive. The final agreement (or non-agreement) will be decided upon in the next few months, although past experience has shown that most so-called ‘agreements’ tend to be quite temporary.

Behind this ambivalence and the protracted negotiations, what are the real choices ? How can we fly above the accountants quarrels to higher ground and see the whole forest ?

Many observers have presented the negotiations as a standard win-lose game. Either Europe ‘wins’ and Greece ‘loses’ or vice versa. In this post and its sequel I argue that the real choice is between ‘win-win’ for both or ‘lose-lose’. In developing my arguments I must acknowledge my intellectual debt to a colleague and friend John Evdokias, portfolio manager for his perceptive insights.
Argument 1 : The Debt Issue is Surprisingly Insignificant

The debt issue, blown out of proportion by professional alarmists, is actually relatively trivial for many reasons.

First the debt itself is small by global standards. 315 billion euros is high for you and me but small in the European and world economy. It can be managed.

What is much more problematic is Greece’s capacity to repay it quickly, given current conditions. The debt is 175% of GDP because the Greek Economy has contracted for the last 6 years due to imposed austerity. To ask for quick repayment is like asking an unemployed worker to immediately reimburse his mortgage. Not possible.

Second, since the debt is held not, thankfully, by the Mafia but by supposedly ‘friendly’ institutions including the European Central Bank and the IMF, what should be at issue are convivial repayment modalities, not the principle of repayment which has been accepted by both parties, These modalities involve (a) the date of maturity and (b) the rate of interest.

Concerning the date of maturity, it may surprise the reader to discover that long term loans (going to one hundred years) are increasing in popularity. At one point Disney Corporation obtained such a loan and as Evdokias pointed out “if a Mickey Mouse company can get such a loan, why not Greece”. Some countries allow 100 year mortgages and some companies issue 100 year bonds. What would have been unthinkable many years ago may become commonplace.

So, an extension of repayment of the Greek Debt would not be absurd perhaps to a hundred years but to a long enough time horizon.

As far as the rate of interest is concerned, as we all know, we live in a period of very low rates which are, in some cases, actually negative. What that means is that lenders are now paying to lend, an aberration a few years ago but now more and more frequent.

The reason behind both trends, longer repayment periods and lower interest rates is simple. Contrary to popular belief, the world is awash with capital both private and public (via money creation and quantitative easing). The challenge for investors is, now, not where to get the highest returns but where to park their money, especially when the capital they themselves invest is usually obtained at extremely low rates. When you lend other people’s money, as banks do, you expect less than when you invest your own.

Given the above, a Greece-Europe divorce based on disagreement on debt repayment would be ridiculous. That’s not how things should be settled between members of the same family.

As to future debt, the question of structural reform, (preventing further imprudent borrowing etc.) is valid and will be addressed in my second post. For now, the argument I am advancing is that past debt issues should not be the casus belli or the cause of the divorce.
Argument 2 : Greece’s Exit From The Eurozone Would Be Very Dangerous For Both Parties

The 19 country Eurozone with a common currency, the euro, is a work in progress. It was designed as a one way street leading towards more and better European integration.

In fact there is no clear mechanism to expel a delinquent member. In addition, consider that new members, joining the European Union, are now obligated to eventually join the Eurozone, although this does not apply to the original members.

If Greece leaves the Eurozone, it may have to leave the European Union itself.

The Eurozone was meant to be followed by some sort of fiscal union and ultimately a political union : the United States of Europe. This has not happened yet, because the economic problems of Europe, at large, since the Great Recession of 2008 have created many Euro skeptics.

A withdrawal from the Euro Zone and the adoption of a new national currency by Greece, may well offer short term benefits for that country since the new drachma will, most likely, be devalued vis-a-vis the euro thus making exports more competitive (and imports more expensive).

But how long will that benefit last ? The strategy of devaluation works if one country devalues and not others. In the 1930s Western countries, faced with depression and mass unemployment, resorted to competitive devaluations, which cancelled each other out. As a result everyone lost.

Furthermore, Grexit, as it is called, may not be an isolated phenomenon. If successful, other countries may be tempted to follow suit, including Spain, Italy and even France, if Marine Le Pen were to become the next French President .

Grexit could then be the first step to a break-up of the entire euro zone. It is very easy to destroy something and much more difficult to build it up. The negative momentum which this would entail, not immediately but over time, would be disastrous for the Old Continent and put the entire European Project in grave jeopardy.
Argument 3 : Beyond economics, serious geopolitical dangers lurk for both parties unless the issues are resolved.

If Greece is forced to stay in the Euro Zone under humiliating conditions this may not be the end of the matter. Right now the Syriza Government is the last bastion for left of center ‘respectable’ parties. If Syriza fails, then much more extreme and less ‘respectable’ parties from the far left and the far right, may be elected with ominous consequences.

Greece will then be vulnerable to serious social upheaval. Putin’s Russia may well seek an interesting new pied a terre in Greece, invoking the common link of orthodoxy. This will not please Western oriented Greeks. The upheaval, may, God forbid, lead to armed violence, including a potential civil war. It must not be forgotten that Greece went through a particularly bloody civil war, on class lines, after the end of World War II, where the extreme left opposed the extreme right. The scars are still there.

Not only would an unstable and weakened Greece be bad news for itself, it would also be very bad news for the entire European Union.

Beyond economics, Europe faces three additional threats. One comes from a newly aggressive Russia, as discussed above seeking to reverse the demise of the Soviet Union. A second one comes for the expansionist and disruptive ambitions of ISIS and radical jihadi terrorism. A third comes from the disaffected euro-skeptics, all over the Continent, some advocating a departure from the euro zone, others against the European Union itself and still others, promoting separatist movements designed to break up existing countries.

The balkanization of Europe would be bad, not only for this continent but for the world, because the European integration experiment which was started after the Second World War was initially seen as a model for better global integration. It could still serve as such a model, once it is restructured, perhaps even reinvented.

To give all this up for a mere question of debt, in a world drowning in unused capital would be to show unbelievable myopia and even masochism.

The Greece-Europe marriage can and must be saved. A reasonable accommodation is quite possible because of the win-win vs. lose-lose potential.

As self appointed ‘marriage counselor’ my recommendations for this accommodation will be found in a subsequent post.
I respect Kimon Valaskakis and John Evdokias and think they're absolutely right, in a world awash in debt and capital, there is no reason to kick Greece out of the eurozone based solely on its debt.

But as I've stated many times in my blog comments, Greece desperately needs major structural reforms. Amazingly, even during Greece's do-or-die moment, there has been no serious austerity whatsoever in the bloated Greek public sector. And by serious austerity, let me be crystal clear, they cut pensions and wages but they didn't cut any public sector jobs.

Importantly, this huge imbalance between the Greek public sector and private sector is the root of all evil in Greece and all political parties have maintained this farce because Greek politicians never dared to cut the hand that feeds them. Powerful public sector unions keep threatening to crush them if they ever dared cutting the Greek public sector beast down to size (keep in mind over 60% of the few jobs remaining in Greece are directly or indirectly related to the public sector, a staggering figure for a country of just 11 million population).

What Greece needs now is a Maggie Thatcher, someone with the courage to stand up to self-entitled Greek oligarchs, special interest groups and ever powerful public sector unions and crush them. This may sound like sheer right-wing lunacy but the reality is that unless Greece implements serious reforms to its grossly antiquated economy, the country will never grow properly and will always remain one step away from bankruptcy.

Of course, as my friend's father reminds me, in the history of Greece, Greeks haven't been kind to heroes like Eleftherios Venizelos, Ioannis Kapodistrias and many others who have tried to change the country for the better. "Greeks have a long, sordid history and the country won't change until they change their collective mentality and stop blaming others for their mistakes," he keeps telling me.

I'm afraid he's right which is why while it pains me to see the big fat Greek squeeze -- knowing full well that more austerity without proper growth initiatives will only exacerbate the euro deflation crisis -- but something has to be done to finally break the Greek public sector shackles and introduce proper reforms in an economy that desperately needs them.

But I warn Germany and other creditors, ramming more austerity onto Greece and other periphery economies without infrastructure growth projects will be a lose-lose proposition for the eurozone.

And it's not just the periphery economies that worry me. Marine Le Pen may not achieve her 'Frexit' referendum promise but she's absolutely right when she recently stated on Greek television that "as long as the government tells the Greek people they can remain in the eurozone while fighting against austerity, it will at worst be lying and at best wrong." 

In a weird twist of irony, the "economic and financial disaster" of Greece's ruling Syriza party has hit the chances of other populist parties gaining power in Europe, analysts told CNBC, after surprising shifts in voting in local elections in France and Spain this weekend. Perhaps this is why Le Pen wants Greece to exit the euro.

As far as Yanis Varoufakis, Greece's "rock star" finance minister, he wrote antoher comment on Project Syndicate, Deescalating Europe’s Politics of Resentment, where he states:
The fact is that Greece had no right to borrow from German – or any other European – taxpayers at a time when its public debt was unsustainable. Before Greece took any loans, it should have initiated debt restructuring and undergone a partial default on debt owed to its private-sector creditors. But this “radical” argument was largely ignored at the time.

Similarly, European citizens should have demanded that their governments refuse even to consider transferring private losses to them. But they failed to do so, and the transfer was effected soon after.

The result was the largest taxpayer-backed loan in history, provided on the condition that Greece pursue such strict austerity that its citizens have lost one-quarter of their incomes, making it impossible to repay private or public debts. The ensuing – and ongoing – humanitarian crisis has been tragic.

Five years after the first bailout was issued, Greece remains in crisis. Animosity among Europeans is at an all-time high, with Greeks and Germans, in particular, having descended to the point of moral grandstanding, mutual finger-pointing, and open antagonism.

This toxic blame game benefits only Europe’s enemies. It has to stop. Only then can Greece – with the support of its European partners, who share an interest in its economic recovery – focus on implementing effective reforms and growth-enhancing policies. This is essential to placing Greece, finally, in a position to repay its debts and fulfill its obligations to its citizens.

In practical terms, the February 20 Eurogroup agreement, which provided a four-month extension for loan repayments, offers an important opportunity for progress. As Greece’s leaders urged at an informal meeting in Brussels last week, it should be implemented immediately.

In the longer term, European leaders must work together to redesign the monetary union so that it supports shared prosperity, rather than fueling mutual resentment. This is a daunting task. But, with a strong sense of purpose, a united approach, and perhaps a positive gesture or two, it can be accomplished.
There is a lot of truth in what Varoufakis writes but as someone who has visited the epicenter of the euro crisis many times throughout my life, let me tell you, Greeks are perennial whiners and they never take responsibility for their economic failures.

But it's also high time that Germany and other creditors take responsibility for the euro deflation crisis which threatens to spread throughout the world. Something is fundamentally broken in the eurozone and all this endless political dithering is hardly inspiring confidence among nervous global investors and worse still, it's betraying an entire generation of young Europeans looking to work and start a family.

Also, I think my readers should read another comment on Project Syndicate by Yannos Papantoniou, Greece’s former Economy and Finance Minister, where he discusses Sustaining the Unsustainable, as well as a superb comment by Robert Skidelsky, Messed-Up Macro.

On this Greek Independence Day, let us all hope that Greece and the eurozone aren't embroiled in a lose-lose game. The Marine Le Pens and Nigel Farages of this world may want the dissolution of the eurozone but this is not in the best interest of Europeans or the global economy, which looks increasingly more fragile.

Below, Greece risks running out of cash by April 20 unless it secures fresh aid, a source familiar with the matter told Reuters on Tuesday, leaving it little time to convince skeptical creditors it is committed to economic reform.

Greece said it will present a package of reforms to its euro zone partners by next Monday in hope of unlocking aid to help it deal with a cash crunch and avoid default. See the Reuters clip below.

And professor Stephen Cohen, America's top Russian expert, says that he and other authorities have no input into US policy toward Russia. He says that there is no discourse, no debate, and that this is unprecedented in American foreign policy.

Cohen says that the "ongoing extraordinary irrational and nonfactual demonization of Putin" is an indication of "the possibility of premeditated war with Russia." Key points from Cohen's speech can be found here, and you can watch it below.

Keep his comments in mind as U.S. politicians voted on Monday to send lethal arms to Ukraine, dangerously escalating an already tense situation. That, Mr. Soros, is the real lose-lose game you're funding.

Tuesday, March 24, 2015

The Great 401(k) Experiment Has Failed?

Kelley Holland of NBC News reports, Retirement Crisis: The Great 401(k) Experiment Has Failed for Many Americans:
You need to know this number: $18,433. That's the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute. Almost 40 percent of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.

Older workers do tend to have more savings. At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living. Not surprisingly, retirement is now Americans' top financial worry, according to a recent Gallup poll.

To be sure, tax-advantaged 401(k) plans have provided a means for millions of retirement savers to build a nest egg. More than three-quarters of employers use such defined contribution plans as the main retirement income plan option for employees, and the vast majority of them offer matching contribution programs, which further enhance employees' ability to accumulate wealth.

But shifting the responsibility for growing retirement income from employers to individuals has proved problematic for many American workers, particularly in the face of wage stagnation and a lack of investment expertise. For them, the grand 401(k) experiment has been a failure.

"In America, when we had disability and defined benefit plans, you actually had an equality of retirement period. Now the rich can retire and workers have to work until they die," said Teresa Ghilarducci, a labor economist at the New School for Social Research who has proposed eliminating the tax breaks for 401(k)s and using the money saved to create government-run retirement plans.

A historical accident?

It wasn't supposed to work out this way.

The 401(k) account came into being quietly, as a clause in the Revenue Act of 1978. The clause said employees could choose to defer some compensation until retirement, and they would not be taxed until that time. (Companies had long offered deferred compensation arrangements, but employers and the IRS had been going back and forth about their tax treatment.)

"401(k)s were never designed as the nation's primary retirement system," said Anthony Webb, a research economist at the Center for Retirement Research. "They came to be that as a historical accident."

History has it that a benefits consultant named Ted Benna realized the provision could be used as a retirement savings vehicle for all employees. In 1981, the IRS clarified that 401(k) plan participants could defer regular wages, not just bonuses, and the plans began to proliferate.

By 1985, there were 30,000 401(k) plans in existence, and 10 years later that figure topped 200,000. As of 2013, there were 638,000 plans in place with 89 million participants, according to the Investment Company Institute. And assets in defined contribution plans totaled $6.6 trillion as of the third quarter of 2014, $4.5 trillion of which was held in 401(k) plans.

"Nobody thought they were going to take over the world," said Daniel Halperin, a professor at Harvard Law School, who was a senior official at the Treasury Department when 401(k) accounts came into being.

Rise of defined contributions

But a funny thing happened as 401(k) plans began to multiply: defined benefit plans started disappearing. In 1985, the year there were 30,000 401(k) plans, defined benefit plans numbered 170,000, according to the Investment Company Institute. By 2005, there were just 41,000 defined benefit plans-and 417,000 401(k) plans.

The reasons for the shift are complex, but Ghilarducci argued that in the early years, "workers overvalued the promise of a 401(k)" and the prospect of amassing investment wealth, so they accepted the change. Meanwhile, companies found that providing a defined contribution, or DC, plan cost them less. (Ghilarducci studied 700 companies' plans over 17 years and found that when employers allocated a larger share of their pension expenditures to defined contribution plans, their overall spending on pension plans went down.)

But the new plans had two key differences. Participation in 401(k) plans is optional and, while pensions provided lifetime income, 401(k) plans offer no such certainty.

"I'm not saying defined benefit plans are flawless, but they certainly didn't put as much of the risk and responsibility on the individual," said Terrance Odean, a professor of finance at the University of California, Berkeley's Haas School of Business.

Early signs of trouble

That concept may not have been in the forefront of employees' minds at the start, but problems with 401(k)s surfaced early.

For one thing, employee participation in 401(k) plans never became anywhere near universal, despite aggressive marketing by investment firms and exhortations by employers and consumer associations to save more. A 2011 report by the Government Accountability Office found that "the percentage of workers participating in employer-sponsored plans has peaked at about 50 percent of the private sector workforce for most of the past two decades."

The employees who did participate tended to be better paid, since those people could defer income more easily. The GAO report found that most of the people contributing as much as they were allowed tended to have incomes of $126,000 or more.

In part, that is because the ascent of 401(k) plans came as college costs started their steep rise, hitting many employees in their prime earning years. Stagnating middle-class wages also made it hard for people to save.

Fees have been another problem. Webb has studied 401(k) fees, and he concluded that "as a result of high fees, fund balances in defined contribution plans are about 20 percent less than they need otherwise be."

The Department of Labor in 2012 established new rules requiring more disclosure of fees, but it faced strong industry opposition, including a 17-page comment from the Investment Company Institute.

Failure of choice

Most employees also turned out to be less than terrific investors, making mistakes like selling low and buying high or shying away from optimal asset classes at the wrong time.

Berkeley's Odean and others have studied the effect of investment choice on 401(k) savers, and found that when investors choose their asset class allocation, a retirement income shortfall is more likely. If they can also choose their stock investments, the odds of a shortfall rise further.

"401(k)'s changed two things: you could choose not to participate, and you chose your own investments, which a lot of people, I think, screw up," Halperin said.

Benna, who is often called the father of the 401(k), has argued that many plans offer far too many choices. " If I were starting over from scratch today with what we know, I'd blow up the existing structure and start over," he said in a 2013 interview.

Another problem is that when 401(k) savers retire, they often opt to take their savings in a lump sum and roll the money into IRAs, which may entail higher fees and expose them to conflicted investment advice. A recent report by the Council of Economic Advisors found that savers receiving such advice, which may be suitable for them but not optimal, see investment returns reduced by a full percentage point, on average. Overall, the report found that conflicted investment advice costs savers $17 billion every year.
The result of all these shortcomings? Some 52 percent of American households were at risk of being unable to maintain their standard of living as of 2013, a figure barely changed from a year earlier—even though a strong bull market should have pushed savings higher and the government gives up billions in tax revenue to subsidize the plans.

In a hearing last September on retirement security, Sen. Ron Wyden, D-Ore., declared that "something is out of whack. The American taxpayer delivers $140 billion each year to subsidize retirement accounts, but still millions of Americans nearing retirement have little or nothing saved."

Retirement worries rise

As problems mount with 401(k)s, Americans' worries about retirement security are intensifying.

A 2014 Harris poll found that 74 percent of Americans were worried about having enough income in retirement, and in a survey published recently by the National Institute on Retirement Security, 86 percent of respondents agree that the country is facing a retirement crisis, with that opinion strongest among high earners.

Changes may come, but for now, 401(k) plans and their ilk remain Americans' predominant workplace retirement savings vehicle. They may be a historical accident, but for the millions of people now facing a potentially impoverished retirement, the fallout is grave indeed.

As a former Treasury official, Halperin witnessed the creation of 401(k) accounts, But, "on balance, I don't think it was a big plus" that the accounts were created, he said. "I don't take credit for it. I try to avoid the blame."
Welcome to the United States of Pension Poverty where rich and powerful private equity and hedge fund titans make off like bandits charging public pension funds excessive fees while the restless masses work till they die, or more likely, retire in poverty because they simply can't save enough money to retire in dignity.

I commend Kelly Holland for writing this article. Of course, it didn't surprise me one bit. In July 2012, I discussed America's 401(k) nightmare and explained why it was going to lead to more pension poverty down the road.

And now that America's private and public sector are following the rest of the world, shifting out of DB into DC plans, you can bet there will be more pension poverty down the road, pretty much ensuring global deflation. That's why I laugh at all the bond bears claiming we're in for a major bond market bruising, they simply don't get it. Rising inequality, including the growing retirement divide, is bad for the overall economy and will dampen growth prospects for decades to come.

What else? America's ongoing retirement crisis (and ongoing quality jobs crisis) will place considerable constraints on public finances, exacerbating total debt due to higher health and social welfare costs. This is why I'm a stickler for enhancing the Canada Pension Plan for all Canadians and doing the same thing via enhanced Social Security for all Americans.

Sure, America's rich and powerful will shout "we can't afford it" and I will counter their warped ideological arguments with a good dose of basic economic theory and tell them we simply can't afford the status quo because it is the real road to serfdom (Hayek got it wrong).

Importantly, policymakers around the world and their rich and powerful backers need to open their eyes and understand the benefits of defined-benefit plans to the overall economy (and overall debt profile of a country) and also recognize the brutal truth on defined-contribution plans.

One thing I can guarantee you, the growing angst of Americans unable to retire will be an issue in the 2016 elections. Senators Warren and Sanders will make it a point to remind Americans that they bailed out Wall Street's elite following the 2008 financial crisis but nobody is going to help Main Street retire in dignity and security.

Below, CNBC's Kelley Holland discusses how $18,433 is the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute, highlighting the failure of 401(k)s.

And Emily Wittmann paid for years into a 401(k), but dipped into those retirement savings during the economic downturn. She's not alone. The scars of the 2008 crisis remain fresh to many Americans petrified to "invest" in these increasingly volatile markets dominated by computer algorithms.

Lastly,  a 2009 report which explains the 401(k) nightmare. As the default retirement plan of the United States, the 401(k) falls short, argues CBS editor-in-chief Eric Schurenberg. He tells Jill Schlesinger why the plans don't work.

Monday, March 23, 2015

The UK Pension Raid?

Katie Morley of the Telegraph reports, Another pension raid: the scenarios of who will have to pay:
In the three years since 2012 the Government has virtually halved the sum people can save into pensions during the course of a working life, slashing it back from £1.8m to £1m.

The numbers may sound big: but the retirement incomes such sums can buy is disappointing.

The latest cut – announced on Wednesday in the Budget – takes the lifetime limit down from £1.25m to £1m.

If your pension grows above that, the tax payable when money is subsequently withdrawn is 55pc.

The Government has decided the limit will remain at £1m until 2018, before increasing in line with inflation every year thereafter. This is not much of a sweetener. The new limit will place a restrictive ceiling on the retirement incomes of middle-class workers such as doctors, middle-managers, teachers and policemen.

Many will now need to change their financial plans. And even though the Budget ink is barely dry, financial advisers have already posted thousands of letters to clients aged 50 and over, warning them at what date they are expected to break through the new lifetime allowance.

One such letter is likely to be opened by John, a 50-year old company director with a £500,000 pension fund. John has £1,000 going into his pension each month and is aiming to retire on his 65th birthday. When he opens the letter from his adviser, Tilney Bestinvest, he will learn that if his pension fund continues to grow at 7pc a year, he will reach the new £1m allowance when he is 58.

Another saver about to receive a shock in the post is Alison, a 55-year-old solicitor with an £800,000 pension pot. She no longer contributes to her pension – because she is already aware of the danger of exceeding the limit – yet she too wants to work until her 65th birthday. Alison will soon find out that if her cautiously invested portfolio continues to grow at 4pc, she will exceed £1m before her 60th birthday, leaving her potentially liable to a huge tax bill.

The lower ceiling is also a blow for younger savers. As things now stand those in their 40s and 30s will not be able to amass retirement funds as generous as their parents’.

The Pensions Minister, Steve Webb MP, has recently warned that people in their twenties and thirties need to be contributing 15pc of their salary into a pension to have a “comfortable” retirement - around seven times more than most currently save. But following the Budget announcement his advice is now questionable.

If a 25-year-old saver earning an average graduate salary of £30,000 put 15pc of their salary into a pension, they would exceed the £1m threshold before they retire, according to projections from Mercer, a pension consultant.

Final salary? You'll get off more lightly
The cut will hit savers with defined contribution pensions twice as hard as those with final salary arrangements in place. This is because they are calculated in very different ways.

For someone using a defined contribution pension pot to buy an index-linked annuity with a spouse’s pension, the allowance cut takes the maximum annual income you can buy down from around £33,500 (bought with a £1.25m fund) to just under £27,000 (bought with a £1m fund). That assumes you take no tax-free cash and spend every penny on an annuity.

For people with final salary pensions, the maximum annual pension they can receive if their pension is worth under £1m in total is reduced to £50,000, down from £62,500 for a fund worth £1.25m.

This higher benefit arises because the value of a final salary scheme – for the purposes of working out the lifetime allowance – is found by multiplying the annual benefit by 20.

Brian Henderson, a partner at consultants Mercer, said: “On the face of it, £1 million is a huge amount of money and beyond the reach of many. However, the impact of this reduction on defined contribution savers reminds us that they continue to be the poorer relation when it comes to pension provision.”

He predicts that some savers will have to abandon the idea of further pension savings and turn instead to “making use of the increased Isa allowances, which they may sensibly choose to use as an alternative to pension savings.”

What should I do if my pension is nearly worth £1m now?

That depends on your age, on how long you have until you want to draw benefits, and whether you want to keep investing.

The new limit doesn’t apply until April 2016 so you have some time to prepare. But if you are near the limit, you do need to keep a close eye on your fund value.

You have the option to “protect” the higher limit of £1.25m if you apply to do so before April 2016 (read on for more details).

So some investors will have to weigh up the advantages of further tax relief if they continue to contribute, against the risk of becoming liable to the penal tax. You will want to get as close as possible to the cap – without ever exceeding it.

This is why your age matters very much. By taking money out of your pension you can manage the risk, but you can only make withdrawals if you are over 55.

Once the money is outside of the pension, if it grows, this growth won’t count toward your allowance. But your withdrawals won’t give you new “headroom”. That’s because the limit is calculated at the point of any withdrawal. So drawing £200,000 from a £900,000 pension will still leave you a lifetime balance of £900,000.

Every time you take benefits, including your tax free cash, your pension firm will test your fund against the lifetime allowance and report this information back to HMRC. If you don’t make withdrawals, your pension firm will only test your pension against the limit at age 75, and/or when you die.

Jackie Holmes, a senior consultant at Towers Watson, said that although the 55pc tax which applies where the limit is exceeded is punitive, sometimes it is better just to pay the tax than to give up valuable benefits.

Some employers offer cash alternatives to pensions for people who have already reached the lifetime allowance, but for people in final schemes these rarely get close to the value of the pension that must be given up.

She said: “ If your employer isn’t offering a cash alternative at all, it’s better to pay 55pc tax on something than 0pc tax on nothing – though the decision is less straightforward if the employee must contribute to benefit.”

What should I do if my pension is worth between £1m and £1.25m now?

If you’ve already built up a pension worth more than £1m but less than the old limit of £1.25m, you’ll be able to “protect” your pension at its current value under various arrangements. Using “protection” means no more money can be put into your pension, or the protection is lost. One danger is where employers mistakenly pay into a pension where protection has been set up, potentially leaving savers vulnerable to the 55pc. The Government knows this is a problem for high earners and has introduced a new rule to allow you to ask your employer to permanently exclude you from “auto-enrolment” into a scheme.
As a Canadian reading all these pension articles from the UK makes me glad I don't live there. What a needlessly complicated pension system.

The other thing I don't really buy with this article is that people in Britain are actually able to save £1m or more by the time they hit 55 years of age. People in the UK are being squeezed by higher cost of living and high taxes. I have serious doubts that they're tucking away 15% of their income for their retirement.

Sure, the Chancellor, George Osborne, just announced plans for a "savings revolution" as the centerpiece for his final budget, just 50 days before the election, but this won't help the working poor as much as the Conservatives claim:
“This Budget helps hard-working people keep more of the money they have earned,” Mr Osborne said.

“This is a Budget that takes Britain one more big step on the road from austerity to prosperity. We have a plan that is working – and this is a Budget that works for you.”

In a surprise announcement, Mr Osborne was also able to proclaim that government debts - as a proportion of the total size of the economy - are forecast to begin falling this year.

The austerity programme will also end a year earlier than expected in 2018 - paving the way for the Conservatives to offer sweeping tax cuts if they are re-elected in the forthcoming general election. New tax pledges are expected to be included in the party's election manifesto next month.
A lot of things can happen between now and 2018, derailing those "sweeping tax cuts" the Conservatives are promising. All it takes is another global financial crisis or a major euro crisis and you can throw those government projections right out the window.

And by the way, those in a defined-contribution plan are much more vulnerable to the vagaries of markets than those in defined-benefit plans. That's just part of the brutal truth on DC plans.  This is why I'm totally against taking money out of pension plans unless you face serious financial constraints due to health or other unfortunate events.

What else? As Katie Morley reports in an other Telegraph article, hundreds of thousands of UK pensioners living overseas are discovering that their state pension is at risk of being cut off if they “fail to prove they are alive”:
Since 2013 the Department for Work & Pensions (DWP) has been making expat pensioners fill in official forms to stop their friends and relatives fraudulently claiming their state pensions after they have died.

If forms are not correctly filled out and returned within nine months, the DWP will assume pensioners are dead – and will stop their pension payments.
Well, I'm all for anti-fraud measures when it comes to pensions and social programs but they better make sure these people are really dead or they risk making some serious mistakes like they did in the United States.

Below, CBS 60 Minutes reports on how thousands of errors to the Social Security Administration's Death Master File can result in fraudulent payments -- costing taxpayers billions -- and identity headaches. Watch this report, it's another eye-opener.

Unfortunately, 60 Minutes doesn't always get it right, like Sunday night's report on rare earths and China. Be very careful deducing any investment advice from 60 Minutes and other news outlets.

Friday, March 20, 2015

The Big Fat Greek Squeeze?

Marcus Bensasson and Nikos Chrysoloras of Bloomberg report, Empty Greek Coffers Bring ‘Accident’ Threat Closer:
With Greece’s coffers emptying and payments looming, Prime Minister Alexis Tsipras’s government is in a tight race to avoid a financial day of reckoning after receiving a “final political push” from his EU partners.

While Tsipras may have bought some time after yesterday’s European Union summit in Brussels, he acknowledges Greece is facing “liquidity pressure”, without revealing how much money is left in the bank. The country’s cash shortfall is projected to hit 3.5 billion euros ($3.7 billion) in March, according to Bloomberg calculations based on 2015 budget figures.

After nearly four hours of talks with German Chancellor Angela Merkel and other European leaders yesterday, Tsipras received no guarantees that creditors would unlock cash from a 240 billion-euro bailout package unless concrete steps are taken to implement agreed reforms. The EU chiefs warned him time is running out to overcome a standoff over the aid and that the Greek government needed to submit a new list of reform measures rapidly.

“To be quite honest, the ball is in the court and in the hands of the Greek government,” Finnish Prime Minister Alexander Stubb told reporters in Brussels today on the second day of the EU summit. “The institutional decisions were taken on Feb. 20 after long and difficult negotiations and now a final political push has been given.”

As Tsipras prepares for another meeting with German Chancellor Angela Merkel in Berlin on Monday, concerns grow as to whether he’ll be able to pay salaries and pensions next week. Just how long Greece can survive on reserves isn’t known, with estimates ranging from a matter of days to a few months. An EU official yesterday said the understanding among euro-zone leaders is that Greece has enough cash until April.
Accident Prone

“A government should not be in this position because it’s a difficult situation prone to accidents,” said Athanasios Vamvakidis, head of G-10 foreign exchange strategy at Bank of America Merrill Lynch. “We are assuming that in April and May the government will be paying mostly wages and pensions. For everything else, things will be delayed, so the government will be running arrears.”

Greece has signed off on a repayment of about 350 million euros of loans to the International Monetary Fund on Friday, two Greek government officials said.

Investors were relieved on Friday that at least an accident has been averted for now. Greek bonds recovered from multi-month lows, while the Athens Stock Exchange index was trading 2.7% higher. The yield on three-year bonds was 55 basis points lower at 23.2 percent at 13:19 p.m. in Athens, after reaching yesterday the highest level since July, when the notes were first issued. The Athens Stock Exchange index has fallen 15.7 percent so far this month, while the yield on three-year bonds has risen almost 9 percentage points as a rift between Greece and its creditors widened. 
Rupture Avoided

“We avoided a rupture which could lead to a depositors panic next week,” George Pagoulatos, a professor of European politics and economy at the Athens University said. “On a more substantial level, we saw that neither side wants to push things to the edge. The fact remains though, that Greece needs to deliver on concrete reform commitments, and it couldn’t have been otherwise.”

Even if Tsipras meets March obligations, things could only get tighter in coming months. The second-quarter shortfall, including debt payments, is an estimated at 5.7 billion euros, based on Bloomberg calculations using monthly figures from the 2015 budget passed by the previous government and finance ministry information on the debt servicing costs.

The second-quarter projection assumes Greece is able to roll over short-term debt as it comes due, most of which is held by the country’s banks. The lenders thus far have participated in liquidity-draining auctions rather than let the country default. That could change if things deteriorate. 
Deposit Outflows

Greek daily deposit outflows accelerated to a one-month high Thursday, two people familiar with the matter said. At this pace available liquidity could be exhausted in a matter of days, one of the people said.

The Bank of Greece has plugged cash shortfalls by tapping the reserves of other public sector entities, including pension funds, hospitals, and universities. How much money these entities have and how easily the government can directly access these funds is critical to knowing how long Greece can keep paying its bills. Officials directly involved in the bailout talks have said they don’t have a clear picture.

“Although visibility on the exact liquidity position is low, reports continue to suggest that the Greek authorities’ ability to continue to meet their liabilities is measured in weeks,” Malcolm Barr, a JPMorgan economist based in London, wrote in note to clients Wednesday.

The public sector held 12.3 billion euros of deposits in the Greek banking system at the end of January, including 3.4 billion euros from the social security fund and 2.2 billion euros from local governments, according to the most recent data available from the central bank. 
Plugging Gaps

If the government taps public sector deposits held at commercial banks, this could add to funding pressure on Greek lenders, which have lost more than 20 billion euros in deposits since November and are reliant on an emergency funding through the European Central Bank to prop them up.

Tsipras is plugging the budget gaps as best he can. Spending in February was 800 million euros less than originally planned and this week the government moved forward with measures designed to bring in more revenue, including a plan to allow repayment of tax arrears in 100 installments.

The government potentially bought itself some time thanks to the ECB. The bank’s governing council on Wednesday raised the amount available to Greek banks by 400 million euros to about 70 billion euros, people familiar with the matter said. Still, that leaves the financial system with a cushion of just 3 billion euros and was less than half of what Greece requested, the people said.

“If we start seeing progress in the negotiations and it becomes clear that we are going to have a deal and Greece will receive official funding in June, there is absolutely no way that the Europeans will allow an accident in Greece,” Vamvakidis said. “However, if the brinkmanship continues and by the end of March we don’t have some concrete progress in the negotiations and we are exactly where we are today, then these funding pressures will become more severe.”
Things are not good in Greece. In order to avoid going bankrupt and a full-blown banking crisis, the cash-strapped leftist government is scrambling to find money and it's resorting to raiding pensions, which were already at a breaking point, to make its basic payments. 

And Kathimerini reports the Greek government has also called on major public corporations, including utilities, to invest their cash reserves in state debt, along the lines of the proposal made to social security funds and other state entities.

As the FT reported last week, the Syriza government is pressing the country’s social security funds to hand over hundreds of millions of euros immediately to ensure that pensions and civil servants’ salaries are paid this month (of course, we wouldn't want to piss off civil servants in the outrageously bloated Greek public sector!). 

How long can this charade go on? I don't know but it's clear Greece's creditors have had enough of the clowns running the country. German Chancellor Angela Merkel has set strict terms for Greek aid, stating on Friday Greece would only receive fresh funds to ease a cash crunch once its creditors approve a comprehensive list of reforms it has promised to present soon.

Basically, Merkel and Schauble are telling Tsipras and his cronies that there is no more time to waste. Either reform the Greek economy or you risk going back to the drachma and being the Argentina of Europe (if they're so lucky).

I call it the big fat Greek squeeze. The creditor nations are using every tool available to weaken the leftist Syriza government in an attempt to persuade Greeks in Greece to start realizing that they won't be blackmailed into submission and that this government is a total farce.

To be sure, the Germans are playing a very dangerous game, one that could easily backfire spectacularly on them, but I'm tired of professor Varoufakis lecturing his counterparts and want to see more concrete actions focusing on what Greece needs now. And what Greece needs are major structural reforms in its antiquated, over-bureaucratized and corrupt economy which benefits a handful of ultra rich families, a few special interest groups and the bloated public sector.

In a sad state of affairs which proves austerity isn't working, Kathimerini now reports the European Union will commit 2 billion euros ($2.15 billion) to help Athens deal with what even EU leaders now call the "humanitarian crisis" hitting Greeks in the wake of the financial crisis that left the nation on the brink of bankruptcy:
EU Commission President Jean-Claude Juncker said the funds will not be linked to international loans keeping Greece afloat but will instead be used as aid for people and companies hit hardest by the crisis.

Greek Prime Minister Alexis Tsipras praised the decision.

"It is a good sign," he said. "It was recognized that there is a humanitarian crisis in our country and that there must be a common effort against it — because it was the not the result of some natural catastrophe."

The pledge came hours after the EU leaders told Tsipras to come up "in the next days" with a raft of budget cuts and tax increases to improve his balance sheet before he gets more bailout money from Europe.

Tsipras, however, refused to commit to a date of delivery, saying "deadlines only create more pressure."

German Chancellor Angela Merkel said Tsipras can decide what mix of budget cuts and tax increases to impose: "What’s important is that in the end the sums add up."

Fears remain that the hard line of the Greek government formed in January could cause the country to drop out of the euro, something that would trigger a crisis for the currency shared by 19 nations.

"A disorderly Greek exit from the euro remains a major threat to Europes economic stability," British Prime Minister David Cameron said.

European leaders have become increasingly exasperated by what many see as foot-dragging on the part of Tsipras’ government. Greece agreed a month ago to push through reforms in exchange for EU help in keeping it solvent, but has delayed submitting the measures.

French President Francois Hollande said Tsipras had recommitted to moving fast.

"The Greek prime minister promised me that he would move as quickly as he can to present his reforms," he said.
Get to it Mr. Tsipras, time is running out and your obsession of holding on to power at all cost is quickly making you and the Syriza government the laughingstock of the entire world.

Of course, if you ask me, Tsipras, Merkel, Schauble, Varoufakis, Juncker and many others should all get an Oscar for their performance. I've never seen so much hopeless political dithering in my life. How the eurozone can survive with such incompetent leaders incapable of making critical decisions is beyond me. Then again, I remain short euros and will gladly short their incompetence!

On that cynical note, I leave you with the now infamous discussion which took place two years ago in Zagreb, Croatia where then professor Varoufakis discussed his book, The Global Minotaur.

Take the time to listen carefully to Varoufakis, there is no denying he's brilliant -- and hopelessly full of himself! He explains in great detail why the United States is able to maintain its global hegemony in spite of taking on increasing debt to maintain its control. You will learn why Paul Volckner is the most important central banker in history and why President Reagan was wrongly glorified by Americans and should be a mere "footnote in history."

I'm actually reading The Global Minotaur along with many other books including Michael Hudson's The Bubble and Beyond, Steve Keen's Debunking Economics, Warren Mosler's The 7 Deadly Innocent Frauds of Economic Policy and Soft Currency Economics II, and Randall Wray's Modern Money Theory. I recommend them all, especially to economics and finance students being taught mainstream garbage at universities.

As you will see in the discussion below, Varoufakis at one point sticks the finger to Germany. This was a complete hoax. A German TV presenter has admitted to faking a video showing Varoufakis giving the middle-finger gesture to Germany, after the politician vehemently contested its authenticity.

Mr. Varoufakis obviously doesn't understand satire. He should stop going around the world lecturing people, doing photo spreads for Paris Match, and writing blog comments on Greek-German relations, and start implementing much needed reforms in the Greek economy.

It's high time Greeks take responsibility for their country's economic failure and realize that there are no magical solutions to this ongoing Greek tragedy. The Global Minotaur will continue to reign supreme but the Greek Minotaur is facing an ugly and painful death if it continues to avoid much needed reforms.