Pensions – Not So Boring Anymore…

In my deep past I wrote a paper for a college economics class.  I recall it was on a solid but boring topic for the time (mid – 70’s), related to pensions and the effect on budgets of mis-forecasting rates of return.  Now this was in an era when interest rates were boring, but soon they would not be so.  In the Seventies the big issue became inflation, or stagflation, which after the ’73 oil shock, started heading towards double digits.  At a time when inflation revolved around 10%, the question was can a pension then earning 9% keep up?

The yield problem, particularly for public sector pensions, has come home to roost in the current era of minimal inflation.  With nominal interest rates near zero, it is hard to achieve a return above 7%.  This is causing political problems for many municipal entities, a problem foreseen several years ago.

Responses have varied, but have come from both the right and left.  With the Tea Party behind him, Wisconsin Governor Scott Walker attacked the unions on collective bargaining rights, going after pay and pensions.  The left has taken up the call, as noted by Democratic advisor David Crane of California in 2010, “I have a special word for my fellow Democrats,” Crane told a public hearing. “One cannot both be a progressive and be opposed to pension reform.”  All this rancor over a bucket of money which has been promised to our public servants (teachers, fire, police, etc.).  But as Crane implied, in the current environment, keeping up with these fixed return obligations is threatening basic services like public schools and social services for the needy, not to mention fire, police, and garbage collection.

All this is being revisited across the country now, as an example New York City faces the prospect of an additional $1.9 billion in annual pension contributions due to a reduction in the assumed rate of return from 8% to 7%.  Its pension contributions currently make up 10% of the total operating budget.

With the majority of American workers now facing retirement with a combination of maybe a 401K yielding 2% and Social Security looking dicey, the public sphere is living in the past.  It is time for them to share the risks of the markets that we all do.  A promise to pay is one thing, a promised return is another.  It is time to put to bed traditional pensions for municipal employees, and the arcane activity of forecasting reasonable returns.

Rob Cannon is a frequent guest contributor at SMBmatters and is a principal at Cannonomics.  He is a virtual CFO for hire.

Related Articles

FTIL 2 – The Time of the Season

What is this world coming to?  Something good, perhaps?  People continue to show that there are changes more significant and meaningful than the unpredictable march of the modern business cycle, and I’m pleased to discover that there’s a new kind of improvement in productivity that affects people’s lives directly, not just through some abstract macroeconomic statistics.

Nowadays, folks are happy campers harvesting grapes, stomping them, and hauling away the sap amidst the blistering Calistoga sun or bitter chills of Halifax winds.  I’m not talking about agricultural employees, I’m talking about the consumers!  Though many could avoid the additional expense and effort through a quick swing through their local store, more and more people will pay handsomely to participate in the vinification process, from performing sweaty vineyard chores to listening in on lectures on the art and science of wine making. 

A growing number of vineyards around the world are more than happy to oblige, customizing sessions and tasks to seasonal needs of the vineyard.  Catering to this new customer demand with titles like “Wine Camp for Beginners” and “Grape to Bottle,” the vineyards’ goals are to demystify the subject and present their wares to the people so that consumers can better appreciate their products, as well as the care and expertise necessary to make them special.

Aside from learning cool words like “riddling” (dislodging sediment to the neck of the bottle) and “disgorging” (removing sediment from the bottle) and, of course, drinking the fruits (no pun intended) of your labor, the biggest benefits of these camps have little to do with wine itself.  They are the laughter, spending time with your family and friends, and crafting memories that last a lifetime.

Oh by the way, if you happen to find yourself in NorCal’s winery region, it’s worth a quick trip to Sonoma for a private tour of facilities at Sonoma-Cutrer Vineyards – my wife and I have many memories of tasting sessions from the barrels in the barrel room with former head winemaker Terry Adams (Terry, hope you are enjoying your retirement pal).  And V. Sattui Winery is the best kept BBQ secret in Napa.

Here’s to finer things in life.  Worry less about the trends, enjoy the seasons.  Cheers!

%d bloggers like this: