The Public Pension Debate
A quick comment today on private version public pensions.
This is a topic I have tremendous passion for so it will be difficult to be brief. Simply, I support defined contribution plans more than I support defined benefit plans. Generally speaking, defined benefit plans have their basis in economic optics using assumed rates of return and discount rates which can lead to gross underfunding, and ultimately bail-outs and bankruptcies.
In the Wall Street Journal today, Ms. Jeannette Neumann (see http://on.wsj.com/eUZeD1) writes an article titled “States Mull Shift In Workers Pensions.” An excerpt:
“….Many government-worker unions oppose a switch to 401(k)-type plans. The debate has become heated in Florida after Gov. Scott called for such a move. Florida’s pension system was 87.9% funded as of July. Doug Martin, legislative director for the Florida branch of the American Federation of State, County and Municipal Employees, opposes abandoning the pension plan and says the costs of switching to a 401(k)-like plan can outweigh the savings for at least 25 years.
A switch can increase the payments a public employer has to make to any pension fund it closes, particularly if the pension is underfunded, which many are. That is because when a fund closes, over time there are fewer workers contributing. The burden can fall on the public employer to make up shortfalls….”
The last paragraph above is outrageous; it defies logic, or at least any rational logic. It suggests an underfunded (defined benefit) pension fund should not be closed because the funding gap will have to be made up by fewer workers – and then further suggests that the burden would then fall to the public employer (i.e., the taxpayer). One can only use “Other People’s Money” for so long. Eventually the money runs out. Leverage only works when it can be paid back and there is a “plan B” for exit. “Hope” is not an investment strategy.
The root cause must be highlighted. Even today, public pension plans use an average investment return approaching 8% (coupled with strict investment restrictions limiting the permissible investments to generally higher quality securities which return no where near 8%). If someone were to guarantee an 8% return (for life), one would be wise to not only find several lawyers to get this guarantee in writing, but beg and borrow to secure funds to invest in such a return. When it is determined that the investment assumptions are flawed, and they are, it leads to only one conclusion: the liability mechanics must change to match the asset.
Without getting too deep in the weeds, GASB (Governmental Accounting Standard Board – the functional equivalent to FASB) has muddied the waters with its various pronouncements surrounding this issue to the point where it is impossible to tell which plans are funded properly and leave the municipalities entirely too much room for interpretation and manipulation.
In short, there needs to be a seismic change in the analysis of public financials.
Partisan Rhetoric
One of my fundamental beliefs is that all things can and should be worked out in peaceful and respectful dialogue. Has that always happened, sadly, no, but not for lack of trying. There have been many failures, but I still, perhaps stubbornly, hold it to be sacred.
While there will continue to be intense partisan rhetoric in the coming weeks over the budget, there was an excellent letter to the editor in today’s Wall Street Journal that touches upon this very issue:
Michael Medved offers sound advice to conservatives to stop accusing President Obama of deliberately weakening America (“Obama Isn’t Trying to ‘Weaken America’,” op-ed, Feb. 14). Most conservatives believe that Mr. Obama is attempting to fundamentally transform America and that, in the process, his policies have weakened the American economy and its standing in the world. But benefit of the doubt says that these are side-effects, not objectives. Although conservatives ought to avoid the malicious intent charge, it is worth remembering that the left used that charge quite effectively to attack President George W. Bush.
President Obama’s primary domestic priority, as stated repeatedly during his campaign, is to make America a fairer country with less income disparity and more help for the disadvantaged—not necessarily a European welfare state, but a major step in that direction. His primary foreign policy is to make America more of a team player, rather than taking action and demanding that others follow suit. Shortly after his inauguration, President Obama told an audience in France that, “In America there is a failure to appreciate Europe’s leading role in the world.”
President Obama is not an economist, businessman or foreign policy expert. He was a lawyer, community organizer and politician. Chances are that he sincerely believes that his vision of a socially just America will produce a better, if not stronger, nation; and, if the economy suffers a little in the process, that is a price worth paying. There’s no malicious intent there, just a community organizer’s view of government’s role in the private sector. Conservatives can show that Mr. Obama’s policies are hurting the country without questioning his intent or impugning his integrity.
Chris Morgan
Charleston, S.C.
Health Care (continued…)
I have heard tremendous feedback on health care and clearly it is an issue that touches several nerves. I continue to believe we need to solve the health care issue (call it investing, call it spending, call it what you want). Its current path is simply not sustainable. Health care is expense and we have to finds ways to manage the cost better. This will, and should, be debated and I will continue to add observations.
With that, David Whelan, of Forbes, has an excellent blog post regarding health care: We Probably Spend Too Little On Health Care (absent the Justin Bieber reference and picture!). See http://bit.ly/hi9RCW
Health Care
Such a major issue, and there is politics in the air. Who can truly believe in their own heart and soul that not every single person in the United States should have appropriate access to quality health care?
However, health care is not free.
Democrats up for re-election in 2012 will feel tremendous pressure to reverse/alter/justify their vote on health care; and no doubt some (many?) will alter their positions depending on opinion polls from their districts.
Republicans also face concern. If Republicans stay on the “repeal heath care” wagon, it will become a distraction from the economy, which at least in the eyes of the American voters, is just about the only thing that really matters. The American public wants to see lower unemployment and in general, feel secure in their financial future. A continuing bombardment of political rhetoric on heath care will have a devastating impact on the Republicans in 2012.
But back to health care: The Unites States needs to provide access to quality health care for all. I know of no one who would want to watch someone sick and be denied appropriate healthcare. Some things, in my opinion, need to happen, and happen soon:
- The FDA needs to be quicker in its approval for medicines, trial clinics, etc. We simply need to remove the bureaucracy of red tape surrounding the FDA; although to do so, we need drastic changes in tort reform. FDA Commissioner Margaret Hamburg recently indicated that an estimated 25% of the economy is affected by FDA oversight. As further indicated by the Milkin Institute in a University of Chicago study, life expectancy gains since 1970 added $3.2 trillion per year to America’s national wealth. A 1% reduction in cancer deaths would equate to $500 billion!
- Mandates – a very hot topic. Simply, the law of large numbers is critical to the success of managing health care. I understand and appreciate the argument – why should I be forced to buy health insurance? Many people have compared it to car insurance in that it is mandated – but the difference is individuals can choose to drive and thus, at a minimum, liability insurance is required. The argument is different with health insurance. Sometimes, the moral obligation outweighs and this is such a time.
- Another key component is allowing interstate commerce for health insurance along with portability. A major challenge exists with the interstate commerce of health insurance because insurance is regulated at the state level; there needs to be federal regulation of insurance. While I am no fan of larger governments, I have seen state insurance regulation in action for over 25 years – and it has its positives, but entirely too many negatives.
Bottom line, the absolute root of health care starts in the home (as does Education, a topic for another time) by creating a healthy lifestyle and in turn, prevention measures. Michelle Obama should be commended for her “Healthy Eating” and “Let’s Move” initiatives. These are critically important. Jamie Oliver’s eight episode TV show Food Revolution should be mandatory for every parent, child, school board and educator in the country. On a personal note, my children watched it, enjoyed it and are understanding healthy choices.
By way of simply example, obesity can be better managed which in turn will lower diabetes, control cholesterol, manage blood pressure, mitigate heart attacks, stokes, blood clots, etc.
I firmly believe that an active dialogue on health care can lead to some amazing and real results. The current health care act needs some changes, but in principle, it is the right thing to do. It will cost money and other programs must be cut and altered. Sacrifice will be required from all angles; but do we really have a choice? I submit we have a moral obligation on this issue.
I Snapped!
I have calmed down a bit, as it has been several hours, but the interview of President Obama by Bill O’Reilly before the Superbowl was atrocious.
O’Reilly was simply and utterly disrespectful. I don’t care if you are right of Newt Gingrich or to the far left of Keith Olbermann; if you are interviewing The President of the United States of America, you show respect to the individual and if you can not find the decency and muscle up that strength, you show some respect for The Office of the President. Bill O’Reilly represents all that is wrong with media sensationalism today.
Disgusting. Simply disgusting.
I have joked that Fox News should have fired Bill O’Reilly out of fairness when Keith Olbermann left MSNBC. Now Fox News needs to fire him with cause.
Geo-Political Matters and Global Economics
I indicated last week I would begin to make a few comments on the major points, that in my view, need to be addressed right now, to move forward (fiscal responsibility, education, energy, defense, healthcare, social security and other entitlements).
But first, a few words on the geo-political environment are necessary as backdrop to understand the source of my observations.
Others are much better informed to discuss geo-political matters and the global economy, but it is important to note that I do remain relatively bullish on the U.S. economy as well as the global economy (in the long-term recognizing short-term volatility). I believe in the American spirit of entrepreneurism and capitalism, two principles on which this country was founded and are the economic cornerstone of this nation.
I strongly believe that there is entirely too much emphasis and importance placed on knee jerk reactions to current events and what I perceive to be the competition within the media to be the first to report events (whether it is geo-political or economic) and immediately interpret its meaning. A recurring theme you will see develop in my observations is that this entire world needs to spend way more time in thoughtful and respective dialogue and work towards resolutions and appropriate consensus. I could go on for hours on this subject, and perhaps one day I may!
A simple case in point is the Dow and S&P lost almost 2% in value last Friday due to the unrest in Egypt with some news outlets discussing the impact on oil and energy – but Egypt is a net importer of oil!
The Middle East
With that, the world is full of push and pull and the unrest in Egypt, while individually is not overly concerning to me, it is very much a symptom of a bigger issue. Certainly if it spreads, it is a concern. Egypt while a very old country chronologically in the history of the world dating back to 3000 BC, is an extremely young country compared to its neighbors when the median age of its citizens is 24.
If citizens of other countries see riots and violet protests as a means to effect change, that becomes very concerning. The interplay and balance within the Middle East with Saudi Arabia, Iran, Israel, etc. is fragile. More unrest could occur if any of these countries see this as an opportunity to try to exert some additional power and significance given the stretched resources of the world’s chief enforcer – the United States. As I type this, President Mubarak has indicated he will not run for re-election. This should significantly calm matters and restore the existence of fragile balance over the next few months.
Japan and China
The likes of Japan don’t worry me. As John Mauldin (www.JohnMauldin.com) so perfectly says, “Japan is a bug looking for a windshield.” And while a lot of time is dedicated to China in the news outlets, China will never be viewed on superior terms or even equal terms when compared to the U.S. China is all about China. There is frightening oppression (of all kinds) throughout China (China recently blocked all information about Egypt via the internet and other social media outlets – although, as did Egypt); and the manipulation of their currency for their own benefit makes Fed Chairman Bernanke and Treasury Secretary Geithner weep in jealously. China is interesting and obviously worthy of attention from an economic balance perspective as they contribute to the world economy, but they are only about China and nothing else, full stop. Just one more example – China is considering a law that requires foreign companies to transfer technology to China if they hope sell in the Chinese market. China is looking to lead not by inventing, but by stealing and rebranding. Ultimately, that is not a sustainable business model.
I just cannot envision a scenario where China is respected as the U.S. is respected.
Europe
Europe is important but fairly well-balanced. Again, much is being made about nothing with respect to the EuroZone, the Euro and its challenges. Each member is relatively small in the grand scheme of the geo-political world and its economic and geo-political operations will eventually sort themselves out quite naturally in time.
The United States
All of this points to the United States continuing to be the Commander-in-Chief from a geo-political and economic point of view. However, for this to occur there does need to be some very meaningful and real changes in the United States; and these changes can come about as a result of dialogue, not protests. The United States simply cannot continue with a budget where only 60% of the cost is covered by revenue and the remaining 40% is borrowed, coupled with the fact that 84% of the budget represents entitlements and defense.
These are important points and the United States need to get its fiscal house in order and strengthen its core competencies.
The State of the Union; Politics and Reality
The State of the Union
President Obama gave a nice speech last night; unanimous agreement exists in the media. His major themes were bipartisan in nature and no one could truly disagree that we, as a country, need to move forward, create jobs and continue to focus on the economy and have a renewed and heightened sense of how to manage our dependence on debt.
These are universal themes. Brian Williams politely, yet adequately, described the speech as “breezy.”
Politics
President Obama and the Democrats are way out in front right now–at least from a perception standpoint. All in, the lame duck session was quite productive. As I have observed several times, President Obama has offered multiple overtures to Speaker Boehner and at least in the President’s words to date (and to some extent, actions), has moved more towards the center; but I suspect the President has moved just about as much as he plans to. Politically, the Republicans have been, well, Republicans.
Perhaps Speaker Boehner and the Republicans have a plan. As I told some guests a few months ago when they asked what I thought of the mid-terms, ignore all politics until about the middle of February. This period, particularly after an eventful mid-term election, is more about rhetoric and the proverbial “chest puffing” than any real and meaningful consensus building dialogue.
However, within the next month and with the delivery of the budget, Speaker Boehner and the Republicans have got to noticeably move forward and towards the center. Speaker Boehner still has time to become the speaker he should and can be, which in my view, is a Republican version of Speaker Tip O’Neil. If the Republicans continue with this current stance, I think the Republicans, and we as a nation, lose a huge opportunity to move in a more centralist and necessary path.
Reality
A well known philosophy to which I subscribe is “…you need to spend money to make money…”
There are countless examples and successes and failures and CNBC’s Phil LeBeau does a great job in his editorial regarding General Motors (see http://bit.ly/dVqUjo)
I agree with President Obama that this country needs to invest (i.e., spend money) to make progress and enhance productivity. Although this will be hotly debated over the coming budget cycle, a few key things need to occur, and we are running out of precious time.
We need to invest in Education (Observation to follow)
We need to invest in Energy and its Infrastructure (Observation to follow)
We need Fiscal Responsibility (Observation to follow): managing health care, social security, Medicare, and managing all expenses including defense and other discretionary spending.
Entitlement programs and defense make up approximately 84% of the federal budget (and keep in mind the Federal Government only collects approximately 60% of the federal budget in revenue, i.e., taxes — the rest is funded through debt). There will be active and productive debate on the remaining 16%. President Obama took a meaningful first step in calling for a spending freeze on this 16%. The real test and the ability to move the needle rests in the remaining 84% – the third rail of politics.
The West Wing remains one of the best television shows, ever. A great scene amplifying my point was when President Bartlet and his Deputy Chief of Staff Josh Lyman were talking about social security. The Deputy Chief of Staff was encouraging the President to move forward with bold action on social security reform and the President was quite reluctant. The President replied, “Josh, social security is the third rail of politics.” (Insert West Wing creator Arron Sorkin’s amazing use of the Shakespearean pause here.) The Deputy Chief of Staff responds, “Yes, Sir, but that is where all the power is.”
There will be much more to come in the next few weeks with respect to these critical points.
