Broken (Pension) Promises

  • Your risk of bailing out government pensions, state by state
  • The sorry state of America’s corporate pensions
  • Rumor denied: Now we know Italian banks are in trouble
  • Britain looks to tighten ties with China; Washington fumes
  • Our Pokémon GO “flash in the pan” call is fulfilled within a week
  • Verizon builds a stellar portfolio (for 1997)… the strangest tale of student loans you’ll read all year… “Federal Reserve Time”… and more!

“If pensions run out of money, taxpayers foot the bill,” our income specialist Zach Scheidt said in this space last month.
“You may not have a teacher retirement program, a state employee pension or some other U.S. pension plan to collect from. But if these pensions run out of money, you can bet that you’ll be the one paying for it in the form of taxes.”
Last week, we noted CalPERS, the big plan for government employees in California, just had its worst year since the Panic of 2008 — a gain of 0.6%, just a wee bit shy of its 7.5% target.
According to the Stanford Institute for Economic Policy Research, state and local government pensions nationwide are now $4.8 trillion in the hole.
Yikes. The last we looked deeply into this matter, around this time five years ago, the figure was “only” $3 trillion.
Your risk as a taxpayer might be higher or lower than normal depending on where you live.
“The three states with the largest potential government pension problem are Alaska, Illinois and California,” says Chuck DeVore of the Texas Public Policy Foundation, writing in Forbes. “The three states that have been the most prudent in not overpromising and underfunding government pensions are North Carolina, Indiana and Tennessee…

“Without pension system reform,” DeVore writes, “government increasingly risks being seen by taxpayers as little more than a public employee pension system collection agency, demanding tax money to pay for well-heeled government retirees while returning less and less in services.”
The mess in private-sector pension plans is little better.
If you’re among the lucky few who still have a “defined benefit” plan with a guaranteed payout every month once you retire… well, those guarantees aren’t as firm as you might think.
In fact, “your future benefits may be at risk,” says Zach Scheidt — back with us today to sound another alarm.
Among the sorry statistics Zach has amassed: Five out of every eight corporate pension plans had negative investment returns last year.
And as a whole, America’s corporate pension plans were only 82.1% funded in 2015 — down from 82.7% the year before. Here’s what that looks like on a chart. “Please note,” says Zach, “that any reading below 100% means that pensions don’t have enough money to meet their obligations to retirees.”

Most alarming of all, corporate contributions to these plans fell from $28.4 billion in 2014 to $21.8 billion in 2015.
“This makes my blood boil,” says Zach. “Workers have spent their lives helping to build these corporations. They’ve been promised a retirement package in return. But corporations are turning a blind eye to these retirees and spending less money to ensure their workers get paid.”
We’ll add another factoid to stoke Zach’s indignation… and maybe your own.
In the event a company gets into trouble and terminates its pension plan, workers’ benefits are — theoretically — covered by a federal agency called the Pension Benefit Guaranty Corp. Basically, it’s the FDIC of pensions.
Unfortunately, the PBGC is in the red. As of last November, it had $88 billion in assets… and it owes $164 billion to workers from failed pension plans. So even if no more pension plans failed, ever, the PBGC is still broke.
You as a taxpayer might be on the hook for this too. As of 2012, two-thirds of private-sector union members take part in a defined-benefit pension plan, according to the AFL-CIO — compared with only 15% of nonunion workers. That could be a powerful constituency in the event of a widespread pension crisis.
When it comes to retirement security, “it no longer makes sense to rely on your corporate pension, Social Security or any other ‘promised’ retirement plan,” says Zach.
“Thankfully, there are still some great choices available to you. These choices can mean the difference between enjoying your retirement years doing the things you enjoy with the ones you love and scrambling to make ends meet week in and week out.”
You do need some money to invest to take advantage of these choices. If you have a modest nest egg, we strongly suggest you start here. If you have a more substantial net worth, you can start drawing instant income payments amounting to hundreds of dollars each week — as we show you at this link.
The major U.S. stock indexes are taking a rest as the week begins. At last check, both the Dow industrials and the S&P 500 were down just under half a percent.
The street buzz is about Yahoo’s acquisition by Verizon for $4.8 billion. Yahoo will join AOL in Verizon’s growing stable of old-and-busted names from the dot-com boom. (Is Lycos next? Prodigy?) Yahoo CEO Marissa Mayer says she’s sticking around, although how long Verizon wants her around in light of her performance is another matter entirely.
Meanwhile, hot money is flowing into Treasuries, the yield on a 10-year note back to 1.56%. Hot money is not flowing into gold, which is down nearly eight bucks, to $1,314.
Crude has tumbled another 2% as we write, to $43.27… and that’s not a function of dollar strength. The dollar index is steady as she goes, at 97.4.
From the “no rumor is confirmed until it’s officially denied” department: Italy’s finance minister has ruled out any “bail-ins” of the country’s sickly banks.
A bail-in, you might recall from Cyprus’ experience in 2013, is when deposits in a troubled bank are converted to shares of that bank.
But not to worry, Italy’s Pier Carlo Padoan said after meeting with his fellow G-20 finance ministers in Chengdu, China. “There is no risk in terms of systemic stability.” Sure, there’s a handful of critical cases, but those are “contained,” he assures.
Ooh… the “C” word. It was in March 2007 that Federal Reserve Chairman Ben Bernanke assured Congress that stresses in the subprime mortgage market would stay “contained.”
As we mentioned last week, Italian banks are sitting on $400 billion in bad loans — a situation our trend follower Michael Covel is watching closely. The next act of the drama comes Friday, when the results of “stress tests” on European banks are released.
This whole “Britain looking eastward after Brexit” thing seems to have legs.
Two weeks ago, a prescient reader suggested that with Great Britain leaving the European Union, the U.K. might look to do deals with China — perhaps leveraging the City of London’s financial prowess to open doors for the Asian Infrastructure Investment Bank, which was launched by China last year as a rival to the World Bank.
At the aforementioned G-20 summit in China, Britain’s new finance minister Philip Hammond announced he’s begun discussions with the Chinese on a comprehensive trade deal — only days after the Chinese Ministry of Commerce put out feelers through state media.
“In return for greater access to the U.K. for its manufactured products and investment,” reports the BBC, “China would reduce barriers to Britain’s service industries like banking and insurance as well as U.K. goods.”
We can’t wait to hear someone at the White House squawk again about Britain’s “constant accommodation” of China. Trying to stay the sole superpower is a female dog…
“Nintendo Shares Plummet After Investors Realize It Doesn’t Actually Make Pokémon GO,” says a cheeky headline at The Verge.
Gee, it was a week ago today we said Nintendo’s success with the augmented reality game Pokémon GO was a flash in the pan.
Today, the company itself affirmed it in a filing with the Japanese government, reminding investors that its share of profits from the game isn’t very big. Nintendo owns only 32% of The Pokémon Co. It was Google spinoff Niantic that developed the game. And Apple collects a 30% cut of all the revenues generated from every Pokémon GO download to an iPhone. That doesn’t leave much for poor ol’ Nintendo.
In reaction to this disclosure of what was already public, shares dropped 17.7% in Tokyo today. Heh…
We don’t want you to get the wrong idea, though. Pokémon GO is a huge phenomenon… and it signals the onset of something far, far bigger. And it’s not too late to act, if you know how to play it right. Ray Blanco of our science-and-wealth team shows you the way…
“So the White House Council of Economic Spin Doctors is blowing off the student loan crisis,” a reader writes after Friday’s episode — “even though outstanding student debt volume has almost doubled during Obama’s presidency?
“This brings new meaning to the term ‘education president.’
“And now Amazon is getting into the business? Yikes.
“Yet the markets just creep higher and higher. To quote Mark Baum, Steve Carell’s character in The Big Short: ‘Hey, there’s a bubble!’”
“Another student loan wrinkle,” writes a reader: This may be a small part of the problem, but I know someone who is working in a highly skilled technical job but turns down her raises. (This is not hearsay.)
“If she makes a little more income or even a good bit more, she will have to start paying back her big student loan. She is single with three children and is on food stamps (and, from what she says, is on other welfare too; I am not privy to all, and I would not say anyway.)
“To live as she does now, she would have to almost double her salary. Under today’s overall economy, she knows (and we know) that is not going to happen; neither the present company nor any company interviewed will come close to doubling her present salary. If she stays at her current salary, she can just barely make ends meet.
“She votes Democratic in hopes that the government will pass laws that will ‘forgive’ some of these loans under special circumstances.
“How many other ways does the government have people trapped in debt?
“Isn’t the government just great?
“I am not, in any way, kin or involved.”
The 5: Wait, let’s see if we’ve got this right: She got a “highly skilled technical job” with the education her student loans made possible. But she turns down her raises and lives near a subsistence level… so her income stays below a certain threshold… so she doesn’t have to repay the loans?
Wow, it’s like Atlas Shrugged, but on acid…
“Having worked in Indonesia and Vietnam a combined 26 years,” a reader writes, “I can tell you that what you call ‘Federal Standard Time’ has been for all these years referred to as ‘Rubber Time’ in both of these countries.
“Today, there is also ‘Federal Reserve Time,’ which is an even slower version. With the world spinning slower as time goes by, we now know where ‘global warming’ comes from.”
The 5: Hmmm… Seeing as Fed policy amounts to making it up as they go along, we’d think “Federal Reserve Time” would be something in which time moves both forward and backward, and at varying speeds…
“About the amount of time it takes to read The 5,” a reader tells us: “My karate master once said that ‘time is irrelevant, but timing is of the essence.’
“Your wisdom has given me great profit. I like to read slowly and repeatedly.”
“I can’t wait until the ‘Internet of Things’ can read The 5 Min. Forecast out loud to me,” writes our final contributor. “But I hope it doesn’t read too fast!”
The 5: There’s all manner of text-to-speech tools out there, many of them free.
Of course, a computer-synthesized voice can’t capture all the nuance of a “heh.” Or our completely subjective choices about where to place an ellipsis…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Warning: Pokémon GO can lead to illegal border crossings.
“Two Canadian teenagers were apprehended by U.S. Border Patrol agents Thursday night,” says ABC News, “after they inadvertently — and illegally — crossed the U.S.-Canada border while playing the location-based game on their phones, officials said.”
After crossing from Alberta into Montana, the Border Patrol reunited the teens with their mom.
What can we say? It’s a phenomenon. And an insanely lucrative one.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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