Broken Promises Transcript

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David Torcivia:

[0:00] I'm David Torcivia.

Daniel Forkner:

I'm Daniel Forkner.

David Torcivia:

And this is Ashes Ashes, a podcast about systemic issues, cracks in civilization, collapse of the environment, and if we're unlucky the end of the world.

Daniel Forkner:

[0:14] But if we learn from all this, maybe we can stop that. The world might be broken, but it doesn't have to be.

David Torcivia:

[0:38] Now this week, we've got a story about broken promises, and a financial disaster looming that might make the 2008 crisis look like nothing. We're talking trillions and trillions of dollars on the line, and the future of many, many Americans and people all around the world. Yes, that's right, we're going to talk about...pensions today!

Now that might sound boring and maybe not as dramatic as a problem as compared to the other things we cover on the show, but believe me when I tell you that this is one of the major catastrophes looming in the not-too-distant future, and in some places it's the present right now.

Daniel Forkner:

[0:52] That's ride this is a reality that's being felt around the world as retirees are finding out that the money they were promised for companies that they work decades, their whole lives for, isn't materializing, and the outlook for the retirement is very bleak. This is really a global ticking time bomb. The world's six largest pension saving systems: the US, UK, Japan, Netherlands, Canada, and Australia, are expected to reach a 224 trillion-dollar gap by 2050. This is the amount of money that they would need to come up with at this time to keep these pension systems alive. And globally were looking at a savings gap of 400 trillion dollars by 2050. This is five times the global GDP.

David Torcivia:

[1:34] And while these numbers are huge and this disaster is looming, an unavoidable,enormous problem, it's not actually something new. We tend to think of our financial inventions, things like pensions, things like the market, as a relatively recent creation and of the problems we face with them having never existed before. But in reality, pensions, the idea of retiring, of somebody being able to pay you in this section of your life, is old. And the problems that go along with this also go Way Way Back.

The Idea Of Retirement Is Centuries Old

Daniel Forkner:

[2:02] Yeah, this concept of having a retirement at the end of your life being set up so that you don't have to work anymore you can just enjoy life and your final years is a centuries-old idea. In fact some have even argued that some famous military mutinies in the Roman Empire were caused by changes to the retirement age and pension benefits of Roman legionnaires. But in the United States the first ever pension was introduced in New York City, this was in 1857, and it was a way to pay benefits for injured police officers.

History Of Pensions In The US

[2:36] American Express was the first private company and the next pension in line, and they adopted one in 1875. And these pensions evolved from there, slowly adding more benefits and becoming more widespread. But it was really in the post-war era that pensions as we know them today really began to take off and flourish.

David Torcivia:

[2:56] And so our modern notion of pensions, at least in the United States, (and it followed in much of the world as well) sort of came to light in the 1950s in this post World War II boom when the economy was growing at a massive rate, when all these soldiers were coming home and looking for work. And a lot of power was in the workers hands. There were strong unions, businesses were growing quickly and needed lots of employees and they needed talented trained employees and all these people were after having come out of the military. So people, this rapidly growing middle-class, suddenly had a lot of power in terms of their bargaining potential with employers. And one of the things that that created was pensions.

These employees, these unions came together and were able to argue with businesses, with corporations, with their employers that in exchange for small sacrifice in terms of their direct salary, they would take this deferred compensation. So I'll give you a little bit of money, you set it aside and invest it for me, and then in the years when I'm retiring from your company, and then again because this was the 1950s 1960s when you would work at a company for 20 plus years, most of your life you're "company man" as the word was at the time, this pension was a sort of agreement between the employer and the employee that "I will stay with you and then one day you will pay me back for this after you no longer are working for me as a thank you for this time and as a return for deferring a little bit of your upfront salary in order to let me pay you years from now when you need it, when you're no longer working."

[4:35] And this worked really well, for a while. It went hand in hand with extremely high interest rates of the markets, as high as 10% - more than that. And so pensions grew and were safe and everybody rejoiced. When you would retire, you would have this check coming in along with your Social Security and you would live a comfortable life. And many of our grandparents, now I'm a millennial so I've never known a pension and I never will, but many of our grandparents did or might still do today. But then things begin to change.

Decline Of Pensions

Daniel Forkner:

[4:48] A number of factors have contributed to the decline of these traditional pensions. Less companies have offered them, more people are relying on individual investment account and savings for retirement, and part of the reason is because it's become more and more apparent that these pension systems are just unsustainable. And maybe they always were but a number of factors have brought that reality to life.

David Torcivia:

[5:11] That huge population boom that caused that surplus of workers, well those workers suddenly started retiring when they got to the end of their life. And now instead of a few workers, seven maybe to one retiree, eventually as time went on and more and more people are tired and the worker explosion wasn't happening anymore, that became two to one. And now every two workers would have to support one retiree which is no longer sustainable.

Daniel Forkner:

[5:36] In addition we've had stock market crashes and recessions which have undermined returns and the ability for pensions to grow these funds in the first place. And life expectancy has gone up. In the 1950s when we started to see the proliferation of these pension systems, retirement age in the United States was 65 years old. And the average life expectancy was between 65 and 70. So many of these pensions only had to pay out benefits for a couple years on average. But now life expectancies are much higher so instead of 2 or 3 years to pay off pensions, companies are now faced with 20 or 30 years but they might be on the hook to pay these pensioners.

David Torcivia:

[6:13] And so as you can see a crisis is looming in this. Lots of private corporations are already getting out of this, but the one place where pensions really have stuck around is in the public sector. And as you can imagine, these problems that we've mentioned are just as pertinent for these public pension programs. And in fact, we're already starting to see some of them explode, like in Dallas, for example.

Crisis Looming; Dallas Case Study

Daniel Forkner:

[6:34] Dallas is such a good example of the perverse incentives that have become associated with these pensions and the potential for them to cause catastrophe in an otherwise healthy municipality or city.

Two years ago in 2016, Dallas was experiencing rapid economic growth, twice the rate of the United States and it was the fastest growing of the largest cities in the country. But despite this the mayor came out that year and said that they were on the verge of bankruptcy. And it was all because of a massive shortfall in the pension obligations to their police and firemen.

The Dallas Police and Fire pension system asked the city for a one-time bail out to stay alive. And the amount they needed was 1.1 billion dollars. Okay, first of all this wasn't even close to the amount they needed to be fully funded, this is just what they needed in the short-term/ And second of all this amount would have consumed the city's entire annual general fund.

David Torcivia:

[7:27] This is a great example of a point that were going to bring up later. That when these pensions implode, really for lack of a better word, we're forced to bail them out somehow. Usually that bailout comes from the taxpayer, whether that's raise taxes, whether that's budget pulled from things that we need like schools, like funding, like road work, this money has to come from somewhere. And so citizens of these municipalities are on the hook, bailing out these poorly managed pension funds that made unrealistic promises. But this is all something maybe that will get into in a little bit later with more details.

Daniel Forkner:

[7:59] Yeah that's a good point David and that's what this pension system was asking Dallas to do is say, "hey, we need a billion dollars and that's all the money that you have for community services, for salaries for public workers, but we're going to have to ask you to give that to us instead." And the mayor came out and said, look if we pay that we're going to go bankrupt we can't operate as a city if we do that. And although Dallas, this is an extreme example and an exceptional one when it comes to mismanagement, the underlying incentives and realities that got them into such a bad situation in the first place exists in many pensions across the country and around the world.

And remember so one of the core reasons the public pensions exist in the first place is to attract and maintain quality people which improves the quality of city services and helps attract more residents. And it's so hard for politicians to avoid the incentive of making an impossible long-term promise in exchange for some short-term benefit that will make the city look better and attract popular attention.

Short Term Promises With No Long-Term Sustainability

David Torcivia:

[8:58] You know what this is reminding me of right here, Daniel?

Daniel Forkner:

What's that?

David Torcivia:

It's our infrastructure episode, right? Once again short-term promises that promised immediate short economic growth with no foresight or thought to the future of how we're going to eventually pay for this when it has to come around. And maybe that's something that comes from the short-term elections or just a society that's obsessed with short-term gains, but our lack of understanding of what's in the future seems like it's going to keep getting us in a pickle.

Daniel Forkner:

[9:23] Yeah, exactly! So let me tell you what what Dallas did in 1993. They added a benefit to the police and firefighter pension system which offered an individual savings account with indefinite guaranteed 8.5% interest rate.

David Torcivia:

[9:38] Oh wait, wait, they guaranteed eight and a half percent interest rate indefinitely?

Daniel Forkner:

[9:42] On these savings accounts for workers 50 years and older.

David Torcivia:

[9:46] Wow. Let me get one of those.

Daniel Forkner:

[9:47] Yeah [laughs]. I mean when you said out loud it's pretty obvious this is just silly and impossible right. It could be justified as affordable by assuming hey, as long as we have an indefinite 5% growth and workers salaries because this is where the contributions in the pension system will come from, and as long as we get 9% returns on the pension fund investments indefinitely.

David Torcivia:

[10:09] Just those two things?

Daniel Forkner:

[10:10] We'll be able to pay for this.

David Torcivia:

[10:12] Yeah, that's easy no problem. 9% growth for forever, plus infinite growth in employees. Easy-peasy.

Daniel Forkner:

[10:19] Right and it was this need for a 9% return which lead fund managers to take extraordinarily risky investments.

And the finger always gets pointed at these fund managers they're the easy ones to blame, right? Oh, mismanagement in the pension system lead to these budget shortfalls and now we're facing this problem, but in a way the fund managers hands are tied. They have to provide returns. They have to go seek risky investments, because there's so much pressure to get those returns in order to pay these impossible benefits.

So this is my favorite part of this Dallas story. So not only were fund managers spending millions of dollars just flying around the world looking at these exotic investments. You know buying things like farmland in Australia, timberland in South America, fancy resorts in California, but Museum Tower is my favorite investment that these Dallas fund trustees made.

Musuem Tower

David Torcivia:

[11:11] Well what is Museum Tower, Daniel? For those of us that are intimately familiar with the architecture of the world, what is Museum Tower?

Daniel Forkner:

[11:17] Museum Tower is this high-rise condominium that was situated in Dallas' historic art center. And these fund managers they made a modest 20 million dollar investment into the development of this high-rise.

David Torcivia:

Peanuts really.

Daniel Forkner:

Yeah, and it was across from this sculpture museum. And shortly after they made this very modest investment, they said you know what this is a nice area let's increase our investment, and then that became you know what let's take this building's height and double it, and then finally they said you know what let's go all-in for 200 million dollars.

David Torcivia:

[11:50] Oh yeah of course, a reasonable 200 million dollar investment.

Daniel Forkner:

[11:53] Well you know as long as it provides return, it is a good investment right?

David Torcivia:

Sure.

Daniel Forkner:

And Museum Tower gets its name from this sculpture museum that was in this historic art center and it had a glass roof. It was designed to allow natural light into the museum to enhance these exhibits and, you know, give a pleasant experience to visitors.

[12:12] Well when this Museum Tower was finally built it was so tall.

David Torcivia:

[12:15] Right across the street, right?

Daniel Forkner:

[12:16] Right across the street, yeah. And the glass facade acted as a huge reflector for the sun's rays. It concentrated right through the roof of the museum blinding visitors, damaging sculptures. Some artist closer exhibit saying, "My work is destroyed." And the director of the pension fund, you know there was this big drama in the price and the museum director was furious, and the fund director basically just shrugged his shoulders and said, "well I guess the museum could change its roof."

David Torcivia:

[12:43] That's such a great microcosm story of what this whole fund world is like with short-sighted decisions no regard at all to how these play out for the people around them. Even the people who are dependent upon these pensions really, as long as the fund managers, as long as the companies investing in this stuff, gets their section of the check, then you know what? The sky's the limit, let's double it 200 million dollars who cares for the arts, for the people.

Daniel Forkner:

[13:09] And so this obviously caused a lot of drama and it resulted in an audit of this pension system and all the investments that they had been doing over the past several years. And they uncovered all these shady investments into risky assets and how they had been adjusting their accounting books to make it look like they were in less trouble than they actually were, and that's why this was such a surprise when the mayor came out and said oh my God we're going to go bankrupt.

David Torcivia:

[13:33] Yeah I mean I guess in that case the burning of this art was almost a positive thing that the city was able to learn that this pension was unstable, that it wasn't well funded, and they could react to do something about it.

And react they did. So last year in 2017, they passed a whole bunch of stuff in order to temporarily prop up this failing fund. They pulled funding from other programs, they increased mandatory contributions, the city is on the hook for a large portion of this, they increased the retirement age, but ultimately all this stuff is just a stopgap solution. And they're still dependent on these very high returns, and they're planning on coming back in a couple years to check in and see how this is going, but unless the market grows at rates that even now in one of the fastest growing markets in history aren't enough, unless this keeps happening indefinitely, this fund is still in deep trouble.

Bbut Daniel, maybe we should talk about how these pensions get in these bad situations in the first place.

Daniel Forkner:

[14:32] I agree David but it does occur to me as we're talking about this, that we haven't really even got over in simple terms what a pension is in the first place.

What Is A Pension Anyway?

David Torcivia:

[14:40] That's an excellent point and I can't believe it slipped my mind. So, wait, tell me if this is right. So this is my very fundamental understanding of what a pension is.

I work for Daniel Forkner Industries, okay.

Daniel Forkner:

Damn right.

David Torcivia:

And, I came up, you hired me. We agreed on my salary, whatever that is, my benefits, and also a pension, okay? And the deal of the pension was, you will take, I don't know, $5000 out of my salary, $20,000 out of my salary, whatever it is, every year. And you will invest that money for me, in your pension fund.

[15:12] And then, when I retire, when I hit this magic pension age whatever that is. For the Dallas case it was 50, now it's 58. In a lot of Pensions it's 65. When I hit this magic age, you start paying me every month funds from your pension fund. Is that right?

Daniel Forkner:

[15:28] That's right and those checks that you're going to be getting when you retire, they've already been defined. So a pension is a defined benefit plan, because those checks that you're going to get have already been agreed to when you started working for me in this example. And it's contrasted with a defined contribution plan. So if you have a 401k that's a defined-contribution because you know how much you're putting into this 401K retirement plan, and then when you retire you get this lump sum whatever happens to be in the 401K. So pension is a little bit different and that you're right you're going to get a set amount, and it's usually a percentage of the salary you had when you worked.

David Torcivia:

[16:04] So it's like being paid to be retired.\

Daniel Forkner:

Yeah.

David Torcivia:

Well that's an easy way to think about it.

Daniel Forkner:

[16:09] But you might be asking what how does a company pay for it? If a company knows, hey in 30 years I'm going to have to start paying my workers x amount of dollars, they're going to try and figure out well how much should I set aside right now.

The way they do that is they estimate how much return they can make on investments say it's 10% or 8%, you said okay, well if we're going to pay our employees this much when they retire 30 years from now, and if we expect the market to make X percent, so this is how much we can grow our money and investment, then we can use a basic formula to figure out how much our employee should contribute. And it's that expected market return that has gotten these pensions into so much trouble.

David Torcivia:

[16:47] Not to be fair, when the idea of pensions grew in popularity in the 1950s and the 1960s you could get a very high what's called, risk free return. Now a risk free return is something that you can count on. So this is interest on bonds and on treasury notes, things that you know you're going to be paid and it's not like gambling in the stock market. It's a defined absolute amount of money that's coming in. And at the time these were very high which makes it very easy for pension to invest in this, have reasonable contributions from their employees, and to make a very safe return that's easy to plan around. But the days of those very high interest rates are long gone and probably never coming back.

Assumptions And Risky Investments

Daniel Forkner:

[17:25] These fund managers, because they continue to assume high rate of return in their funding, in their investments as the only way they can pay these benefits in the future, they have to increasingly look to riskier investments to make up the difference in this risk-free rate and the return they need to get. So less money is going towards safe bonds and more money is going towards these alternative risky investments, like these real estate deals that Dallas was making. And like we said, this is not just a problem in Dallas, this is a worldwide systemic problem. You know 12 years ago the average portion of pension dollars, that went to these risky investments like real estate as triple is going from 7% of the pensions total assets to 22% today.

David Torcivia:

[18:08] 22% in risky real estate investments?

Daniel Forkner:

That's right.

David Torcivia:

That's a bold market play. And it seems me something like that, especially made right before say the financial crash in 2008, would have been a very bad decision and get a lot of pensions into trouble.

Daniel Forkner:

[18:22] The worst of these public pensions in terms of budget shortfalls is the California Public Employees Retirement System.

David Torcivia:

[18:30] CalPERS.

Daniel Forkner:

[18:31] CalPERS exactly.

CalPERS

David Torcivia:

[18:32] Wait, wait, a second, Daniel. I've actually looked at and read the public financial statements of CalPERS because I have friends out there who are public school teachers and other things and I told him about this pension stuff, I told him to watch out. And they said to, me oh no we don't have to worry CalPERS is in a good system, they're well-funded.

I wasn't so sure about that, so when actually I pulled up their financial document from last year. Looked at their books. And their unfunded liabilities they claim was only $159 billion. I say only there with very large air quotes.

Daniel Forkner:

[19:03] So that hundred fifty billion dollars that they're saying is a shortfall, that's how much they would need according to them today in order to fully fund all their benefits right? But that hundred fifty billion dollars, this unfunded liability, is calculated by them using a return rate that they expect to make in the market. And the return rate that they use, right now is about seven and a half percent.

David Torcivia:

[19:25] Yeah that's where this big thing says okay wait a second, you're estimating that you're going to get, seven and a half percent? And that we should note here that this is not the standard way of calculating unfunded liabilities in pensions. This is something that has sort of come into vogue in these public pensions that are vastly underfunded. Private pensions tend not to calculate things the same way.

Daniel Forkner:

[19:46] Yeah the public pensions for some reason they just look at their past returns and they're allowed to use a return that kind of conforms to their previous results. But as we know, markets are not so predictable right? And this also assumes compounded growth uninterrupted indefinitely. And so if you were to apply and more reasonable rate of return to their system, a risk-free rate.

David Torcivia:

[20:08] This same calculation that these private pensions tend to use.

Daniel Forkner:

[20:11] Their unfunded liabilities are closer to 1 trillion dollars - so eight times the amount that they have on their book.

David Torcivia:

[20:17] Now that is a lot of money. That'sa problem waiting to happen.

Daniel Forkner:

[20:20] The definition of a ticking time bomb.

David Torcivia:

[20:23] And you know what's interesting about this? Is that actually, a lot of groups, municipalities in California, have looked at these numbers, have said, wait your unfunded liabilities are $150 billion with 7.5% growth? That seems totally unreasonable to us, we want to exit this pension program.

Daniel Forkner:

Makes sense.

David Torcivia:

[20:42] And CalPERS says, yeah you can do whatever you want, if you want to get out of here and get off this sinking ship, feel free to do so. But if you do, you need to calculate your unfunded liabilities based on this risk free calculations scheme. And of course when a municipality does that and realizes wait, if we do that then we're super unfunded, we can't possibly get enough contributions from our teachers, from our police officers, whatever, to stay solvent in this risk free way of calculating this, so you know what we're just going to stay with CalPERS.

And what's interesting about that is that it's an admission from this pension program that, yes we know we're doing things wrong, yes we know these returns are unrealistic, but if you jump out (which is something that would threaten the pension as a whole), you know then you're on your own and we'll make sure that you're going to die too. So it's sort of we're all going down together, and we know that we're going down, but hopefully we can keep taking this can down the road and then maybe the markets will go up forever and never go down, which is one way to look at it I suppose.

Public Pensions And Risk Free Calculations

Daniel Forkner:

[21:37] The difference between what the state say is their unfunded liabilities and what they actually are when we use a more realistic risk free rate, is the difference between about 2 trillion dollars of current unfunded liabilities officially, from these states when in reality is closer to 6 trillion.

David Torcivia:

[21:52] And that's immediate unfunded liabilities.

Daniel Forkner:

[21:54] That's how much we need today to make sure that those who have been promised a pension in the future by our public systems will be able to actually see it.

David Torcivia:

[22:02] Yeah, and what's really interesting to me is when you look at how big these discrepancies are in terms of percentage basis. So let's look at a state that claims to have a really great funding ratio using their number. So like, Florida is a great example for this. They claim to be 85% funded and only 15% in these unfunded liabilities using, you know, this homebrewed state calculation format. When in reality, when using the risk free calculation, they're less than 40% funded - that's a massive gap.

[22:30] And what's really funny is some states like Wisconsin, which in their defense, they are the most funded, they have the best pension program of any state, but they claim 100% funding. And that's the number they hit because they're using this twisted way of calculating it and they targeted it because of this. So now they have 100% funding based on the idea that they're going to get this guaranteed return, what's not true. When you look at the actual risk free return, which is only thing you can count on especially the market makes the downturn, then they're at 62% funding, which again is by far the best in the system, but you have to say well what kind of mess up system is this where the very best by a dramatic amount, by 20%, is only 60% funded.

And just a quick shout-out to Kentucky who has abysmal funding in both the regular reporting (44%) and their risk free reporting (just 21% funding). Y'all got to get it together.

And again we talked about these as a lot of numbers, but really what this is is the ability of people to retire, and to survive as they retire. To continue living a comfortable life. To not become a burden on their children, on their family, and to society as a whole.

The Individuals

Daniel Forkner:

[23:35] I think that's important to focus on, David. Ultimately, I mean, these unfunded liabilities, these are big numbers, but at the end of the day, this unfunded liability means that people have nothing to fall back on when they retire. If they even get to retire at this point, right?

People like, Jackie Harrison. She's a 62 year old woman, and when she retired she thought that she would be set up with this pension system that she was promised for all the years that she worked. But that pension system failed her and ultimately she had to sell her family home, she had to move to a different city where living standards were cheaper, and she left behind a daughter, a grandchild, and her aging eighty-year-old parents. She had to leave that behind because she couldn't afford it.

And that's what we're looking at. We're looking at people who cannot afford to live the lives that they were promised, and like you mentioned earlier, David, because a lot of these people won't be able to afford just their basic necessities: their rent, their health care costs, it means a higher burden as well for younger generations who instead of saving for their retirement (because they're not going to get a pension, right? the pension system, it won't exist for young people working today).

David Torcivia:

[24:38] Yeah and who knows even about the social security system? I know I'm never counting on getting a check from that.

Daniel Forkner:

[24:42] So they're only other option to prepare for retirement is to save their own money and hopefully make some investments, but they won't even be able to do that when they're spending all their money on maintaining their parents lives, right?

David Torcivia:

[24:54] Yeah and that's really the human element to this. Again it's very easy to get trapped in all these numbers, these percentage points, these phrases like unfunded liabilities. What this all really means is that these people paid their own money into a program that promised them money when they retire. That said "we will take care of you, because you are helping us now." And then because of mismanagement, because of lies, because of the way these systems were constructed to fail, now these people's lives are broken.

Wall Street

Daniel Forkner:

[25:24] And even in this moment we have to give a shout out to the Wall Street investment firms that that no doubt see this reality but are taking great advantage to make it so much worse.

David Torcivia:

[25:35] Well they see this reality as a way to make some money.

Daniel Forkner:

[25:38] The need for so many of these pension systems to close the gap in their budget shortfalls, have thrown them into these extremely shady relationships with investment firms in Wall Street and ultimately has hurt the beneficiaries of these pensions in just about every way, while these undeserving investment firms, market parasites really, rake in huge profits at the expense of the American public.

David Torcivia:

[26:01] Yeah can we discuss one of my favorite. So I actually have some friends who were here, and I say friends, I know some people who work here. I know people who work in the financial industry who would like to work here because of they're one of the big dogs on Wall Street and that is the infamous the evil Blackstone.

Daniel Forkner:

[26:19] Thanks for the introduction, David.

Blackstone is one of these firms, it's not the largest investment firm in the world, but it may be the largest in the world for some of these high-risk alternative investments. And many Pension funds have agreed to these really terrible contracts with this firm. Among many things they agree to these really exorbitant fees that eat into the investment returns of these pensions. One of the funds that was created by Blackstone, this Blackstone Alternative Asset Management Fund, it charges these pensions a percentage fee on the amount they manage, then charges 10% on any overall profits that the funds generate, an additional management fee, and then invest this money into a conglomerate of hedge fund (which by the way have been proven again and again to underperform the market), and then on top of all that Blackstone will charge additional fees for the benefit of these underlying hedge funds.

And so these Pension funds end up suffering worse returns because of these fees and general under performance then they would investing in a simple index fund that just tracks the market. And because of the nature of these contracts, investment firms are allowed to keep breaking in these fees regardless of how well they do with their investments.

David Torcivia:

[27:30] So they can even lose money and these pension funds are still paying out fees too these fund managers who are actively losing money on the pension. But this is sort of a devil's choice these pensions had to make, right? Because, yes, while they could take out an index and while maybe that index fund would have absolutely been the right choice over the past 5 years in this unprecedented market growth. Fact of the matter is that's still not enough. They need these ultra high-risk options to even have a chance of being able to meet these ridiculous returns that they need in order to survive.

Daniel Forkner:

[28:00] And well maybe one or two pension funds might in the short-term win out on just the chance that some of these risky investments will play out, ultimately it means that on average most of these pension funds are going to lose out. And likely will be when the next recession hits.

Private Pensions Foreshadow Doom

David Torcivia:

[28:15] We know we have an interesting opportunity to look at what might happen when these pensions, when their reckoning day eventually comes: and that's with private pensions, because, again we talked about them, a lot of them were more conservatively managed, but private companies go out of business in ways that cities and states can't. And so when some of these businesses disappear, the pension funds do as well.

So one of these great examples is McDonnell Douglas. Okay, this was a major airplane manufacturer - as big as Boeing, as big as Lockheed Martin. This is a company that you would've pointed and said, "this is a company that will be around for forever." And that's what the employees who worked their thought. These are people who worked 20, 30 years there, at this company. And thought that when they retire their pensions would be safe for forever. But in 1997 McDonnell Douglas merged with Boeing. And in doing so most of their former obligations were dissolved, including these pensions.

[29:06] And these people who had given their who life to a company, who had been promised that the company would take care of them because they had taken care of the company throughout their whole life. Well that promise was broken and now you have people like Tom Coomer where he retired at 65 and then when he realized Social Security wasn't going to be enough after all this pension disappear went back to work. And so now he's 79 years old, working full-time at Walmart as a greeter. Can't stand anymore, sits on a stool and says hello to people as they walk in.

Daniel Forkner:

[29:33] For eight hours today.

David Torcivia:

[29:34] 8 hours a day working for a second part of his life full-time job as someone who was promised if you give us your life, we will take care of you when you can no longer work. Well that promise was broken and he's working again.

And we see the story over and over and over with these pensions. But this isn't just limited to companies that are in trouble. UPS, United Parcel Service, the ubiquitous shipping company that we all know, they're a healthy company doing extremely well. But even they are unable to meet their pension obligations.

Daniel Forkner:

[30:00] UPS along with Lockheed Martin, Dupont, will be freezing their pensions for 70,000 workers in order to reduce cost. And what's interesting is that while UPS is freezing its pension for this many workers, at the same time they're spending over billion dollars on improvements which will increase their automation capabilities. Which is kind of ironic, right? They're spending money on capital improvements that will reduce their need for labor, so even reducing that support ratio even more and further undermine their ability to pay these workers pension obligations in the future.

David Torcivia:

[30:33] And what's funny is during this time, this company saying we can't afford this, we can't afford his obligations, we can't pay you so we're freezing this. Well you know what? Their stock has been going up, they've been doing well the revenues up. They're making more and more money off of this. And so what they're doing by freezing this is stealing money from their employees, they're stealing money from the rest of us who are going to have to support their employees when they retire. They're stealing money from their employee's children who are going to have to support their parents when they retire, because that funding, that promise is broken. They're not going to have the money to survive without help from family, without help from society, without help from all the rest of us, because these companies said "I will help you until it's too inconvenient for me, and then you know what your back on your own. All those promises I made? It's just my word, there was no obligation."

Well what happens when there is an obligation?

Where Will The Money Come From?

Daniel Forkner:

[31:19] As many of these cities and municipalities and these states have. They don't have the option to just go out of business and let their pension shrivel up and die. They don't have the option to just freeze their pensions and just say hey forget about it, don't worry about it. They have an obligation, they have a legal responsibility to pay these pensions.

[31:36] But ultimately a lot of these cities, a lot of these states, are going to have to do some kind of bankruptcy, because these are unsustainable. There's just no money to pay them. And what that means is, you know relating it back to our infrastructure episode, is I think we're going to see a death spiral in many municipalities in this country. When the recession hits and these unfunded liabilities really blow up, cities are going to have to make really uncomfortable choices. Part of it will be like Dallas did in order to pay their pension obligations: raising taxes, raising the contributions that city employees have to make, lowering the benefits that the ultimately pay out to these people, maybe raising more debt in order to pay these. And remember that the whole purpose of this pension system in the first place, one of the main reasons was to attract workers to cities, to provide good city services to attract more residents, increase your tax base, and keep growing. Well when they can no longer guarantee to their public workers that they can uphold these promises they've made, people won't want to work for these cities which means that their civil services will decline.

David Torcivia:

[32:37] Less people paying to the pensions too.

Daniel Forkner:

[32:39] And when that happens less people want to live in these cities especially when they have to start raising taxes, right? This is a positive feedback loop that's going to happen, driving these cities into bankruptcy and destitution.

David Torcivia:

[32:51] Damn that's dark from you. I'm normally the dark one.

But that's how big of a problem this is. This is inescapable, it's coming, and it's going to have gigantic effects on our municipalities, on people trying to retire, and in the markets as a whole, because these pension funds are going to panic trying to find these risky investments and when those eventually blow up, that's a huge amount of money to disappear.

Again the 2008 crisis that caused all that blow up with over just about 2 trillion dollars worth of money, and this unfunded liabilities problem that were facing right now on just these public pensions is over six trillion dollars.

Daniel Forkner:

[33:26] Which is a third of the United States total gross domestic product.

David Torcivia:

[33:31] It's a lot of money. And those private pension that we mentioned were more conservative with their estimates? Well they're struggling too. Over 40% are frozen or destroyed or cancelled at this point in Fortune 500 companies. And remember, all of this is big problem that we are facing right now, is under one of the largest stock market growth in the history of the market. And if they can't find this money now, then I don't know what to tell him, because it's not going to get better. The news keeps going on about how Invincible the economy, but the warning bells are sounding, the IMF, the World Bank, lots of analysts, lots of banks are saying this is all about to blow up on us. We need to start looking out for this recession that's coming.

Well when that happens, you're going to see these unfunded liabilities explode and this hole will never ever be able to get out of. And as people retire and suddenly find that the money they expected isn't there, well who knows what's going to happen.

Daniel Forkner:

[34:24] What do we do David?

David Torcivia:

[34:25] You know a lot of times we sit here and we're like "well if we just look at it this way then maybe things will be able to be fine," but with this pension problem, I'm really, I don't see a way out of it, if I'm completely honest. Bankruptcy is not an option because of all the other negative effects that's going to have, so we're just going to have to deal with this fall out as it comes.

And I mean the conventional wisdom here is to say "well you should be saving for your own retirement outside of these programs. You are personally responsible for being able to live out your life after you retire."

Daniel Forkner:

[34:55] And ultimately that's where the blame is going to be placed it when the fall out comes right.

David Torcivia:

[35:00] Well these people didn't prepare better, they're just trying to be rich pensioners living off our money now, right?

Daniel Forkner:

[35:05] Which is kind of how the narrative have shifted, right? Starting in the 90s. And so these Bankers will probably get away, and again it's going to fall on "hey will you can't afford retirement, how come you didn't save when you were working?"

David Torcivia:

[35:17] But doesn't that seem wrong to you? That idea, that because we're living longer, better lives (and I say better under quotation marks with some of these things were talking about now). But because we're living for a longer time, we're also working for longer than we ever have in human history. When has it become that The Human Experience is about working our whole life, just so we can survive? Working at 79 standing at Wal Mart, saying hello to people, handing them shopping bags so they can be more stuff. And that's how we spend our sunset years? That seems messed up.

[35:49] And so it's the responsibility of society to take care of all of us, I think. And not an individual narrative saying you are responsible for yourself. And while that might be practical, I don't think that's the system we should be looking at. We should be in a world where we watch out for each other, and again this is something we talked about even in the last episode, in a world where we can trust each other. I think also world where we can count on helping each other when we need it, in times like this, when we can no longer work, when we deserve to have some time off, to relax after a lifetime of contribution to these companies, to these states, to these governments, and to each other.

Inequality And Discrimination

Daniel Forkner:

[36:23] I think you're onto something, David. And one of the sad things about, this narrative that "hey it's your responsibility to take care of your retirement" and the fact that some of these pension systems are extending the retirement age is, when you're forced to work into your old age ultimately this is kind of like a discrimination, because if you live in a poor area and you didn't have the best healthcare growing up, then you're probably not going to live as long, so you're going to be paying into these pension systems into your 70s or even your 80s in some cases and then you're not going to make it to your retirement age. But the fact that you've been paying into this pension system, trying to follow the narrative of working hard and earning your retirement, you're ultimately going to just be paying the benefits to those who live in richer areas, who had better healthcare, and can live a lot longer life.

And not just that but also poor people who did not have the opportunity to get a good education and develop the specialized intellectual skills. The only work for them that's possible is these Wal Mart greeter roles or swinging a hammer, things that are difficult to do when you're old age and maybe suffer from different physical discomforts. You also won't be able to sustain that lifestyle, while those in richer areas who did have those opportunities to develop the specialized skills can work away in their architecture firms for engineering firms and work relative comfort.

David Torcivia:

[37:41] I think you really having a great point, is how much this disproportionately affects those less well-off. And not just in their lives but in terms of their children as well. If somebody has to spend whatever meager savings they were able to scrape together on surviving without their pension, then that's wealth they can't pass on to their children. It's a loss of generational wealth. And people who do well, who don't have to depend on that can pass this on and enhance that inequality even further.

More than that, a lot of savings programs, how the government decides are the elderly able to survive in retirement. In the numbers that they say is, it varies a lot. Remember this is a country where less than 50% of people can come up with $1,000 for an emergency, okay. And what the government says, what these think tanks say when they analyze this, is that maybe 1/3 to 2/3 of Americans are not prepared at all for retirement. And when you look at what they say "prepared for retirement" what that means, a lot of that funding, of being able to survive in retirement, yes it's pensions, yes it's social security, but also includes things like reverse mortgages on their home. Again that's taking away wealth that would be passed on to younger generations and passing it instead to the financial instruments around us: the banks. This is another thing that enhances inequality. And the very idea of retirement, of the way that we have to pay for it ourselves, and survive this way is about heightening that inequality.

A Better Future

Daniel Forkner:

[39:01] If you have parents who may be facing the consequences of this pension crisis, and you know firsthand the fact that you may be responsible financially for their well-being into their retirement (which is going to hurt your ability to save), and if you don't but you recognize that people around you might be in that situation, you should demand we should all demand a society that doesn't place the failings of these systems on individuals. But it's a society that, rather, recognizes that we all need to take care of each other, that we're all in this together, and it's not okay for people to end their lives in poverty. Or live their lives in poverty at all, honestly. But that's just something we'll have to think about.

David Torcivia:

[39:43] You know here on Ashes Ashes, on this podcast. We might be accused a lot of talking about this negative news, about the bad things happening in the world. And yes, that's true, but we do so because we want to see a better world. Because we think a better world is possible. And that's ultimately the end conversation of all of these. That once we know these issues then we can be aware of what's going wrong, and we can work together to work towards a world where these things can't happen.

Daniel Forkner:

[40:12] And when we see a recession and these consequences start to take place, we shouldn't point fingers and blame each other and blame these pension managers (even though they they have played a role in this). The time for pointing fingers will be over and the time for extending our hand to our neighbors and our family members, and trying to build communities that support each other will be the only thing worth doing. We should consider that now before we're facing the worst part of all this, so that we can be prepared.

Wrap Up

David Torcivia:

[40:39] That wraps it up for this week. If you want to learn more about this, about the impending pension crisis, or read a full transcript of this episode, all that is available and more on a website ashesashes.org. You can also find us on your favorite social media network @ashesashescast.

Daniel Forkner:

[40:55] A lot of time in research goes into making these episodes possible. We will never use ads to support this podcast. If you enjoy it and would like us to keep going you, can support us by giving us a review and recommending us to a friend.

David Torcivia:

We hope you tune in next week. This is Ashes Ashes.

Daniel Forkner:

Bye.

David Torcivia:

Bye Bye.