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Response to Demeter (Original post)

Sun Jun 24, 2012, 05:24 AM

61. US Pensions screwed as train chugs on toward the debt cliff (Mauldin)

... If bonds are only yielding 4%, then to get an 8% return in a 60-40 portfolio requires that stocks rise over 10% a year, compounded. Not going to happen for a few years, until we see the end of the secular bear market (these last on average about 17 years), by which time pension funds will be even more massively underfunded and baby boomers will be wanting to retire. Look back to 2000. What has the total stock market return been?

... How badly have investors been hit? The chart below tells a very sad tale. Interest income has been almost cut in half over the last few years of the Fed targeting interest rates.



Part of the reason the Fed cut rates was to stimulate the economy. Lower rates mean lower mortgages and credit-card and car payments. They give businesses access to cheaper capital and hopefully spurs profits and thus hiring. This puts more money into the hands of consumers. As an example, US 30-year mortgage rates recently hit a record low of 3.66%, down from 4.5% the same time last year. A number of mortgage holders will refinance, given the much lower rates, increasing disposable income. That almost makes me want to buy a house or two.

Part of the mantra of Keynesian economics is that it is imperative to stimulate final consumer demand in times of recession or slow growth. That rationale is why the "stimulus" package of a few years ago included so many government transfer payments and tax cuts, coupled with much larger deficit spending.

But low rates punish savers and leave them with less money, so that hurts retirees' final consumer demand – or that is the view from the cheap seats where I sit. And retiree income and spending is a growing portion of the economy. Hurt that, and it's a sector big enough to have consequences. I know that economists can argue that the trade-off is positive, but it seems to me we are defrauding a generation or two of hard-working savers. You did what you were supposed to do, and your reward is a ten-year bond at 1.5%. Since you paid off your mortgage a long time ago, the lower rates don't help you either! So you either cut back or move out the risk curve. While better yields can be had with some serious research and homework, it is not easy.

The Fed is not going to change its policy to help retirees and pension funds, so you are left to fend for yourselves. Sadly, the recent vote by the citizens of San Jose to dramatically cut their fire and police pension benefits, which they felt was necessary because their city council had for years promised more than the tax base could afford, is going to become normal over the next few years.

Part of the problem is simply promising too much in the way of benefits, but an equally big part is pension-fund consultants making assumptions based on the bull market of the '80s and '90s. And now, low interest rates make those assumptions look even worse. To the point where local and state governments cannot afford what was contractually promised.

I should note that the vote in heavily Democratic San Jose, California was 2-1 in favor of those pension cuts. Not just a slim majority, and certainly unusual for a municipal election. Something similar happened in San Diego. It was not just in Wisconsin that voters said Tuesday a week ago that deficits matter. I think those municipal votes are highly indicative of a tectonic change, as voters look to the future of government deficits and start to say "Enough! Stop!" It can't happen too soon, as our train chugs on toward the debt cliff...

/..Read more: http://www.businessinsider.com/mauldin-the-fed-is-destroying-retirees-and-pension-funds-2012-6#ixzz1yhe7iCV3

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