This is only the half of it.  Practically no private pension plans have a COLA, a cost-of-living-adjustment.  In fact, few private sector employees even get a pension although virtually all government people do.  Once retired, a fixed pension in the private sector stays at the same collar amount no matter what happens to the value of a dollar.  Even at a modest 3% inflation, that fixed pension goes down each year until it has lost almost half its purchasing power after twenty years of retirement when highly inflated health costs peak.  But that’s not true of the growing number of government workers due to get COLA pensions.  Their actual buying power remains the same.  And we pay for it with our taxes.

Government workers can thank their strong labor unions and weak government negotiators.  Some people think that the United Auto Workers have obtained inordinately high benefits for their members.  The UAW pales in comparison to the unions that wrestle money and benefits from our taxes.  Of course the Congress and state legislatures don’t want to make too big a fuss over this.  After all, legislatures too gain great retirement benefits.  For example, congressional retirement benefits are the same as those of the federal fire fighters.

Let’s not forget the fact that most public employees have retirement savings plans as well–and have very good health insurance benefits.  Like pensions, these too are often not available to those in the private sector.

You can use the retirement calculators on www.analyzenow.com to see how much you can spend for your own retirement.  It’s unlikely to be the same as Mr. Nowicki, nor have the generous health benefits.  But you might want to bump up your estimate of future tax rates.  Unlike private sector businesses, the government is not obliged to count retirement obligations as a liability.  If the feds did that, technically the U.S. would be bankrupt!

Bud

Last night  I went to the movie I.O.U.S.A. followed by live commentary from Warren Buffett, Pete Peterson, Dave Walker (headed GAO and was Controller General), William Novell from AARP, William Niskanen from the CATO Institute and an Economist whose name I can’t remember.  You’ll have to pardon the errors in this because I was taking notes in the dark and found later that it’s almost impossible to read them.

The commentary that followed was handled by Becky Quick from CNBC’s Squawk Box show who fielded questions from the audience.  The movie was loosely based on the book, Empire of Debt, and was actually exciting—quite a surprise for a financial show.  It even got our local movie audience clapping and laughing.  The show was financed by the Peterson Foundation and starts out with a lot of material from the Concord Coalition.  It was non partisan.

The more I think about the conclusions of the experts (Buffett, Walker, Peterson, et.al.) at the conclusion of the movie I.O.U.S.A., the more I wonder about their almost universal opinion that the main solution would be to increase the federal tax rates and moderate Social Security and Medicare payments to solve the $53 trillion government obligation problem.  Nowhere did they mention the other main debt problems:  personal debts, business and financial firm’s loans, State obligations including unfunded public employee pensions, and the sorry state of our transportation infrastructure.  These have to be satisfied as well.  As bad as the national condition was portrayed, our share of the total obligations was far understated.

One position that was mentioned was a mandatory savings program although the small percent cited would do little to solve our huge savings problem.  After all, Social Security costs us 6.2% plus another 6.2% from our employer—and that isn’t enough to keep the program solvent.  Further, as I have cited in Getting Started in a Financially Secure Retirement, the savings rate (not including Social Security) has to be well over 20% for the next two decades just to make up for the lack of savings in the past two decades of consumerism.

There are those that would only tax the rich, but as much as I dislike the extreme over-compensation of the top executives in major companies, those people eventually have to spend their money, and in so doing enrich the rest of us.  They and their children may live what we consider (or wish we could achieve) obscenely ostentatious lives, but their incomes (less taxes) eventually come into the economy.

On the other hand, government spending and wealth redistribution do little to increase productivity.  In fact all of the paperwork, additional government employees, even more private sector employees to respond to government regulations, and the imposition on our personal time all hurt productivity.  That’s not to say that some innovation doesn’t come from government sponsored research in medicine, military and space activities, but there is lots more that comes from the private sector where competition and necessity are the stimulus for invention.  This is well illustrated by the modern examples of nations that have converted from pure welfare states.  Russia and China now have booming economies by comparison with their past under totally controlled economies.

Higher taxes and increased savings have to reduce economic activity.  Some other alternative solutions are particularly unappealing:  Government bankruptcy, revolution, and hyperinflation.  Bankruptcy destroys much of the world’s economy with it.  Revolution ends the way of life we and few others know.  Hyperinflation puts those on fixed incomes into poverty.  Yet, in my view, a little of each of these horrible extremes is the medicine that might be necessary to at least end up in some reasonable equilibrium.

How about some real government changes to same money?  The Congress should start by setting the example and cutting its overgrown and bloated staffs by 50%.  Then it should act to change all federal pensions, including their own, to fixed pensions like all of those in the private sector.  (Only one in five private sector employment earns a pension, and they don’t have cost-of-living-adjusted pensions like federal and most state pensions.)  Stand up to your unions.  Let them strike.  That would reduce cash outflows too.  Then deny state largess from the federal coffers unless the states do likewise.  Don’t stop there.  Demand IRS 1040 simplification so that the IRS can cut its work force in half and we don’t have to use accountants and computer programs to do our taxes.  Simultaneously, get Medicare to do the same thing so that both government employees and the private medical facilities can cut their own staffs with less paper to handle.  Then sell off the excess office buildings.  Give up your perks.  These are the kind of things we have to do in the private sector in order for a business to survive.  You’ve got to save a country—that’s even more important!

This is not “change” as envisioned by current political parties.  Current political “change” is aimed at things that increase government spending and control.  In my view, change should be moderately more inflation than now considered acceptable, reduced bailouts of industry and financial firms, meat-ax reductions in government personnel, and much increased foresightedness in Congress and personal financial planning –together with some tax increases and entitlement reductions.  We all have to consider much longer horizons than hours or days in financial markets or a few years as in elected office terms.   We even have to think in terms longer than decades as we did in our Boeing planning.  We have to think in terms of generations and life-expectancies, just as in the insurance business.

Everyone is going to get hurt, but we all have to understand that a little pain now is a lot better than a lot of pain if we wait longer to take our medicine.  Perhaps the only Congress and Administration people willing to take such long range positions might be those nearing retirement, but certainly not the others and especially their supporting staffs which provide all of the advice and “smarts” on which government officials depend.  These all need their jobs to feed their families, and most are terrified of leaving their jobs to seek private sector employment and much lower benefits than the government provides.  Further, they have demonstrated that they have no interest in solving the additional problems of personal savings to replace debt, business debt, State obligations including public pensions and the sorry state of our transportation infrastructure. 

That said, here are my notes from the movie, I.O.U.S.A., and the comments from some of the more powerful people in financial circles and former government executives.  I feel all citizens should hear this message—and consider some of the points I have made above.

Of course, the movie is mostly about debts this country has incurred to date as well as the history leading up to our current situation.   Before the movie began, they had a digital display showing the current national debt as it was actually changing.  It was increasing by millions as we watched.   The only time this country was out of debt was 1830.   At the time the movie was made the total unfunded obligations of the country were $53 trillion or $175,000 for every man, woman and child in the US.  By 1/1/09, it will be $55 trillion and $184,000 for each person.

$10 trillion of this will be the national debt at the end of the year.  44.5% of our debt is owned by foreigners, principally China.  The other time the country reached levels of national debt to GDP like we are now was at the end of WWII, but that debt was owed to ourselves, largely as savings bonds.  Unlike now, the people were willing to make great sacrifices because they had experienced the Great Depression and had come out of the War where most things were rationed.  So much of the debt got paid.

One of the few periods in modern times when the government was not outspending its income was in the Clinton administration supported by a Republican Congress.  The movie came down hard on President Bush for not containing spending, especially for approving Medicare drug assistance with Part D.  It showed clips of Secretary O’Neill who was very upset about being fired for his disagreements with President Bush.

All commentators agreed that the current problem was largely due to excessive consumption.  Our national savings rate is now -2.9%.  The graphics showed the highest savings, about 23%, occurred during WWII.  Most of the time savings rates in the past have been about 9% to 10% through good times and bad.

There was a considerable amount of material on inflation with laudatory comments about Paul Volker raising the interest rate to 20% to combat what had occurred in the Carter years.  There were also clips of Ron Paul railing the government for printing money.

Social Security was highlighted in the movie as well as the commentary.  Various solutions were suggested such as raising the full retirement age from 66 to 70 or doubling the Social Security tax on the work force.  After 2017, without action, the Social Security Trust Fund will no longer be able to support cash flows for things other than Social Security as it does now because the trust funds won’t be there.  As most of us already know, the trust fund is a fiction.  It’s full of IOUs from the federal government.  One person said that the trust fund is neither a fund, nor can it be trusted.

The movie showed street interviews with ordinary people.  It was shocking how little they knew not just about the country’s financial conditions, but even simple financial terms like deficit.  The movie and all commentators (except Warren Buffett) felt it was grossly unfair to have our children and grandchildren and following generations have to pay for our current excesses.  Buffett felt that the ingenuity of our people would come up with things to solve the problems so that our children would actually have better lives than us.  The movie and commentators showed how poor our schools were compared to all other developed countries.  We are particularly deficient in math and science.  After seeing the movie, I’d add that they are even worse in teaching basic finance and money management.

The movie also made some dramatic points about the trade deficit.  It showed a US scrap yard where the manager said the majority of his scrap was being sold to Japan and China who were manufacturing things to be exported back to the US.

Foreigners that hold our debt hold it in dollars, so if they sell it to another foreigner, the other foreigner will have the same debt in dollars.  It’s like a tar baby.  The risk is not the foreigners dumping the debt; the risk is the interest rate and being able to get them to take on more of our debt.

Walker pointed out that one of the things that made the debt problem so intractable is that 68% of the national budget is on autopilot (e.g., automatically adjusted for inflation) and only 32% is for the things originally intended by our founding fathers to be what the federal government was supposed to do—like defend us.  Also, Congress was supposed to be a part-time job where the congressmen went back home to their regular jobs the rest of the year.  Now, congressmen work to preserve their congressional jobs and have a very short term perspective directed at whatever it takes to get reelected.

Most of the commentators agreed that the solution to our problem relies on national leadership—and it just isn’t there.  Politicians are campaigning with programs advocating more government spending, not less.  Medicare is currently the largest single unfunded liability—and it looks like the finance problem not only will not get solved—it will get worse with all of the add-ons.

The $53 trillion debt and unfunded liabilities is made up (as I recall the numbers) with $10 trillion national debt, 7 trillion Social Security, $26 trillion Medicare parts A and B, 8 trillion Medicare part D and some miscellaneous items.  I don’t remember how they accounted for the trade deficit, and there was no mention of State debts or industrial debts which must exacerbate the problems.

If you get a chance to see a replay, I’d urge you to see it yourself.  It has a very compelling message that should be understood by all citizens including those in high-school.  We need better government leadership and we must greatly increase personal savings.

How would you like to have retirement resources that will provide about the same income in retirement as when working and be inflation protected? Answer: Go to work for the government. Oregon has one of the richest pension plans. After 30 years of employment, pensions equal or exceed their working compensation per 1999 rules. (Statesman Journal, April 20, 2003) Add Social Security which may provide another 40%.

The baby boomers with government pensions will exceed the number of baby boomers getting pensions in private industry if current trends continue. Consumer Reports Money Adviser (May, 2008) cites Boston College research showing that while 36% of the private sector employees had defined benefit plans in 1992, only 19% have such plans now. That translates to about 22 million private sector employees (19% of 116 million) who get pensions. Virtually all of the 23 million government employees get pensions. This does not count those in the military who also get pensions, and I believe does not count postal service employees or those in similar government sponsored corporations like the Pension Benefit Guarantee Corporation that’s supposed to save pensions for the rest of us.

Most federal pensions have inflation protected cost-of-living-adjustments, COLAs. Many state pensions also have this rich benefit. Practically no private sector pensions have COLAs. At 65, a pension with a COLA has a funding obligation about 50% more than a fixed pension assuming future inflation is only 3%. So if you’d go to buy an inflation adjusted immediate annuity with regular monthly payments like a pension, a COLA annuity will cost about 50% more than a fixed payment annuity. Said another way, a $1,000 a month COLA pension will pay $1,810 after 20 years of 3% inflation while a $1,000 fixed pension will still pay $1,000.

So we are paying into a pension plan that’s not our own even if we personally will not get a pension. That’s because we are paying for the federal, state and local government retirement plans with our taxes. As government increases in size, we’ll pay more—and even more with the COLA adjustments. Although politicians run for office on the basis of reducing government spending, it practically never means reducing the government payroll. Every addition for oversight or a function adds people. And it’s almost impossible to reduce the staff size in a government job. I can remember when congressmen had only 4 people on their staff while ten times that much is not uncommon today.

That’s not all. The percentage of retired people is increasing relative to the number of working people, perhaps 10% to 20% more in the next couple of decades. That means that an ever smaller working force is going to have to support an ever increasing number of aged people. This is not just for the government pensions. It also covers everyone’s Social Security (also inflation adjusted) and Medicare. Medicare is not only increasing from inflation—it’s increasing because of the increasing number of aged and faster-than-inflation growth of medical expenses of almost every kind.

It also means that over 17% to 20% of the work force will be in the government excluding the military and other quasi government workers and the unstoppable growth of government. That’s a powerful voting block. Government employees will always vote to keep their jobs.

Federal employees have subsidized health insurance in retirement as do many state and local government retirees. Very few private sector employees have this benefit. This is huge. A retired couple from the private sector pays about $700 a month for Medicare and Medigap policies, and that doesn’t cover drugs, uninsured costs and care of eye sight, hearing or dental work.

Government employees have 403(b) savings accounts with provisions similar to the 401(k)s in the private sector. But, in the case of the private sector, these savings plans are rapidly replacing pensions, not in the government sector. The public sector is better subscribed because many of those in the private sector opt out, even when the employer offers matching funds.

The average government employee now makes about 50% more than the average person in the private sector. USA Today (2/1/08) reports that “State and local government workers now earn an average of $39.50 per hour in total compensation …Private workers earn an average of $26.09 an hour. . . From 2000 to 2007, public employees enjoyed a 16% increase in compensation after adjusting for inflation compared to 11% for private workers.” In large part, many government workers can thank their very powerful unions and public shy politicians afraid to confront a large part of their voters.

So there you have it. We’ve grown a government that not only pays its employees better than the private sector, we give them better benefits. We’ll pay for those employees not only while they are working, but at an ever increasing rate while most of the rest of us in private sector retirement see our incomes cut by inflation.

General Motors, move aside. There’s another entity that is going to pay more dearly than you for all the retirement promises it has made. Ah, but it’s a sovereign power that has the ability to tax. Sorry about that GM. You have to manage better to catch up. The government doesn’t.

Bud