Pension Bailout: The Next Chapter

Posted On Jul 25, 2019 By Emily Clancy

  • State pensions and broken promises
  • The best and worst pensions ranked
  • How Mike Pence became a “pension-aire”
  • An act of “congressional self-dealing”
  • Tesla investors jump from moving (electric) cars
  • The Zuck has nine lives?
  • Mike Burnick’s retirement advice (25 years in the making)
  • Crimes against crab cakes.

Recent data from the Pew Charitable Trusts show just how stressed each state retirement pension is. [Spoiler: The Bluegrass state? Bless its heart.]

Working with the most current data available, from 2017, state pension plans are operating at a funding deficit of $1.28 trillion nationwide.

But, hey, look on the bright side — FY16 had a deficit of $1.35 trillion. An improvement, however miniscule, that’s attributed to stronger returns on some more aggressive investment plans.

Hooray?

“The message is still clear: Many states face a pension crisis,” says the Tax Foundation.

The chart below ranks states according to pension funding ratios (assets to liabilities):

Pensions' State of the Union

Click on map to enlarge

If you’re just taking a quick glance at the chart, we find this shorthand helpful. Pink? Pensions are, well, in the pink. Seeing yellow? These state pensions are downright jaundiced!

Taking a closer look, however, we’ll start with the bad news first: “Kentucky faces the largest deficit, with its plans only 34% funded. New Jersey follows at 36% funded, with Illinois only slightly better at 38%,” the Tax Foundation says.

And desultory results for the bottom three pension offenders come even after each of these states upped pension contributions in 2017; thing is, they couldn’t outrun compounding debts.

Good news? “Pension plans in Wisconsin and South Dakota are in the best shape, with funded ratios of 103% and 100%, respectively. Tennessee is right behind with a 97% ratio.”

Wisconsin’s like that kid in class who already had an A… but still did the extra credit. (Heh… that “kid” might be running Wisconsin’s public pension fund now.)

“Pension plan structures vary from state to state, but historically, most states have provided some form of defined-benefit plan that promises retirees a lifetime annuity,” the Tax Foundation says. Keyword: promises.

Some states have pivoted to a 401(k)-style defined-contribution plan for new hires. Still other states have transitioned to hybrid plans: combining elements of a defined-contribution plan with a defined state benefit plan.

“The shift from defined-benefit plans toward more fiscally responsible alternatives can help states better manage future liability, but many states still face years of underfunded obligations that will need to be fulfilled.”

Bottom line: “In the case of dramatically underfunded pension plans, reform now may be less costly and less painful than coping with a larger crisis later,” the Tax Foundation says.

Now for someone not facing a pension crisis, we turn to Vice President Mike Pence. A series of exposés at Forbes kicked off last week; the first asks the question: How did Mike Pence become a millionaire?

(In coming weeks, the Forbes series will look at the financials of other Trump administration VIPs, including Betsy DeVos, Steve Mnuchin and — Dave’s fave — Attorney General William Barr. Should be illuminating.)

According to Forbes: “Mike Pence doesn’t have all that much to his name.”

The 60-year-old has about $65,000 invested in index funds with roughly $15,000 in the bank. And no white picket fence for Pence either — he’s not a homeowner.

“With no significant business experience, [Pence] ranked among the Capitol’s poorer members, with few assets besides stock in an Indiana gas station and convenience store chain called Kiel Bros. Oil Co.”

A local chain that went bankrupt in 2004… scrambling Pence’s $600,000 nest egg with it. (Guess he never heard of diversifying?)

“Luckily, Pence works for the government,” says Forbes. “That means taxpayers are on the hook to fund the 60-year-old vice president’s retirement through his state and federal pensions.”

Pensions' State of the Union

*Slow clap for pensions* We’ll do just fine, Mother.

And how

“Those pensions,” Forbes continues, “will likely pay Pence at least $85,000 per year for the rest of his life [and] are worth a combined $1.2 million — enough to push Pence’s net worth to an estimated $1 million after factoring in his six-figure student loan debt.” (For his three kids’ education, by the way.)

Pensions' State of the Union

As for Pence’s state pension — according to the map at the top of today’s issue — Indiana’s pension is ranked 33rd, at 65% funded… hmm.

No sweat. Pence will benefit handsomely “from an act of congressional self-dealing.”

Forbes says: “A 1986 federal law based pension payouts for members of Congress and their staffers on a higher percentage of their annual pay than regular federal workers’ pensions.” (Emphasis added.)

“Pence voted in favor of closing this benefit for future congressmen in 2012, though he remains one of many lawmakers grandfathered into the older, more lucrative pensions.”

Mike’s further #blessed; if he leaves office in 2025, he’ll be right around retirement age, ready to start cashing pension checks… endorsed by taxpayers like you.

“Just as Tesla posted its first consecutive quarterly profits,” says Agora analyst Greg Guenthner, “Elon was already writing checks with his mouth that his electric car company can’t cash.”

Seems Musk trumpeting Tesla would be profitable “in Q1 and all quarters going forward” was outlandishly premature. In reality, according to second-quarter earnings, the company reports losses of $1.12 per share — a huge miss.

“Investors weren’t exactly happy with these results,” Greg says. “Tesla dropped double digits last night after the company missed top- and bottom-line expectations.

Tesla Chart

“We’ll have to wait and see if any buyers step in to scoop up Tesla shares following its earnings flop,” Greg says. “But as of right now, it’s safe to say that the stock’s comeback rally is officially in jeopardy.”

Oh, we got a kick out of something said at WSJ about how TSLA is shifting strategy to “emphasize expanding the size of its business over profit.” But hasn’t that always been Tesla’s strategy?

The S&P 500 and Nasdaq are both coming off record closes yesterday; not so much the Dow — Boeing is the highest-weighted Dow stock at 9% — so the reason’s pretty obvious.

Speaking of, the Dow’s down 140 points to 27,132; the S&P 500’s down 13 points to 3,006 while the techie Nasdaq’s lost 68 points to 8,254.

In the meantime, oil’s up 36 cents to $56.24 for a barrel of West Texas crude. Gold’s down $7.70 per ounce to $1,415.90.

As for crypto, bitcoin’s up $204.04 to a smidge under $10,000.

A few more economic quick takes…

  • Facebook was in the news yesterday as word came down the FTC is opening an antitrust investigation into the social media Zucker-naut… including talk of a $5 billion fine. Investors? Worried? Nah… it’s all about earnings. And Facebook reported beats all around. FB shares spiked to a record-high $205 — give or take — in after-hours trading. At the time of writing, shares are settling, down about 2%
  • Durable goods orders surprised to the upside, up 2% in June. And that’s not skewed by aircraft and/or military hardware: “Core capital goods” were up 1.9%. Also, the biggest increase in orders for new equipment since February 2018. The number is so strong it pretty well scotches the likelihood of a half-percentage point rate cut by the Fed next week — only a quarter now
  • The European Central Bank met and signaled an imminent rate cut for the first time in over 3 years and may even resume quantitative easing. The economic outlook is “getting worse and worse,” says Draghi. No lie: A survey of German factory executives released shortly before the decision says conditions are in a “free fall.”

“Most Americans are woefully undersaving for retirement,” says Mike Burnick. “Even the smart Americans who are saving know little about the tools they are using… such as their 401(k) plan.

“In fact, 63% of Americans admit to knowing little or nothing about their 401(k),” he says. “[But] you’d be a damn fool to walk away from any opportunity that turns $70 into $150 overnight.”

But we’re getting ahead of ourselves…

So for a peek at advice Mike gives friends and family, here are five rules to help save for retirement:

Rule #1: The 6% Rule. Mike says contribute at least 6% of your income to your 401(k). The reason? “Most (not all) companies match 50 cents for each dollar that you contribute up to 6%,” he says. “In short, you get a FREE 3% match if you put 6% of your pay into your 401(k).”

That “effectively [allows] you to stash away a total of 9% of your salary toward your retirement.”

Rule #2: Buy, Don’t Run. Basically — whatever the market does — stay invested and keep buying.

Rule #3: K.I.S.S. (You know what it means.) “The investment offerings vary from 401(k) to 401(k),” Mike says, “but almost all of them include index funds.” Invest accordingly.

Rule #4: Split the Raise. “Every time you get a raise, I suggest you put 50% of that raise into your 401(k) contribution,” Mike says. “If you get a $200 a month pay raise, keep $100 for yourself to spend but increase your 401(k) contribution by $100 as well.”

Rule #5: Look but Don’t Touch. Don’t be overly impressed with paper gains; on the other hand, don’t panic when you see losses on paper either. (The fourth quarter of 2018 is a prime example.)

Mike’s last piece of advice: “Max out your 401(k) contributions…

“Good news: 401(k) contribution limits got an increase in 2019,” says Mike. “Contribution limits rose from $18,500 to $19,000 for workers under 50, while limits for workers over 50 rose from $24,500 to $25,000.

“If you simply can’t hit the $19,000 or $25,000 maximums,” Mike says, “at least force yourself to sock away more this year than you did the year before.

“And don’t forget the importance of making your savings work as hard as you do.” You know Mike favors income-generating dividend stocks with long track records. “They have proven time and time again to beat the pants off the S&P 500 and do so with lower volatility.”

Mike closes: “More money with less risk is the best way to build long-term wealth.”

Heh… it’s really too bad the veep didn’t take Mike Burnick’s advice. Pence might not be living off the government’s largess if he had.

“A South Carolina restaurant is taking aim at a Guinness World Record by offering a $310 crab cake that comes encrusted with platinum,” UPI reports.

Far surpassing the stupidly extravagant “Foodgod 24K Gold Wings” — a menu offering at a NYC eatery we reported last year.

Gold Wings' State of the Union

Mmm… appetizing.

Chef Lazarius Ken Leysath Walker of Columbia restaurant The Twist says: “The thing about it was trial and error. I’ve wasted so much platinum trying to get it right.”

Ooh, boy… there are more angles here than we can shake a crab mallet at!

First, peak boom phase of the boom-bust cycle much?

Second, precious metals circling the drain or winding up in a landfill?

Last — we’re from Bawlmer, hon — the ONLY thing you should put on a crab cake is Old Bay. Period.

Best regards,

Emily Clancy

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