The Lies We Tell Ourselves

A few years back I had a stretch where I worked on a number of cases involving multiemployer pension funds.   Multiemployer funds or "Taft-Hartley" funds are union pension plans in industries that organize workers in relatively small enterprises into a larger union for purposes of negotiating benefits, etc.    The two big cases I had involved employees at grocery stores across the South, and employees at print shops in the northeast.   Both of the pension plans had essentially the same two problems.

First, the pensions as a whole were structured as a Ponzi scheme where high benefits for the current retirees were only affordable if the union kept growing and getting new members whose contributions to the plan would support the benefits.   If the unions didn't grow -- and, as we know, unions have been shrinking -- the plans fell apart, because there simply weren't enough contributions coming in to support the high level of promised benefits.

Second, the pensions covered up the first problem through the 1980s and 1990s by getting high returns on their investments, and by assuming that those high returns would continue forever.   This is called the actuarial return on investment assumption, and plans would typically assume that they would get 8% or even 9% a year on their investments ad infinitum.   By doing so, they could assume that investment returns would pay for future benefits, and could kid themselves into believing that relatively low and inadequate levels of current contributions would be good enough.   Some plans who were flush with cash at the end of the 1990s even gave themselves "contribution holidays."

What happens when there aren't enough current workers to contribute to a plan, and investment returns go flat?   In the industry what happens is known as a pension "death spiral."

This is a long way around to pointing you toward an important article in today's WSJ by Andy Kessler in which he talks about the problems of pension finances across the country as highlighted by the bankruptcy of the City of Stockton in California:

You can't wish this stuff away. Over time, returns are going to be subpar and the contributions demanded from cities across California and companies across America are going to go up and more dominoes are going to fall. San Bernardino and seven other California cities may also be headed to Chapter 9. The more Chapter 9 filings, the less money Calpers receives, and the more strain on the fictional expected rate of return until the boiler bursts.  

Sadly, the only thing left is to cut retiree payouts, something Judge Klein has left open. There are 12,338 retired California government workers receiving $100,000 or more in pension payments from Calpers. Michael D. Johnson, a retiree from the County of Solano, pulls in $30,920.24 per month. As more municipalities file Chapter 9, the more these kinds of retirement deals will be broken. When Wisconsin public employees protested the state government's move to rein in pensions in 2011, the demonstrations got ugly—but that was just a hint of the torches and pitchforks likely to come.

America as a whole is just a big Stockton, with our Social Security systems and Medicare systems essentially playing the role of the union pension and retiree health plans.   It's a Ponzi scheme based on the assumption of endless consistent GDP growth -- where instead we have stagnation -- and a steady influx of new workers -- where instead we have a barely replacement level birthrate.   We lie to ourselves that a culture of consumption and hedonism and low birth rates can support the retirement promises we've made to ourselves.   But it can't -- there aren't enough young people to work, and there's not enough economic growth.

Torches and pitchforks sounds pretty mild compared to what we might expect.    A society this affluent and this entitled has never before tried the experiment of falling apart in slow motion.