Posts tagged ‘pensions’

Money for Nothing, Detroit Edition

A huge portion of Detroit's operating costs go to police and fire.  If you include retiree health care and pensions, way over half of Detroit's budget goes to police and fire**.  That is an enormous increase since 1960.

detroit-bankruptcy-spending

So one might expect the schools to suck and the streetlights to be broken (which they do and are), but you would expect great freaking fire and police coverage.  But you would be wrong.  Detroit has one of the highest crime rates in the country.  This is what you get for your money there:

If you're a Detroiter who needs a police officer, it will take 58 minutes to get help -- more than five times what it takes elsewhere in the United States...

Here are some of the other problems outlined in the bankruptcy filing:

-- Response times for Emergency Medical Services and the Detroit Fire Department average 15 minutes, which is more than double the 7-minute averages seen in other cities.

-- The police department closes only 8.7% of its criminal cases, which the filing blames on the department's "lack of a case management system, lack of accountability for detectives, unfavorable work rules imposed by collective bargaining agreements and a high attrition rate in the investigative operations unit."

-- The city's violent crime rate is five times the national average, and the highest of any city with a population exceeding 200,000.

 

** This is in large part due to the power of their unions, and their ability in elections to translate hero worship for police and fire fighters into political power that will allow them to get anything they want.  As a politician, try to stand up for sanity and you will be deluged by union ads arguing that you don't respect our men who are risking their lives for you, etc. etc.

Absolute Fecklessness

I am still reading through the Detroit Free Press report on Detroit's financial history and it is really amazing.  All the stuff you expect to see is there -- over taxation, over regulation, crony gifts, huge government pay and pensions, etc.  But this was new to me, and even worse than I expected:

Gifting a billion in bonuses: Pension officials handed out about $1 billion in bonuses from the city’s two pension funds to retirees and active city workers from 1985 to 2008. That money — mostly in the form of so-called 13th checks — could have shored up the funds and possibly prevented the city from filing for bankruptcy. If that money had been saved, it would have been worth more than $1.9 billion today to the city and pension funds, by one expert’s estimate.

Outright gifts of taxpayer money to government workers, even beyond their already rich salary and pensions!  Folks on the Left from Paul Krugman to Obama are trying to portray Detroit as the innocent victim of economic and demographic exogenous forces beyond their control.  Don't let them.  The exodus from Detroit and the destruction of its economy were not random events the city had to endure, but self-inflicted wounds.

When Low Interest Rates are Anti-Stimulus

We have heard about the difficulty folks who are retired are having with low interest rates.  But low interest rates are having a huge impact on corporations that still have defined-benefit pensions.

Across America's business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.

The firm estimates that companies now hold only $81 of every $100 promised to pensioners.

In general, everything happening on the liability side of the pension equation is working against companies. A big source of the problem: persistently low interest rates, set largely by the Federal Reserve....

Pension liabilities change over time as employees enter and leave a pension plan. For financial-reporting purposes, companies use a so-called discount rate to calculate the present value of payments they expect to make over the life of their plan.

The discount rate serves as a proxy for the hypothetical interest rate that an insurance company would expect on a bond today to fund a company's future pension payments. The lower the discount rate, the greater the company's pension liabilities.

Boeing's discount rate, for example, fell to 3.8% last year from 6.2% in 2007. The aircraft manufacturer said in a securities filing that a 0.25-percentage-point decrease in its discount rate would add $3.1 billion to its projected pension obligations.

Boeing reported a net pension deficit of $19.7 billion at the end of 2012.

The discount rate is based on the yields of highly rated corporate bonds—double-A or higher—with maturities equal to the expected schedule of pension-benefit payouts.

Moody's decision last summer to lower the credit rating of big banks hurt UPS and other companies by booting those banks out of the calculation. And because bonds issued by some of those banks carried higher yields than other bonds used in the calculation, UPS's discount rate fell 1.20 percentage points.

This is obviously not a wildly productive use of corporate funds, to divert ever-increasing amounts of money to pay people who are no longer producing.  But at least corporations are acknowledged the problem (I will give credit where it is due -- thanks to accounting rules and government regulations that force a fair amount of transparency here).

It is interesting to note the Boeing example, where their expected rate of return on pension funds fell from 6.2% to 3.8%.  Compare that to corrupt government entities like Calpers, which bravely faced this new reality by cutting its discount rate from an absurd 7.75% to a still absurd 7.5%.  This despite returns last year around 1%.  By keeping the number artificially high, Calpers is hiding its underfunding problem.  An interesting reform would be to force Calpers to use a discount rate equal to the average of that used by the 10 largest private pension funds.

More California Idiocy -- Calpers Scam to Run Private Pension System

A new California mandate on employers I completely missed:

California Governor Jerry Brown signed a law that permits as many as 6.3 million private workers without a pension plan to set aside retirement money for management by the state.

It is the first state-run pension program for nongovernment employees and may add as much as $6.6 billion to funds managed by the California Public Employees’ Retirement System, the biggest U.S. pension. Calpers, as the fund is known, has assets of $242 billion.

The law is aimed at businesses with five or more employees that don’t offer pensions or 401(k) savings programs. The law requires companies to contribute 3 percent of a worker’s salary to a retirement account. Workers will be enrolled in the program unless they choose to opt out.

This is just insane, and I don't remember any public debate on it.  Given that the government already has a forced retirement program with a much higher percentage contribution (Social Security with 16% of wages when including the employer piece), my guess is that this is meant as a bone for or a bailout of Calpers.  Calpers wields enormous political power in the state, and it is entirely believable that they alone are behind this.  Calpers is about to be forced to acknowledge that it is billions short of what it needs to cover future pension obligations because it has been assuming unrealistically high returns form its investments.  Without those high returns, more money needs to be put in the fund to cover public employee pensions that march to ridiculous levels.

I have skimmed the law, and there is nothing in there about what returns will be paid to these new private employees.  My guess is that private contributions will be used as a slush fund to make sure public employees get paid, because they DO have defined benefits, as well as a justification to pay Calpers managers more money.  I can absolutely guarantee that when push comes to shove and Calpers is short of money, private employees will see their benefits rolled back and their contributions going to public employees' pockets.

This is also insane for two other reasons:

  1. In California, there has probably been a zillion lawsuits with the state punishing private entities for running "opt-out" rather than "opt-in" systems.   Having to explicitly opt out to keep ones money is a scam only the government is allowed to get away with
  2. In our company, all but a few of our workers are already retired, working part-time for us to keep busy.  The vast majority of our employees, for example, are on Social Security and many also have private pensions.  So why am I forced to set up all the expensive infrastructure to provide 401K contributions to people who are all drawing down their 401k's?

A Good Reason To Get Obama Out of Office

OK, there are lots of reasons to get Obama out of office.  The problem is, that for most of them, I have no reasonable hope that Romney will be any better.  Corporatism?  CEO as Venture-Capitalist-in-Chief?  Indefinite detentions?  Lack of Transparency?  The Drug War?   Obamacare, which was modeled on Romneycare?  What are the odds that any of these improve under Romney, and at least under Obama they are not being done by someone who wraps himself in the mantle of small government and free markets, helping to corrupt the public understanding of those terms.

But here is one issue Obama is almost certainly going to be worse:  Bail outs of states.  States will start seeking Federal bailouts, probably initially in the form of Federal guarantees of their pension obligations, in the next 4 years.  I had thought that Obama would be particularly susceptible if California is the first to come begging.  But imagine how fast he will whip out our money if it is Illinois at the trough first?

Now that Chicago's children have returned to not learning in school, we can all move on to the next crisis in Illinois public finance: unfunded public pensions. Readers who live in the other 49 states will be pleased to learn that Governor Pat Quinn's 2012 budget proposal already floated the idea of a federal guarantee of its pension debt. Think Germany and eurobonds for Greece, Italy and Spain.

Thank you for sharing, Governor.

Sooner or later, we knew it would come to this since the Democrats who are running Illinois into the ground can't bring themselves to oppose union demands. Illinois now has some $8 billion in current debts outstanding and taxpayers are on the hook for more than $200 billion in unfunded retirement costs for government workers. By some estimates, the system could be the first in the nation to go broke, as early as 2018....

For years, states have engaged in elaborate accounting tricks to improve appearances, including using an unrealistically high 8% "discount" rate to account for future liabilities. To make that fairy tale come true, state pension funds would have to average returns of 8% a year, which even the toothless Government Accounting Standards Board and Moody's have said are unrealistic....

Look no further than the recent Chicago teachers strike. The city is already facing upwards of a $1 billion deficit next year with hundreds of millions of dollars in annual pension costs for retired teachers coming due. But despite the fiscal imperatives, the negotiation didn't even discuss pensions. The final deal gave unions a more than 17% raise over four years, while they keep benefits and pensions that workers in the wealth-creating private economy can only imagine.

As a political matter, public unions are pursuing a version of the GM strategy: Never make a concession at the state level, figuring that if things get really bad the federal government will have no political choice but to bail out the pensions if not the entire state. Mr. Quinn made that official by pointing out in his budget proposal that "significant long-term improvements" in the state pension debt will come from "seeking a federal guarantee of the debt."

I had not paid much attention to the Chicago teacher's strike, except to note that the City basically caved to the unions.  The average teacher salary in Chicago, even without benefits, will soon rise to nearly $100,000 a year for just 9 months work.  But I am amazed at the statement that no one even bothered to challenge the union on pensions despite the fact that the system is essentially bankrupt.  Illinois really seems to be banking on their favorite son bailing them out with our money.

The Ultimate End of Social-Democratic Labor Policy

When a country

  • Increases the minimum wage, and therefore the minimum skill / productivity needed for a job
  • Adds substantially to the costs of labor through required taxes, insurance premiums, pensions, etc
  • Makes employees virtually un-fireable, thus forcing companies to think twice about hiring young, unproven employees they may be saddled with, good or bad, for decades
  • Puts labor policy in the hands of people who already have jobs (ie unions)
  • Shift wealth via social security and medical programs from the young to the old

It gets this

 

The bitterly ironic part is that when these folks hit the streets in mass protests, it will likely be for more of the same that put them there in the first place.

 
Want to argue that such policies are hurting workers rather than helping?  Good luck, at least in Italy

Pietro Ichino, a professor of labor law at the University of Milan and a senator in the Italian legislature, is known as the author of several “neoliberal” books and studies recommending that the Italian government relax its extraordinarily stringent regulation of employers’ hiring and firing decisions. As Bloomberg Business Week reports, that means that Prof. Ichino must fear for his life: “For the past 10 years, the academic and parliamentarian has lived under armed escort, traveling exclusively by armored car, and almost never without the company of two plainclothes policemen. The protection is provided by the Italian government, which has reason to believe that people want to murder Ichino for his views.”

Memo to US:  Don't get cocky, you are going down the same path

 Update:  Interesting and sort of related from Megan McArdle

An apparent paradox that frequently puzzles journalists is that Europeans work fewer hours than workers in the United States, while in some countries, hourly productivity appears to be the same, or even higher, than that of American workers.
This is not actually a paradox at all.  Much of the decline in European hours worked per-capita came in the form of unemployment.  Rigid labor laws which make it hard to fire (and thus, risky to hire) shut less productive workers out of the market, particularly the young, and those who had been displaced due to disruptive industry change.  So does anything that raises the cost of labor, like, er, loads of mandatory vacation and leave.  When you exclude your least productive workers from the labor force, your measured hourly productivity will be higher, particularly if you use metrics like GDP per hours worked.

Greek Government Essentially in State of Default

Nice tax refund you have coming .... we think we'll keep it

The [Greek] government has decided to stop tax returns and other obligation payments to enterprises, salary workers and pensioners as it sees the budget deficit soaring to over 10 percent of gross domestic product for 2011.

For all the supposed austerity, the budget situation is worse in Greece.  Germany and other countries will soon have to accept they have poured tens of billions of euros down a rathole, and that they will have to do what they should have done over a year ago - let Greece move out of the Euro.

Government workers and pensioners simply will not accept any cuts without rioting in the street.  And the banks will all go under with a default on government debt.  And no one will pay any more taxes.  And Germany is not going to keep funding a 10% of GDP deficit.  The only way out seems to be to print money (to pay the debt) and devalue the currency (to effectively reduce fixed pensions and salaries).  And the only way to do all that is outside of the Euro.  From an economic standpoint, the inflation approach is probably not the best, but it is the politically easiest to implement.

Abandoning Even the Pretense of Neutrality

The Obama administration has abandoned even the pretense of not being in the tank for its union supporters.

First, it handed took ownership of GM away from secured creditors and gave it to the UAW.

Second was the NLRB over-reach in veto-ing plant relocation decisions by Boeing

More recently came the rules changes for quick, midnight unionization elections to prevent target companies from being able to tell their side of their story

Finally, comes news that the Obama Administration worked to trash pensions of non-unionized auto workers while protecting pensions of union workers.

Why Is Anyone Surprised?

From Fox Business

U.S. Treasury Secretary Timothy Geithner told Congress he would start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294 trillion legal limit on its debt.

The U.S. Treasury will issue $72 billion in bonds and notes on Monday, pushing the nation right up against its borrowing cap at some point during the day, according to a Treasury official.

Geithner said he would suspend investments in two government retirement funds, which will give the U.S. Treasury $147 billion in additional borrowing capacity.

"I will be unable to invest fully" in the civil service retirement and disability fund and the government securities investment fund, he said in a letter to congressional leaders

Why does this surprise anyone?  Up to this point, government workers have enjoyed a special privilege.  All other Americans have had their retirement accounts in the Social Security system raided and replaced with IOU's, such that $0 actually still exists in these accounts.  All this does is subject government worker's pensions to the same treatment.  It is in fact telling that government employees have been a protected class on this dimension for so long.

I am sure these funds will be quickly replaced.  No such luck for folks counting on Social Security for their retirement.

State Bankruptcy Prediction

There seems to be discussion in Washington about creating a legal framework for state bankruptcies.  My guess is that any law that might be passed will simply be a Trojan Horse.

A lot of people (including myself) would like the idea of the tough provisions applied to individuals who are bankrupt being applied to states.  Unfortunately, it is wildly unlikely that this is actually what we will get.  Any such law would likely just be a bailout program renamed "bankruptcy" to make it more palatable to the public, a transfer of obligations from state to federal taxpayers without any real imposition of discipline or cleanup of long-term obligations like pensions.  Heck, this is exactly what happened at GM, and that was just a private company.

Some might assume that a Republican House would be loathe to support bailout provisions for California, but two thoughts come to mind.

First, California, despite being a blue state, has plenty of red Congresspersons who will scream support for a bailout (for a parallel, think ethanol or farm subsidies, where grain state Republicans are among the first to break ranks with their brethren to support government interventionism).

Second, it is not clear that the Administration even needs the Congress any more to dish out money.  It has found so many extra-Constitutional ways to appropriate money without actually having to go to Congress (e.g. use of TARP funds for about anything, use of the Federal Reserve, etc.) that it should be no problem to do this without the House.  Take just one idea -- Imagine California issues a $100 billion in 0.0000005% 100-year bonds that the Fed then buys at face value with printed money (as they have been buying US securities).  Instant bailout, no Congress.

At Last, Something Other Than Downfall

This is a clever subtitle mashup criticizing public pensions in California which, incredibly, does not actually use the Hitler clip from Downfall.

So What?

Via Glen Reynolds, from Keith Jurow at Business Insider

There is a far-reaching change occurring now which threatens housing markets around the country. A survey conducted by Harris Interactive for the National Apartment Association in May 2010 found that 76% of those surveyed now believe that renting is a better option than buying in the current real estate market, up from 71% in 2008.  Especially sobering was the fact that 78% of those surveyed were homeowners.

David Neithercut, CEO of Equity Residential, the nation's largest multi-family landlord, believes that there is a "psychology change" in the mind of consumers.  In a June address to an industry conference, he declared that there is "a change in one's thought process about the benefits or wisdom of owning a single-family home."

When an author uses the word "threatens" to describe a trend, you know he doesn't like it.  While a home may be  a good place to put excess cash for some people, as a leveraged investment it is insane.  It is a dead asset, producing no cash flow or future value.  While the land under it may be a scarce asset, particularly in some areas with strict growth limits and zoning laws, the house itself is a depreciating asset as much as your car is (trust me, I just replaced an air conditioner and spent weeks repairing dry wall cracks).

Renting pays a lot of benefits, not the least of which is the mobility it adds to the labor market.  Individuals with leases are less tied to a certain spot, so have more flexibility to leave a given area to seek better opportunities elsewhere  (this actually triggers a thought I had not had before -- I wonder if government promotion of home ownership, particularly at the state and local level -- can be seen as a modern form of serfdom, with politicians attempting to tie people to the land so they cannot move and take their tax money elsewhere).

So home ownership is a fine option for many (I own a home and prefer that status in my present circumstances) but there is no law that says it has to be the norm or the default.  Many people have switched from whole life to term, from buying individual stocks to mutual funds, from defined benefit pensions to 401k's.  The way we achieve goals evolve over time, and there should be nothing surprising about a change in how people wish to access housing.  And certainly nothing in this trend which should occasion government intervention to prevent.

In Case You Were Not Depressed Enough...

I wrote the other day about restrictions in the Federal stimulus bill that substantially reduced the ability of state governments to cut spending in response to lower tax revenues.  It turns out there are a myriad of other limitations, including court cases and past consent decrees, that make it nearly impossible for states to do much if anything about their budget shortfalls (except raise taxes, of course).  Just about everyone except for taxpayers have a set of lawyers in courts full time preventing budget changes that affect their special interests.

If you thought elected officials in your state were running the budget show, you might be in for a surprise.  Likely as not the federal courts are more powerful budget authorities than the state's legislature or executive.  A few consent decrees can easily cripple any attempt to pass a balanced budget requirement in a state legislature, and overturn the act itself in federal court if it does happen to pass.  Tennessee, for instance, was shacked by three consent decrees, all of which were administered by federal judges.  Before even writing budget legislation, the governor of Tennessee had to persuade two federal judges, who were the de facto managers of the state's health care system, that any changes were a good idea.

The most damaging consent decrees to state budgets tend to be related to staffing levels.  A number of state agencies settled all manner of employment and discrimination claims by entering consent decrees freezing staff levels.  Often state employee unions were among the most active consent decree wielders.  These decrees tend to lock up not only staff levels, but salaries (through "constructive termination" clauses that equate even modest pay cuts with termination and thereby trigger staffing minimum clauses) and pension benefits as well.

Explain to me again how these government officials who signed these incredibly short-sighted consent decrees just to get through their own term in office are more long-term focused than private actors?  Would any of you short-term-focused capitalists sign an open-ended agreement to never cut staff or salaries or benefits for employees no matter what the future fortunes of your company were?

The only way through this is going to be a massive string of state and local government bankruptcies.

Update: Sort of related, I got this in my email today from a reader

The City of San Francisco pays for two Police Departments and two Fire Departments, less about 5%.
Both have one active-duty department and one retired-duty department.
When a cop or firefighter retires in San Francisco, he receives a 90% pension.

Then, every year THEREAFTER, the retiree receives 50% of every raise negotiated by the active duty Memorandum of Understanding.

He seems to have it right, he links to this site, which does indeed show that the COLA on retiree pay includes 50% of all raises given to active duty employees.  I wonder how early they are vested?

Update #2: Via Nick Gillespie, update #1 is not that unusual:

Retirement incomes for the most experienced government employees top out at 88 percent of their active-duty pay. Unlike most private-sector workers, whose retirement is driven by the strength of the stock market and their 401-k plans, the pensions for government employees are guaranteed.

In addition to higher average retirement incomes, government retirees in Ohio also enjoy government-sponsored health care, can retire as young as 48 for police and firefighters, and have the opportunity to 'retire' and collect a full pension while going back to work, often at full pay for doing the same job. Such 'double-dippers' were paid more than $741 million by the State Teachers Retirement System last year and $240 million by the Public Employees Retirement System, records show.

In Toledo, even the mayor is a double-dipper.

Since starting his current term in January 2006, Toledo Mayor Carty Finkbeiner has drawn his annual salary of $136,000 in addition to a state pension for more than two decades in elected and unelected positions. He is leaving office on Monday.

And because he is already receiving a Public Employees Retirement System pension, Toledo taxpayers have paid $75,221 into an annuity as an additional retirement fund for Finkbeiner.

Government Apples and Private Oranges

Bruce McQuain has a really good post debunking the meme that Medicare overhead costs are lower than those of private insurers.  You should read the whole post, but the short answer is:

  • Medicare participants are older and less healthy than those insured privately, so the denominator for their overhead ratio is much higher
  • Comparing overhead costs per plan participant, Medicare costs are higher than private
  • The comparison is apples and oranges, because private firms pay account differently than does the government
  • Lower Medicare overhead has tradeoffs, as it lets fraud through which is not counted as a cost

I can't add to Bruce's post, except to say that as someone in the business of trying to privatize government functions, we see the apples and oranges problem all the time.  I am constantly having cost discussions with government bodies, and they frequently leave out most of the following when they compute their costs:

  • Insurance  (e.g. liability, property).  They say the government is self-insured, but the government does not charge its divisions any cost for this implicit guarantee.  I have to pay real money for it.
  • State / local taxes.  Private companies have to collect and pay many state and local sales, excise, and property taxes that the feds do not pay.
  • Pensions / retirement benefits.  The government grants fat pensions and retirement medical benefits to its employees but does not accrue or put any funds away in the present to pay for these.  Private companies do  (and in fact would go to jail for not doing so).
  • Capital spending and rent.  This varies by entity, but most government bodies do not see full depreciation of the capital assets they are using in their budgets.  Ditto for the value of the space they are occupying - they often get valuable space rent and/or depreciation free.
  • Services from other government divisions.  Sometimes transfer prices are charged, and sometimes they are even close to market rates, but most times they are not

We Make Money the Old Fashioned Way -- Through Massive Public Subsidies

During and after the Obama proposal for lots more government spending on long-distance rail lines no one will ride, there was a lot of discussion about how European railroads make money with high speed lines.  This sounded like BS to me, from my experience.  Years ago I consulted briefly with the SNCF, the state railroad of France.  Just as one example, we found they had something like 100,000 freight cars and 125,000 freight car mechanics.  I tongue-in-cheek suggested they could assign each guy his own car to ride with full time and fix if necessary and still cut staff by 20%.

Anyway, it turns out the profitability claim is BS.  The Antiplanner links to this study by the Amtrak inspector general.   Here is the key chart, with the green the "reported" profits.  But it turns out they book subsidies as revenue.  The subsidies (including indirect subsidies like taking railroad pensions into the national system and off the railroad's books) are in red.

railroad-losses

Postscript: I have always been amazed that greens get all misty-eyed at European rail.  Sure, its cool to ride a fast train, but the cost of having an extensive passenger rail system is that most of Europe's freight pounds along highways, rather than via rail.  In the US, the mix is opposite, with few passengers on trains but much more of our freight moving by rail.  I would have thought that preferentially moving freight over rail rather than passengers was a much greener approach.

This Crisis is Solely About Lack of Government Regulation

You see, kids, government has to closely regulate evil capitalists, because these capitalists sometimes make investment mistakes, like making highly leveraged investments in risky bubble assets.  The government must be the one to watch over their shoulder, because well-meaning public servants would never make such a mistake themselves:

The California Public Employees' Retirement System (CalPERS)is now warning California's cities that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers, reports the Wall Street Journal. Some communities are already cutting municipal services and they are blaming CalPERS, not Proposition 13. Dan Cort, mayor of Pacific Grove, has been quoted as saying, "CalPERS could bankrupt us faster than anything else."

According to the Journal, CalPERS has lost almost a quarter of the $239 billion in assets it held in June of this year. Stock market losses are an obvious cause of the fund's distress, but less well known is that CalPERS makes extensive investments in real estate -- investments that have been largely financed by borrowing. Some deals involved as much as 80 percent of borrowed money. While this worked well in a rising market, now that real estate has tanked CalPERS expects to report paper losses of 103 percent on its housing investments for the fiscal year ending in June.

Note especially the text in bold.  It takes some effort to lose more than 100% of your investment in one year.  They would have been better off investing with Bernie Madoff, since a 100% loss would have been better than 103%.

The inherent flaw in every call for government action is not the "insight" that business people sometimes are wrong, even way wrong.  The flaw is assuming that anyone in government is more capable, or has superior incentives, to make better decisions.

The Ultimate Lottery Ticket

A government job can be a great deal.  Likely it pays more than a comparable private job, it's generally impossible to get fired from, and it has outrageously good medical and pension plans.  And, if you don't shy away from a bit of perjury, can be made to pay off spectacularly:

During the workweek, it is not uncommon to find retired L.I.R.R. [Long Island Railroad]
employees, sometimes dozens of them, golfing there. A few even walk the
course. Yet this is not your typical retiree outing.

These
golfers are considered disabled. At an age when most people still work,
they get a pension and tens of thousands of dollars in annual
disability payments "” a sum roughly equal to the base salary of their
old jobs. Even the golf is free, courtesy of New York State taxpayers.

With  incentives like these, occupational disabilities at the L.I.R.R. have become a full-blown epidemic.

Virtually
every career employee "” as many as 97 percent in one recent year "”
applies for and gets disability payments soon after retirement, a
computer analysis of federal records by The New York Times has found.
Since 2000, those records show, about a quarter of a billion dollars in
federal disability money has gone to former L.I.R.R. employees,
including about 2,000 who retired during that time.

97 percent?  Wow!  And just to demonstrate that year was not some kind of outlier:

In each year since 2000, between 93 percent and 97 percent of employees
over 50 who retired with 20 years of service also received disability
payments.

The article goes on to demonstrate that this is occurring at what appears, from the injury statistics, to be one of the safest railroads in the area.  Say what you will about the NY Times, but when they get their teeth into local corruption they can still do a masterful job, as evidenced by this long article discussing many apparently ridiculous payroll situations at the LIRR.

I can say from experience that there is a group of people in this country for whom getting a lifetime disability payment (e.g. from the Social Security Administration) is as good as hitting the lottery.  I remember one time I got a survey form from the SSA asking about a former employee.  I didn't pay much attention to the form's purpose as I filled it out -- I get all kinds of such government wastepaper with breathless admonishments about the urgency of my reply.  Anyway, about 2 weeks later I got a very threatening letter from the attorney for this former employee, threatening me with all kinds of dire consequences if I did not immediately retract my (honest) answers to the SSA inquiry.  Apparently, I was endangering a lifetime disability determination that this person had been working on obtaining for years. 

Every day, in fact, I get job applicants who try to cut deals with me of one sort or another (e.g. can you pay me under the table in cash?) because they say they are fully able to do outdoor maintenance work but they can't show any income because it might endanger their lifetime disability payments.  In a similar vein, I have three cases I know of in my company today where workers filed workman's compensation claims of injury several days after they were terminated.

I've said it before, but the reckoning is coming on state and local government pensions, which in most cases are unfunded, undisclosed liabilities of startling magnitude.  The disaster that is fast approaching in these state and local government finances will make Social Security's problems look pitiful by comparison.

Postscript:
  Railroad labor law is just weird and a total mess.  Being the first major industry, and the first major industry that was regulated, a whole regulatory structure was put in place for railroads that (fortunately) has been applied to few other industries.  Whatever the problems we have with state workman's comp programs, they are models of governance compared to how things work in the railroad industry.

For example, I remember when I worked for a railroad in the 1990's, carpel tunnel claims were common.  By the nature of the comp system, workers got cash payments for injuries in addition to medical treatment (I recall a figure at the time of $7500 per wrist for carpel tunnel, but that may be off).  It was a common piece of advice among railroad workers that if one wanted to get the money together for a down-payment on a new pickup truck, one only had to go to Dr. X or Y and get a carpel tunnel diagnosis.

They Knew Exactly What They Were Doing

OK, so this guy committed fraud:

In the hundreds of bills for which he has provided estimates to
lawmakers since 2000, the actuary, Jonathan Schwartz, said legislation
adjusting the pensions of public employees would have no cost, or
limited cost, to the city.

But just 11 of the more than 50 bills vetted by Mr. Schwartz that
have become law since 2000 will result in the $500 million in eventual
costs, or more than $60 million annually, according to projections
provided by Robert C. North Jr., the independent actuary of the city
pension system, and by Mayor Michael R. Bloomberg's office....

Mr. North and other city employees made the calculations on the 11
bills when they were before the Legislature, but for the other bills,
no alternative to Mr. Schwartz's projections could be found. The New
York Times reported last month that in an arrangement that had not been
publicly disclosed, Mr. Schwartz was being paid by labor unions. He
acknowledged in an interview that he skewed his work to favor the
public employees, calling his job "a step above voodoo."

But really, did any of the legislators supporting these bills really think the costs were zero?  If the public employees union is asking for a pension change, you can be sure it is not to save the state money.  This does not let legislators off the hook for failing to exercises any common sense.

The Core Problem with Social Security

I am happy to see others making the point I have tried to make for years:  That the coming financial problems with Social Security are not its biggest problem.  Megan McArdle and Clive Cook say it very well:

In this post on Paul Krugman and Social Security,
Clive, as usual, targets with laser accuracy the real problem with the
Social Security system: not that it is bankrupt, but that it encourages
people to make extremely bad decisions about providing for their future.

It starts with childbearing:  social security systems seem to exert downward pressure on birthrates,
in effect undermining their own actuarial base. Social security
socializes the benefits of childbearing in providing for retirement,
but no one has yet figured out how to socialize the main cost, which is
turning your life choices over to a screaming pre-verbal dictator.
People are thus tempted to free ride on the childbearing of others, and
the more generous benefits are, the more they seem to free ride. This
is one reason that Social Security, which used to have more than 30
workers for each retiree, now has only three, headed towards two.

Social Security also encourages people to leave the workforce
earlier than they otherwise would. People are healthier than ever at
65, but while in 1950, almost half of all men over the age of 65
worked, that number is now less than 20%. This appears to be highly
correlated with the spread of defined benefit pensions such as social
security, which offer no advantage to delaying retirement. Indeed,
Social Security perversely penalizes anyone who takes early benefit but
continues to work, docking a third of their earnings.

Finally, Social Security discourages private savings. This is
terrible for two reasons. If future fiscal problems force the
government to reduce benefits, the people who didn't save enough
because they relied on those promises will be made much worse off than
they would otherwise have been.

The other problem is that Social Security is not a productive
investment. Privately saved money is mostly lent to corporations that
mostly use the money to do things that make the economy more
productive, such as R&D and capital equipment upgrades. Social
security "contributions" are lent to the government, where they are
mostly spent on things that could not be remotely described as
improving our economy's productive capacity, such as farm subsidies.

Excellent.  I ran the numbers and discussed what a bad investment return was paid by Social Security here.  I discussed Social Security as intellectual welfare here.

And the First to Violate Net Neutrality is ... The Government!

I have never been very excited about the concept of "net neutrality."  Various bills in Congress trying to enforce this strike me as Trojan horses for regulation of the Internet, and are at best the attempts by one segment of the population to enforce their vision of the Internet via the coercive power of the government. But more on this in a second.

The City of Boston has a free municipal Wi-Fi network  (I aired some of my objections to this here).  By using this "free" wi-fi network (which is free only in the sense that you paid for it via taxes rather than use fees) you apparently must accept government filtering of the content, which caused Boing-Boing to get blocked the other day, for some "arbitrary and capricious" reasons.  Readers may remember I already dinged Boston once when it used its government power to try to block free competitors.

So despite all the panic that evil capitalist broadband suppliers will somehow block or skew content from certain content suppliers, it turns out that the government, acting as broadband supplier, is the first to do so.  Fortunately, Bostonians have many free competitors to the municipal service that provide uncensored access to the Internet.  But without those private options, they would be enjoying the Chinese Internet experience.

Which gets us back to the issue of accountability.  In short, socialists distrust individual self-interest and the market as accountability tools, and believe the government is much more accountable, and therefore trustworthy, than any private institution.  What amazes be is that anyone with a working knowledge of history can continue to believe this.  Take any issue:

  • Corruption?  Sure there was Enron and Worldcom, but any crimes at these institutions are trivial compared in both magnitude and frequency to the financial abuses of government.  Take pensions as one example.  Maybe 10-20 out of 500 of the companies in the DJIA have underfunded pensions, with some money put away but not enough.  But probably 99 out of every 100 municipalities you can name have underfunded pensions, and in most cases these not only have too little money put away, they have ZERO!
  • Worker health?  Almost all private work environments are incredibly safe -- the very fact that we are worried about carpal tunnel syndrome should tell you something.  But what about in the past?  Well, take one of the highest profile cases of worker harm, that of long-term asbestos exposure.  A huge number of the worst asbestos cases are people exposed in government naval yards.  Government naval yards, for decades, eschewed basic worker protections from asbestos that were common in private industry.
  • Environment?  One only has to look at the superfund site list and see that government sites are represented way out of proportion to their economic activity.  This is not to say their are not god-awful private sites, created either through ignorance or willful disregard, but you will find that the government was at least as active a polluter as even the worst private polluters.   Or look around today, at water quality.  The number of private contributors to water problems is nearly nil.  Most modern water pollution problems are caused by governments (Boston's "solution" to piping raw sewage into the harbor was to... lay a longer pipe and dump it further out in the ocean).
  • Monopoly?  It is hard to find, in history, any stable private monopolies.  Perhaps the most famous, Standard Oil, was losing market share rapidly due to private forces at the time of its breakup.  Government monopolies, however, can last forever despite high prices and crappy services.  Just look at public education.
  • Commerce?  Those who are frequent readers will know that I buy some product from the government, and they are by far my worst, hardest to deal with, and most abusive vendor.

Getting back to the issue of net neutrality, let's take a look at what accountability-enforcement tools a private individual has over a private vs. a public broadband supplier.  If I don't like my private broadband supplier, I can make a phone call and switch to one of several others.  Time elapsed:  About 30 minutes.  If I don't like my public broadband supplier, I could switch to a private company.  But this is really a libertarian end-around to the socialist problem.  To be fair, we need to look at a pure socialist system and evaluate the accountability tools in this system.  So, assuming the government entity has enforced a monopoly position for itself (like in education or the postal service), I would have to muster a grass roots campaign and likely millions of dollars to force any changes through an entrenched and brain-dead legislative body.  Time elapsed:  From 3 years to never.

Government Workers Protect Themselves

A few days ago, I did the calculations on my Social Security statement and discovered the government was paying me a -0.8% a year return (yes that is negative) on the taxes paid into the system on my behalf.  But rest assured, government workers, who know they are sticking it to us with Social Security, would never allow such a thing to happen with their own pensions:

In New York and Oregon, public employees who contribute their own money
to retirement plans get a guaranteed rate of return that is often far
beyond what the market provides, and taxpayers must make up the
difference. In Oregon, the return is 8 percent annually"”about double
what safe investments like treasury bonds provide today.

Part of a great article by Steven Malanga on the growing power of public sector unions.

Business vs. Government Time Horizons

One of the excuses statists often use to promote government over private enterprise is that businesses are "short-term focused".  They are only after "profit in the next quarter."  They don't "invest for the long-term" like a government can.  Really?

Iran's oil exports are plummeting at 10pc a year on lack of
investment and could be exhausted within a decade, depriving the world
economy of its second-biggest source of crude supplies.

A report by the US National Academy of Sciences said rickety
infrastructure dating back to the era of the Shah had crippled output,
while local fuel use was rising at 6pc a year.

"Their domestic demand is growing at the highest rate of any country
in the world," said Prof Roger Stern, an Iran expert at Johns Hopkins
University, Baltimore.

"They need to invest $2.5bn (£1.28bn) a year just to stand still
and they're not doing it because it's politically easier to spend the
money on social welfare and the army than to wait four to six years for
a return on investment," he said.

"They've been running down the industry like this for 20 years."

You never hear this problem in the privately run oil industry.  And I can say with complete confidence that this is a government problem, not just an Iran problem. 

Take one area in this country I know about, public recreation.   The BLM, the Forest Service, the National Park Service, the Corps of Engineers (not to mention state, county and local authorities) all run thousands of recreation facilities across the country.  And I can tell you that no public entity I know of budgets or spends adequate money on preventative and routine maintenance.  The nature of the process is that Congressmen love to get their name attached to building a new government recreation facility - that's sexy.  But then they never appropriate enough money to keep it maintained.  In their calculus, politicians can get a lot more political mileage from spending money in year 2 on another flashy announcement of a new facility than they can from spending that money to maintain the facilities they funded in year 1.

Can you imagine someone like Disney doing this?  Of course not.  The Magic Kingdom at DisneyWorld, the oldest of the them parks there, looks as fresh and new and well-kept when you visit it as does the newer MGM and Animal Kingdom parks.

And don't even get me started on government pensions and Social Security.  Oops, too late, I am started.  Yes, a few private companies in steel and airlines have under-funded pensions (though the government is partially to blame there) but by the definition of "under-funded" that private companies use, nearly every single public pension fund in the country is under-funded.  That is because most public pensions do not actually put away any money (zero, zip) for future liabilities -- they simply pay this year's required payments out of this year's funds.  States and municipalities have a huge balloon pension burden coming -- just wait twenty years and we will all be talking about it.  And Social Security, for all the smoke and mirrors, effectively works the same way, since current premiums in excess of current obligations are spent on the feds general obligations (if you still think there is some trust fund out there, wake up.)

Shifting Nature of Income

Kevin Drum takes the following statistic:

As a result, wages and salaries no longer make up the smallest share of
the gross domestic product since World War II. They accounted for 46.1
percent of all economic output in the second quarter, down from a high
of 53.6 percent in 1970 but up from 45.4 percent in the spring of 2005.

And declares it to be a bad thing.  He doesn't really explain, but as a frequent reader of his site I can guess his issue is that he interprets this statement as a sign of the weakening fortunes of the American wage earner.

Isn't it really dangerous to leap to such a conclusion?  I can think of a number of perfectly innocuous, even positive trends that would cause such a shift:

  • Aging of population means more people retirement age who take their income in form of dividends, investment returns, pensions, social security, etc., none of which are included in "wages"
  • Ownership of investment assets, and thus income from these assets, has spread from just the rich to the middle class, meaning most people get more of a share of their personal income from investments and asset (e.g. house) appreciation
  • Entrepreneurship rates are way up since 1970.  This means many more people, particularly in the middle class, have given up working for someone else for a wage and now work for themselves for a business profit.

I know Drum wants to interpret it as a "the poor are poor because the rich take all the money" zero sum game.  Anyone know what is really going on behind these numbers?

Update: Children in European Restaurants

Not really forewarned about this social trend in advance, my family was surprised to find that many restaurants in smaller English towns would not let us in with our children.  I wrote about the strange Chitty-Chitty-Bang-Bang-esque reactions we got to our children here.

Reader Tom Van Horn sends in this update from Newsweek:

a recent British study showed a house's value drops by 5 percent if
neighbors move in with teenage kids. Hotels are catering to the
childless, too; Italy's La Veduta country resort promises, "Your Tuscan
holiday will not be shattered by the clamor of children." In Rome, many
restaurants make it clear that children are not welcome"”in some cases
by establishing themselves as "clubs," where members must be older than
18 to join.

*shrug*  There are times when my wife and I like to get away from kids too, and we have a couple of them.  I know a few couples who have chosen to remain childless and I can assure you they are sick and tired of being asked about their childlessness like it was some kind of disease.  I am sure they will welcome a sense of normalcy for their chosen way to live.  Combining this trend with my observation that Parisians will take their dog anywhere, it is probably not long before there are public places in Paris where dogs are welcome but kids are not.

That doesn't mean that everyone shares my willingness to let folks live in peace like they choose.  Certain politicians around Europe seem to want to intervene (and isn't that why people become politicians in the first place -- to force other people into making choices that they would not have made for themselves?)

Politicians and religious leaders warn darkly of an "epidemic" of
childlessness that saps the moral fiber of nations; they blame the
child-free for impending population decline, the collapse of pension
systems and even the rise in immigration. In Japan, commentators have
identified the "parasite single" who lives off society instead of doing
his duty to start a family

In Germany, where the childless rate is the
highest in the world, at 25 percent, the best-seller lists have been
full of tomes forecasting demographic doomsday. In "Minimum," the
conservative commentator Frank Schirrmacher describes a "spiral of
childlessness," where a declining population becomes ever more
reluctant to have kids. Media reports have stigmatized the "cold career
woman""”one such recent article came with mug shots of childless female
celebs"”accusing them of placing their jobs before kids. Never mind that
Germany trails its neighbors in the availability of child care, or the
amount of time men spend helping around the house.

From
Germany to Russia, there is increasing talk of sanctions against the
childless. In Slovakia, a leading adviser on the government's Strategic
Council on Economic Development proposed in March to replace an
unpopular payroll tax with a levy on all childless Slovaks between the
ages of 25 and 50. In Russia, where the birthrate has dropped from 2.3
in the 1980s to 1.3 today, a powerful business lobby has called for an
income-tax surcharge on childless couples. In Germany, economists and
politicians have demanded that public pensions for the childless be
slashed by up to 50 percent"”never mind that such pensions were invented
as an alternative to senior citizens' having to depend on their
offspring.

More Trouble Than I Thought at GM

Today's announcement that GM will sell 51% of their GMAC financing arm really brought home to me how bad things are at GM.  I haven't really followed the situation, but I had assumed that GM was facing the same type demographic bomb as the airlines, fat and underfunded pensions and retiree health care benefits promised when times were good and US auto makers didn't face much troubling competition.

Here is what I found interesting:  GMAC is reported to make about $2.5 - 3 billion a year in profits.  This might tend to imply a value of at least $25 to $30 billion, which is confirmed by the fact that GM just sold half for $14 billion.  But GM as a whole has a market cap of just under twelve billion.  This means that their entire manufacturing business is valued in the market at roughtly -$16 Billion.  Yes, negative sixteen billion.  Another way to look at this is that if instead of selling GMAC yesterday, GM had instead sold all of their automotive manufacturing, brands, designs, etc. to someone for $1, and became a pure financing business, GM shareholders would be richer by $16 billion, the equivilent of raising the current stock price from about $21 to about $49.