Pension Blues

Posted on the 04 July 2015 by Adask

Politician: Trust Me–I’ll Protect Your Pension
[courtesy Google Images]

MarketWatch.com

“When Chicago Public Schools announced on June 24 that it would borrow $1 billion to make a $600 million-plus pension payment due June 30 an eerie feeling spread across bond investors and taxpayers alike.”

Get that?  The Chicago Public School system has undoubtedly already collected hundreds of millions of dollars (probably billions) from the teachers to fund the teacher pension plan.  The School system is therefore a debtor to those teachers.  And yet, that debtor sought to borrow another $1 billion to pay the part of the debt that’s due on June 30th.  How much more will be due on July 30th, August 30th and December 30th?  How much will be due this year, next year and next decade?

By borrowing $1 billion to pay existing debt, the Chicago teachers’ pension fund demonstrates that it’s already broke.  Where’s the money going to come from to pay future pension obligations?

The School system’s attempt to borrow more money to pay an existing debt is analogous to an ordinary man using his Visa to pay off his MasterCard that he’d already used to pay off his American Express.   Going deeper into debt to repay existing debt is evidence of desperation and gross mismanagement of funds.

Borrowing more to pay an existing debt may buy some time, but the result is virtually inevitable:  bankruptcy.

If you don’t believe me, ask Greece.

“It was the same eerie feeling that gripped investors when Moody’s Investors Service downgraded Chicago’s credit rating to junk based almost entirely on the city’s pension problems.

“The fear was that elevated pension costs, in cities like Chicago, might push these public entities into insolvency, wiping out much of the holdings of municipal-bond investors.”

“Might”?!  Might push these public entities into insolvency?  That’s pretty much like saying the sun “might” rise in the east tomorrow.  There’s no “might” about it—only when.

•  The MarketWatch article surprised me because it focused on the investors who’ve purchased municipal bonds to fund teacher’s retirement plans rather than on the retirees who expect to receive those funds.

Up until now, I’ve been inclined to think of growing pension problems in terms of the losses that will be suffered by retirees.

However, evidence indicates that, at least initially, the pensioners who are scheduled to receive money from the city are not the first victims of city insolvency.  The first victims are the bondholders—the creditors who loaned money to the city to pay existing pension debts.

The creditors believed that it was supremely safe to lend to governmental entities because government, by means of its coercive taxing power, could always squeeze more money out of taxpayers to repay the bonds.

Silly creditors.

Didn’t they know that if government went broke (as seen in Greece), government would rather rob the creditors (by repudiating the bonds) than rob the retirees (by refusing to provide pensions) or rob the taxpayers by raising taxes?

It’s simple politics.  Bondholders may be relatively wealthy but they are few in number.  Of the three groups (bondholders, retirees, and taxpayers) bondholders are the smallest group.  Therefore, they have the least political clout.  If somebody has to be robbed, the smallest group will be the first victims because they will make the least political noise.  Besides, who really objects to robbing the relatively rich?

Later, government will rob the second smallest group—retirees—by “restructuring” or even repudiating their pension plans.  Finally, government will try to extort every last dime out of the multitude of taxpayers by subjecting them to “austerity”.

It’s just like Greece.  First, Greece robbed their creditors (bondholder) by refusing to pay the debts owed.  Next, they’ll rob the Greek retirees by restructuring or repudiating the pension plans.  Finally, they’ll rob the Greek people by subjecting the nation to austerity and economic depression.

You can expect to see a similar series of thefts in this country in the near future.

•  Willy Sutton was a famous bank robber during the Great Depression. When finally arrested and asked why he robbed banks, he answered “Because that’s where the money is.”  The same principle animates today’s financial system.

Why does our government always rob creditors?  Because that’s where the money is.  Lending to the government is like lending to Al Capone.   Ultimately, you’re gonna get robbed.

Our modern financial system has depended on inflation (theft) at least since WWII.  Any financial system based on theft is immoral and ungodly.

Q:  Who, primarily, is robbed by inflation?

A:  Those who have savings.  Creditors.

Yes, I know that the biggest creditors get special breaks (“too big to fail”).  But ordinary creditors/savers are always the Number One Victim of government extortion.  Taxes.

But.  If push comes to shove, government will rob anyone including taxpayers, bondholders, pension recipients and even future generations (by borrowing now and leaving the debt to our children).  Unfortunately, under current economic conditions, the taxpayers (a/k/a “voters”) have already been robbed of so much that there’s not much left to take without collapsing the entire economy.

Fleecing taxpayers is like feeding slaves.  As a slave owner, you can save a lot of money by refusing to feed your slaves, but after 30 days or so, they’ll die and then who’ll be left to do the work?   Who’ll have to work then?  Your wife?  Your kids?  You’d never hear the end of it.

The government can’t tax its slaves (taxpayers) into abject poverty unless government is prepared to collapse the economy.  For the system to continue to function and avoid a violent revolution, the government’s slaves must be treated like house niggers who are allowed to have their own homes, cars and clothes.

Government’s growing need to rob future generations (by means of borrowing) is evidence that today’s taxpayers have already been robbed/taxed to the limit.  Evidence is seen in the national debt which first started to go exponential back about A.D. 1973 (just after the US dollar became a pure fiat/immoral currency).  That inflection point arguably marked the maximum tax rate that could be imposed on the American people without degrading the economy.

Since then, government has tried to sustain the economy by not raising taxes significantly on current taxpayers while raising taxes considerably on future generations.  Tax increases on future generations (who aren’t here to defend themselves and their lives from government confiscation) is seen in the growth of the national debt which is officially, about $18 trillion, but believed by some to be over $200 trillion.

Recently, government passed the FATCA law in order to raise taxes on US citizens who live, work or bank in foreign countries. Some see FATCA as evidence of government’s growing power.  I see FATCA as evidence of government’s growing desperation.  Where will they find enough revenue to hold this racket together?  Who will they tax next?  The Greeks?

Sooner or later, even future taxpayers (borrowing) will be unable to fund the government’s debt?

Then what?

The inevitable will no longer be postponed.

•  All of which is more-or-less consistent with the warnings I’ve given you for the past four or five years:

1) What can’t be paid, won’t be paid.

2)  One man’s debt is another man’s asset.

3) When the debts can’t be paid, the correlative paper-assets (bonds) become worthless.

As with Greece, the federal, state and local governments of the U.S. have made deceptive, irrational, and overly-generous, pension-promises to government workers.  Greedy government workers and public employee unions delighted in the promise of fat future pensions.  But, until now, no one has bothered to seriously consider the fact that the pensions promised are not only unearned but also unpayable.

Which brings us back to:  1) What can’t be paid, won’t be paid.  That means the retirees won’t get their pensions, and the bondholders won’t be repaid on their investments.

The various federal, state and local governments will go through a predictable series of steps (thefts) such as the lunacy of borrowing more money from future generations (who aren’t here to defend their interests) to pay existing debts.  But the fact remains that, sooner or later, we’ll have to face the truth:  What can’t be paid, won’t be paid.  Government creditors (bondholders) are already not being paid.  Soon, even government pension plans will be too broke to pay retirees in full, and therefore won’t pay retirees in full (if at all).

It might take another year or three for cities like Chicago to face and publicly admit that they’re insolvent.  But, like Greece, government’s excessive pension plan promises are on a collision course with mathematical reality—especially when the economy is in a recession and tax revenues are down.  When pension promises and fiscal reality collide, government retirees are going to lose their expected payments.  They’ll scream and shout—but it won’t matter.  They’re either going to lose a lot of their pensions, or—if they refuse to “voluntarily” take a big “haircut” in pension promises—they’ll suffer the involuntary loss of all of their pensions.

 

“. . . public pensions have recently turned into the biggest headache for taxpayers and municipal-bond investors, threatening to bring down the finances of U.S. cities and states.

“Detroit as well as three Californian cities—Vallejo, Stockton, and San Bernardino—had to declare bankruptcy because of their overwhelming pension costs.

“In those cases, the courtroom turned into a brutal battlefield pitting bond investors trying to save the money they invested in those cities’ municipal bonds on one side. And on the other side have been public employees trying to save the dwindling pensions that were promised to them.”

Fascinating.

I’d thought the pension battle was strictly between the retirees and the taxpayers.  But it turns out that the battle is currently between the municipal bond holders and the retirees.

At first glance, you might think that the bond-holders and retirees don’t have much in common.  You’d be wrong.  The bond-holders and retirees are two subsets of a single fundamental class:  creditors who’ve loaned their wealth to the government.

First, the school teachers loaned their money to government when they contributed funds into government-run pension plans.  The government mismanaged, lost, wasted or stole those funds.

Later, the municipal bondholders loaned their money to government  to support the illusion that government (which had already robbed the pension funds) was sufficiently responsible, honorable and trustworthy to repay its first debt to the teachers’ pension funds and second debt to the bondholders

How stupid is that?  Bondholders (who are presumably intelligent people) are:

1) lending money to a known thief (government) to make good on a debt whose original funds (pension plans) have already been stolen by that thief; and

2) expecting they won’t also be robbed by the known thief.

The bondholders figured that government (like Al Capone) would use its guns to rob the taxpayers to repay the bondholders.  They never dreamed that government (like Al Capone) would use its guns to rob bondholders.

I have no sympathy for either class of creditors.

The teachers loaned their money to a corrupt government in return for promises that government (like Al Capone) would use its guns to extort enough money from taxpayers to pay unearned and excessive pensions to retired teachers.  The teachers laughed and smirked over their good fortune in being allowed to rob the taxpayers.  But in their laughter, the teachers became complicit in the government’s promise to rob the taxpayers.  The teachers were just as immoral as government.

The municipal bond-holders loaned their money to the known thief, government, in return for promises that government (like Al Capone) would use its guns to extort enough currency from taxpayers to repay those municipal bonds.  By lending money to the known thief, bond-holders became complicit in government plans to rob taxpayers.

Neither the teachers nor the bondholders dreamed that there was a limit to how much even “Al Capone” could extort from current taxpayers with taxes.

Nobody dreamed that there was a limit to how much “Al Capone” could extort form future taxpayers by borrowing.

Unfortunately, the time for dreaming is done.  The nightmare is here.  We’ve reached that limit on government revenues and government can’t pay its debts.  Like Al Capone, government is looking for someone else to rob.  If it can’t rob the taxpayers, it’ll rob its creditors by repudiating its debts.  The teacher who cheered when government promised to rob the taxpayers and the bondholders who smirked when government promised to rob the taxpayers, are now themselves going to be robbed.

So sad.

Please pass me a tissue.

•  “Recent cases have shown that bond investors are clearly losing this battle [between investors and pensioners].

“In the bankruptcies of Detroit, Vallejo, Stockton and San Bernardino, bondholders have faced losses of up to 99% of their holdings . . . . all three California cities chose to preserve full pensions for their employees, while Detroit only cut pensions by approximately 18%.”

For now, the bondholders are taking the beating and the pensioners are being (mostly) protected.

However, insofar as some government pension-plan bondholders are taking 99% losses today, we can wonder, “Who will lend more money to fund government’s pension-plan obligations tomorrow?”  If current bondholders are being robbed, future creditors will refuse to purchase more municipal bonds.  Soon, government won’t be able to borrow more money to support its pension plans and also won’t be able raise taxes in the recessed economy.

If government can’t borrow more or raise taxes enough to pay its pension obligations, it won’t pay those obligations and, inevitably, the retirees will be robbed and impoverished.

Sooner or later, not only the bondholders, but also the government retirees will suffer significant losses in the pension plans government had guaranteed.

What can’t be paid, won’t be paid.

•  Part of the reason bondholders have been taking it on the chin is Chapter 9 bankruptcies of the Federal bankruptcy code that regulates the bankruptcy of cities and other municipal governments.

“Under Chapter 9, a city has to present an outline of its assets and liabilities to a bankruptcy court and propose a plan, known as a ‘plan of debt adjustment,’ essentially saying how much the city will pay each creditor, such as bondholders, pensioners and employees.

“But unlike other bankruptcies, where creditors can also put forward plans—including the proposal to liquidate assets—in a Chapter 9 bankruptcy, the city council is in control of the process and the judge can only determine whether the plan is “fair and equitable” . . . .  This means that once the bankruptcy begins, creditors find themselves ‘at the mercy of the city’s proposed treatment’ . . . .

Gee, why am I not surprised to learn that, under federal bankruptcy law, governmental entities enjoy special immunities from debt obligations while their creditors can be treated as slaves?   How do those “special immunities from debt obligations” differ from a license to steal?  Insofar as we allow our legislators to grant special-immunities/licenses-to-steal to municipalities, why should we be surprised or even complain if our municipalities rob us?

How many people invested in government bonds believing they were the safest form of investments since government would always have enough guns to extort more money out of the taxpayers?

But, how many people who invested in governmental bonds realized that if the city or municipality issuing the bonds went bankrupt, it would be legal for the government to effectively rob the investors rather than the taxpayers?

Ha!  The greedy creditors who invested in the “safety” of government bonds, are losing their assets.

They’ll not have my sympathy.  Most of them loaned to a corrupt government believing government could always extort enough money from taxpayers to repay the bonds.  Instead, because current taxpayers are already broke, government is robbing the investors.  And, soon enough, the government will rob the retirees.  And lastly, it’ll rob the current taxpayers by raising taxes and advocating “austerity” that will collapse the economy in order to save the government.  When it comes to robbery, government is an equal-opportunity kinda guy.

All of which goes to prove the ancient aphorism:  “Those who lay down with government, get fleas” . . . or is that “fleeced”?

Anyone who lends currency or political support to a known thief has no moral ground to complain when they get robbed.  If you’re going to hang out with, or vote for, known thieves, expect to lose your assets.