Mind-Boggling California Pension Crisis Gets Catchy Name ‘Silver Tsunami’

Mish

Pension deficits accelerate in California to "mind boggling" levels despite the rising economy.

The San Francisco Chronicle notes ‘Silver Tsunami’ Hits as Pension Costs Devour California School Budgets. I reordered some of the paragraphs below for clarity.

School systems are getting hammered by the rising costs of pension and health care commitments. California is not an anomaly. Districts throughout the nation are facing the same squeeze.

The size of these unfunded liabilities is mind-boggling. Nationally, the estimate is $1.4 trillion. In California, it’s $97 billion for teachers and other school employees as of 2015-16. To put this into perspective, total venture capital investment in educational technology since 2010 was $2.3 billion.

Just when you think it couldn’t get worse, California has more than $92 billion in unfunded health care liabilities. By 2030, Los Angeles Unified School District, serving more than a half-million students, is projected to spend half its budget on retiree pension and health care costs. Hundreds of other districts could make dramatic budget cuts or even go bankrupt.

And how did we get into this situation in the first place?

Money is boring: And only boring people like chief financial officers talk about money and use phrases like “unfunded liabilities.” Interesting, cutting-edge people talk about “disruptive innovations” like personalized learning, or anything with the word “maker” in it.

Money is politically messy. Everyone wants funding for their favorite education project. In this zero-sum world, no one wants to talk about making tough choices. Even fewer want to discuss sensitive topics such as pension and health care liabilities.

Education finance has never been part of our nation’s education wars. Most of the opinion makers in education are like the Great Houses of Westeros in the HBO series “Game of Thrones.” They are much happier fighting each other to the death about issues like unions and charter schools than focusing on the more powerful forces that could destroy them all.

Unlike the fantasy world of Westeros, there are no magical solutions or heroes coming to save us. The problem may seem insurmountable, boring and politically dangerous, but ignoring it places the future of California’s education system and our children at risk. Responsibility for its solution lies with all of us.

Systemic Risk

I picked this story up from John Rubino at Dollar Collapse. Rubino comments:

With 10,000 or so baby boomers – many of whom are public sector employees – turning 65 every day, pension imbalances will explode in the coming decade. That means life gets harder for pretty much everyone who drives, needs police protection or has kids in school. Which in turn makes politics even more unstable and unpredictable than currently.

At the same time, the weakest pension plans and their cities will be forced into bankruptcy, leading to panic among the not yet bankrupt and – now we’re getting to the systemic risk – the owners and potential future buyers of the bonds cities and states issue to keep afloat. When the muni market dies, so does much of the rest of the US financial system.

Game of Thrones

How the Chronicle authors came up with the name ‘Silver Tsunami’ is a mystery. Perhaps I do not understand because I do not watch the Game of Thrones.

The Chronicle authors comment: In “Game of Thrones,” that force is the White Walkers. In education, it’s the “Silver Tsunami” — the tens of billions of dollars in pension and other post-retirement benefits guaranteed to retirees.

Mike "Mish" Shedlock

Comments (44)
No. 1-44
Hooligan
Hooligan

spot the logical fallacy: "hey let's vote ourselves lots of money"

bradw2k
bradw2k

There is going to be a "lost generation" (or two or three) economic period in which vast crowds will not get the pensions they were promised, and relatively few can retire. To be followed by a great spring forward in productivity, rising on the wings of robotics and AI-based economic revolutions which come decades later than most desired or predicted.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

I did an all-nighter last night photographing the Milky Way, then staying up for sunrise. Did not get up until 3:00 PM

flubber
flubber

Time to consider robot teachers and taped lectures. No lie.....my brother had accounting classes at a major university taught from recorded lecture tapes of an accounting professor that had passed away a few years before. Grad students assisted on class assignments and questions from the class.

SweetKenny
SweetKenny

Winter is coming...

Snow_Dog
Snow_Dog

Silver tsunami? Sorry, but nothing happens until after the gold rush.

https://youtu.be/c_SeXZq_t60

MntGoat
MntGoat

How would the USA be different if defined benefit pensions didn't exist? AND all gov't workers (city, state, Fed) had to use Obamacare (which they don't)? This includes everyone in congress, all the supreme court justices, all the Fed governors. NO ONE gets a pension or separate "special" zero deductible health care for life. Just like the private sector, they get paid a competitive salary for their position, and if they want money in retirement they have to SAVE and invest like everyone else. And just like the private sector, once they retire if under 65 they are responsible for their own health insurance, and after 65 get medicare. Would that be an interesting world?

Snow_Dog
Snow_Dog

“When the muni market dies, so does much of the rest of the US financial system.”

Like the radar operator on Titanic who ponders “Should there be an iceberg right in front of us?” It will be the long awaited Meredith Whitney call of muni collapse. Slowly first, then all at once.

MntGoat
MntGoat

Its the fox watching the hen house. All the judges that would rule on changes to pensions, special health care for gov't employees, etc.......all get massive pensions and zero deductible health care themselves. Everyone in congress that makes our laws get massive tax payer funded pensions and special zero deductible health care for life. Why would Greenspan, Bernake, Yellen care about inflated assets or a future crash if they have a guaranteed massive pension (adjusted for inflation) and zero deductible special health care for life? They have no skin in the game.

2banana
2banana

Liberal progressive cities/states with insanely powerful public unions (that support democrats 99-1) are in the worst shape. Almost like cause and effect.

abend237-04
abend237-04

The next cry will be for federal help to "save our schools" (Bail out the grotesquely bloated teacher unions), followed closely behind with demands that college loans be "forgiven."

Kinuachdrach
Kinuachdrach

Even arch-socialist FDR was opposed to public sector unions. But the unions came, and bought off Democrat politicians, and here we are today. It is a measure of how completely the Political Class has screwed up that the only realistic solution to the pension & healthcare promises which can never be honored would be a sudden outbreak of a plague like the medieval Black Death, eliminating most of the aged & unhealthy.

MediaReader
MediaReader

There will also be massive cuts to the payouts - likely long before going bankrupt. A pensioner "bail-in" if you will. The plan instantly gets balanced if you eliminate most of the unfunded levels. The "bail-ins" will land on Welfare, SNAP, Medcare,...

MediaReader
MediaReader

BTW I think "Silver Tsunami" refers to silver haired teachers upcoming retirement.

AWC
AWC

Taxpayers better take on a second job. California is too big to fail, so gonna need to pony up more fiatskies here. Six digit pensions ain't cheap.

Realist
Realist

I have a few points to make. First: there is nothing wrong with Defined Benefit Pension Plans. There are many well run DBP Plans in the world that are fully funded. The fact that so many DBP plans in the US are so poorly run doesn’t mean you should taint the rest. Second: Because of how Health Care is funded in the US, it puts extra strain on employers that you don’t have in countries with a single-payer system. This puts the US at a distinct disadvantage. However, I don’t expect either of these two things to change any time soon. Since Americans can’t seem to agree on how to fix anything, I expect the US will continue to poorly manage pensions and health care to the detriment of its citizens. Sadly, this will result in a lower standard of living for many Americans over the next few decades.

CautiousObserver
CautiousObserver

Prediction: A massive cry by local and state governments for federal help in arresting a deflationary pension crises will eventually be answered. The price for this help will be a sort of merger between local, state and federal governments. To some extent this has already happened where “federal dollars” are contributed to certain local projects that meet federal goals.

Excerpt from Bernanke’s November 21, 2002, speech:

...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent) , that allows it to produce as many U.S. dollars as it wishes at essentially no cost...
... To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system–for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities [including state and local authorities]...

Jojo
Jojo

Unsure if you have featured this previously:

A public university president in Oregon gives new meaning to the idea of a pensioner.

Joseph Robertson, an eye surgeon who retired as head of the Oregon Health & Science University last fall, receives the state’s largest government pension.

It is $76,111.

Per month.

That is considerably more than the average Oregon family earns in a year.

Oregon — like many other states and cities, including New Jersey, Kentucky and Connecticut — is caught in a fiscal squeeze of its own making. Its economy is growing, but the cost of its state-run pension system is growing faster. More government workers are retiring, including more than 2,000, like Dr. Robertson, who get pensions exceeding $100,000 a year.

The state is not the most profligate pension payer in America, but its spiraling costs are notable in part because Oregon enjoys a reputation for fiscal discipline. Its experience shows how faulty financial decisions by states can eventually swamp local communities.
...
https://www.nytimes.com/2018/04/14/business/pension-finance-oregon.html

JonSellers
JonSellers

The vast majority of pension money goes to cops and firemen. Nobody is going to cut them.

Irondoor
Irondoor

I reviewed the publicly-available information on my state's retirement programs. Guess which one was fully funded? The judges pension plan. And they kept it separate from all the other state workers and teachers plans. Check you own state. In other news, we recently sold our too-large home and are downsizing to one at half the cost to purchase, maintain, heat, cool, no fireplace thus no firewood, etc. Best part: cut my property tax bill by 60%. Cut my electric/propane bill by 40%. The buyer of our former house (which we leased back for $1 for six months) is moving from California and he actually thanked me for selling to him. He can't wait to retire and get out of there. He will likely cut his own property, income and sales taxes by a lot.

Blacklisted
Blacklisted

Regardless, our pensions are doomed and civil unrest will explode as govt's renege on their promises (lies) and raise taxes in an ATTEMPT to mask their gross mismanagement.

Blacklisted
Blacklisted

No one will be spared when the financial reset hits. Expect to see more firemen, cops, and teachers to be crowding out the homeless, begging on the corners with their boots and hats out.

Blurtman
Blurtman

We must seize the remainder of Mexico! Remember The Alamo!

El_Tedo
El_Tedo

Reason #567 why we should allow - even encourage - California to become an independent country.

Carl_R
Carl_R

How did this problem come to be? The first art of the reason is that there is no opposite interest. When pensions are negotiated, on one side of the table you have the government employees' union, who wants higher pensions. On the other side of the table you have a government employee who wants higher pensions. No one represents taxpayers. The second part of the problem is that this is all off-budget, and handled on a cash basis. Taxpayers don't ever see the full liability that is created. The only part that they ever see is the amount actually contributed to the fund. Thus, in good years a lot may be contributed, but no one notices. In bad years very little, if any may be contributed, so again, the budget deficit is never "because of pensions". States should have to list the full increase in pension liability as a part of their budget each year, and then taxpayers would be more apt to demand accountability.

Stuki
Stuki

“First: there is nothing wrong with Defined Benefit Pension Plans. “

There is very much something wrong with defined benefit pension plans. You simply cannot, in any universe where what the future holds is even remotely random, know what you will at some later date have available to pay someone with. The best you can do, is collect dollars, stick them in Fort Knox, and never promise to pay more than what you have at any instant tucked away. But even then, Putin-the-nuke-guy, or some meteor, can come down hard enough on your vault, to mess up your best effort to hold up your end of the bargain. Leaving the poor sap you made promises to, high and dry.

And no “well run” plan anywhere, is even remotely as “well ran” as that. Instead, all they are, are schemes to get old suckers to cheer for ever more massive governments tasked with robbing other people’s children. In order to so-called “pay for” “promises” made by known conmen way before said children were ever born. Whether the robbery is direct, via the tax bill, or indirect via printing presses debasing young people to hand the loot to pension plan operators via asset appreciation, is 100%, full stop completely irrelevant. The latter mechanism doesn’t somehow magically make the theft any crasser than the former.

Carl_R
Carl_R

I do favor banning defined benefit plans, and replacing them with defined contribution plans for the simple reason that the latter can not be abused, while the former can. That said, there are analogs to a defined benefit plan that you can purchase for yourself, those being annuities. I note, though that when you do, these days they tend to limit them. Insurance companies, not being stupid, tend to put a limit on the total benefits you can draw to protect themselves from the possibility that medical advances in the years ahead could dramatically alter the landscape. Suppose that the average life expectancy jumped from 80 to 120? Just imagine what that would do to today's defined benefit plans? What affect would that have on defined contribution plans? The plans would be fine, but people had better become more frugal, or continue to work.

Kinuachdrach
Kinuachdrach

Long ago, an old guy told me that the argument for government-run pension plans when they were first set up was that people could not be trusted to save their own money for retirement; we would spend the money on wine, women, and song. Government needed to act as the adult in the room, take money from workers today, and save it wisely for our futures. Unfortunately, the Political Class turned out to be the most irresponsible people on the planet. They failed to save anything, and wasted it on more frivolous things than wine, women, and song. The root of the coming pension debacle, and the root of much that is unsatisfactory in this world, is our reliance on a selfish, corrupt Political Class.

RonJ
RonJ

"I do favor banning defined benefit plans, and replacing them with defined contribution plans for the simple reason that the latter can not be abused, while the former can." Anything can be abused. There are enough bad stories about 401K plans at some employers.

Ambrose_Bierce
Ambrose_Bierce

I don't get the retiree benefit liability, when you retire you go on Medicare, and your former employer backs your supplemental. As for dental and vision, (the number of new dentists setting up businesses is noteworthy) they can moonwalk their way out of that. My PCP said some time ago, not to worry, everyone is going to have the same healthcare, by that he meant retirees. The long term for 20yr olds is something different than boomers, if you're 65 where will you be in 20yr? The problem is transitory

BornInZion
BornInZion

"Silver Tsunami" is shorthand for the demographic long known as the baby boomer retirement wave.

JonSellers
JonSellers

It is a difficult choice. Obviously our economic system can't possibly produce enough to feed, clothe and shelter both our aged AND our young. Perhaps we need to find an economic system that is more productive. Been to a Walmart or grocery store lately? Bare shelves everywhere!

Realist
Realist

Stuki. You need to learn some actuarial math. A defined benefit pension plan is a perfectly acceptable form. As RonJ points out, anything can be abused. In the US, this seems to apply to almost everything, including DBPP. As I say, there are many good examples in other countries. Perhaps you should ban them in the US since you seem incapable of running them properly.

JonSellers
JonSellers

Assuming of course the employee is provided with the education necessary to properly invest those resources, is fully aware of the amount of resources that are needed to be saved, and has the time to research the companies and funds into which s/he is investing. Otherwise, the individual might make some very unfortunate investment decisions over the course of his/her income generating years leaving him/her with inadequate funding of his/her retirement years. Which, of course, would be morally repugnant.

klausmkl
klausmkl

All the negative rhetoric about Cal pers because the state supreme court is due to rule on the California Rule. so as good lap dogs the media spews it's negative bias. Dummies lap it up like a dog who licks his own vomit. Go read the financial report that is posted on the Cal pers web site. the fund has 360 billion in it. If you know how to read financial reports and make up your own mind.

8dots
8dots

A Calif old lady could not breath well in the middle of the night and complained. Her part time female DR. , in 30 min, sent her out with referrals worth half of the Dr. annual salary : sleep deprivation lab, Brain CT + and a follow up CT in half a year to inspect a change, a stress test, oxygen tank + mask, assistant nurse,.... multi visitations back to --> the very devoted & productive part time DR. Healthcare is part of the service industry. It's consumption. US consumption = 70%. In the old days, consumption was the real name of tuberculosis = a body that is slowly waste itself, it just take time, weather u go back to the Biltmore hotel, or back to your slum !! The Ca Dr. and her old lady "customer", both passionately hate the infantile, narcissist Trump.

Carl_R
Carl_R

Calpers is in a lot better shape that the funds in Illinois. If you assume a 6.2% rate of return going forward, they are 58% funded. In other words, they are pretty close, they have $360 billion of the $660 billion they will need to pay the pensions. Now, if they can average a 12.5% return going forward, they are fully funded. I think they won't be able to even hit 6.2%, so the shortage is actually larger than $300 billion.

George_Phillies
George_Phillies

A defined contribution plan managed by a third party and properly audited is less likely to be abused. However, read NakedCapitalism.com on CalPers. WIth respect to CA and IL, that which cannot continue, won't.

Important sentence in the original, referring to cities that use bonds to stay afloat...Cities that claim they are need bonds to stay afloat are in fact bankrupt. Some of us are old enough to remember New York City in the late 1970s.

Cocoa
Cocoa

When they retire, they get some high % of their highest salary as a pension guaranteed. The PERS and Teacher Union Benefits would have to be pulling 8- 10% on the markets to match the liability. Plus these Unions allow gaming of the salary(ie: you work/get overtime from buddies in you last year to boost your top salary. There's no way with costs rising like that in a low interest environment to make it...it's insolvent

SteveAdams
SteveAdams

So they make some bad decisions, so some percent end up broke and a warning to others - the alternative is massive destruction of significant parts of our civilization where even more people, excluding entire cites end up broken. Frankly I’m tired of the bs - there’s no point brining the whole system down because some sub group is unable or unwilling to take responsibility for their lives.


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