KinAlberta Posted May 26, 2015 Share Posted May 26, 2015 The unfunded liability issue is fascinating to me and I have a somewhat parallel political analogy to it: In the early 1970s in my province of Alberta, Canada a highly intelligent, forward thinking, Harvard educated Peter Lougheed and his Progressive Conservatives had swept into power and created the "Heritage Savings Trust Fund" (HSTF) to bank billions upon billions of dollars of royalties on the depleting provincially owned oil. It was a fund for the future - for rainy days - for when selling high margin oil is no longer an option. Well, that didn't last long and the contributions were soon capped by following leaders and the fund has barely grown over the last few decades. Humorously, in the '80s era of low oil prices and provincial recession, bumper stickers on cars read: "Please God let there be another oil boom and this time we won't piss it all away." Then in the 2000's, God answered our prayers and we had that new oil boom and so - we "pissed" it all away - again. So now to pensions, a system set up to handle what are essentially royalties on our depleting ability to work, to earn money from our labours. Just as our ability to sell our higher margin oil here in Alberta will come to an end, our ability to sell our higher margin labour will eventually come to an end. So, both individuals and pension administrators require some long-term, actuarial thinking to anticipate future needs. Most individuals can't do it well so experts are hired and paid extremely well to do it for us as pension administrators. Well, well, well... here we are with record low interest rates which have handed pension funds an unbelievable, "once in a lifetime" (if not two), return on their bond allocations. We've also seen an amazing recovery since 2008 on equity allocations. In fact, compared to portfolio return expectations up to the 1980s, I imagine both bond and equity returns have been unexpectedly generous. So to read that many pensions, with their long time horizons, have unfunded liabilities is VERY interesting if not very astounding. So if the unfunded liabilities are not portfolio returns what are they from? In my part of the world pensions are generally blaming unfunded liabilities on increased longevity and baby boomers. Yet, I've heard of the baby boom issue all my life - since I was a kid. In fact I once Googled baby boomers and pensions and recall finding news articles dating back to the early 1970s raising the issue of the future impact of the baby boomers on social security. In the early 80s in my university courses the baby boom generation was textbook material. As for increased longevity, I can't believe that that hasn't also been expected for a few generations as well. So there should have been no surprises on these two fronts. So, folks, if the problem isn't returns and it's not liability forecasting, what is it? What's wrong with the pension system to allow unfunded liability crises to develop? I would say it's a fundamental problem with those managing they system simply not doing their job, not doing what at the most basic level what they are paid to do. By the way, back to my analogy: Here in Alberta in the recent election, the electorate ignored the popular right leaning Wild Rose Party, and after an amazing 43 years of conservative rule under the Progressive Conservative Party, the electorate "fired" the incumbents en mass, and swept left leaning NDP party to power with a huge majority. Of course, this has all happened after oil prices collapsed and it's pretty much too late to save oil royalties for a rainy day and so we all now face austerity measures due to deficit spending and debt levels, no matter who is in power. That's what's wrong with democracy, we don't elect to avoid obvious pending failure, we penalize after failure. I imagine a lot of those running pensions today are counting on that fact of life to protect them from their own incompetence*. I can find articles like this (see below) going back years and years. In the 1970s Buffett was writing about pension problems! Now the problems are coming home to roost. I believe it was Peterson, before the Peterson Foundation, was saying around the year 2015 the US's social security issue would turn real and involve real money. Which Cities Should Be Most Worried About Pension Funds? BY ALEXIS STEPHENS | SEPTEMBER 3, 2014 America’s pension debt problem is at a critical juncture; the Census of Governments reports that pensions now exceed outstanding debt as the largest type of state and local government liability. Next City’s Forefront this week dives into how American cities and states are confronting the snowballing problems of keeping their pension plans funded for the next generations of retirees. ..." https://nextcity.org/daily/entry/cities-pension-funds-worries * and those fearing socialist rule as a knee jerk, self-defense reaction to incompetence and dogma, should read about the history of social welfare Otto von Bismarck, Winston Churchill and Lloyd George and how they promoted social welfare to fend off socialism. Warren Buffett seems to get it too as evidenced by his latest anti-minimum wage but guaranteed gov't paid income suggestion. .... Link to comment Share on other sites More sharing options...
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