By John Seiler

Why are government pensions going broke? Wayne Lusvardi wrote about recently it in one of our Special Series on municipal bankruptcy, “California counties are more at risk of going belly up.”

In one sentence, he wrote, “No one knows what rates of return pension funds will yield in the future”

In a reply, “Truthsquad” referred to that sentence, and commented,

“Exactly — but we can look at the past and lifetime of the pension systems in our state. Historically the returns have been well over 8 percent. Framing the picture to say returns will be as low as they are during an economic downturn is bogus, and thus undermines the ‘sky is falling premise of the information provided here.”

But look at the following chart.

It shows the performance of the Dow Jones Industrial Average since 1900, but adjusted for inflation. Pension funds generally mirror the stock market.

Look on the right side. The DJIA has shown essentially no growth for about 13 years, since the dot-com bust of 1999-2000. There was “growth” in the mid-2000s, but it was fake growth from the real estate boom — which quickly became the real estate bust.

This dismal record occurred under both Republican President George W. Bush and Democratic President Barack Obama, as well as under Congress when it was controlled, alternately, by Democrats or Republicans. So there’s plenty of blame to go around. And today’s “gridlock” — the Dems controlling the White House and the U.S. Senate, and Reps controlling the U.S. House — isn’t any better, either.

The assumption by “TruthSquad” and other defenders of the existing pension system is that growth will resume, zoom upward, and make up for the recent stagnation. But how can it make up for 13 years of stagnation?

Basically, you would need another Ronald Reagan to come in and cut taxes and regulations. Check out the chart: After he did that in 1981, growth rose sharply and lasted two decades. Bill Clinton, contrary to popular belief, did not revoke Reagan’s policies, but continued them. Clinton did increase taxes once; but he also cut taxes twice. So it basically was a wash — that is, a continuation of Reagan’s policies.

The Bush “tax cuts” of 2003 were temporary, leading to the ongoing extension crises. That means nobody knows what next year’s tax levels will be, thus scrambling business and personal tax and spending calculations. The economy only will grow when taxes are stabilized — with no new taxes; and when the Federal Reserve Board ends its inflationary, low-interest policies.

Moreover, “TruthSquad” doesn’t point out that even CalPERS doesn’t hold to that 8 percent figure. It recently cut its retrun expectations rate from 7.75 percent to 7.5 percent.

And CalPERS itself pays only 3.8 percent for “terminated pension plans” — those seeking to get out of its system. That’s the real amount that ought to be used in its own calculations.

Federal debt rising

Meanwhile, the U.S. government’s debt is $16 trillion and rising. And that doesn’t even include the debt for federal civilian and military pensions, Medicare, Medicaid and Social Security.

Look at this chart from an article on LewRockwell.com:

There’s nothing but economic disaster that can come from such a heavy load of debt. The fedeeral government will have to continue its recent policies of inflating the currency, meaning more economic stagnation.

Imposing President Obama’s “Buffett tax” won’t help. Assuming it works, it would raise at most $160 billion over 10 years, or $16 billion a year, according to the liberal Center for American Progress. But the budget deficit is more than $1 trillion a year. With interest on the $16 trillion debt also compounding, that $16 billion (note the “b) a year is like spitting in the Pacific Ocean.

Another ‘lost decade’

“TruthSquad” expects economic growth to pick up substantially  because it has in the past. But why should it? Japan already is in its third “lost decade.” America has had one “lost decade,” 1999 to 2009; and now is well into its second, 2010-2012. American economic polices, as outlined above, are as dismal as ever.

Unless you believe Mitt Romney is the reincarnation of the Gipper (I don’t), then there’s nothing but more doom and gloom.

The pension funds will cut more deeply into state and local budgets.

If you disagree with me, then there’s something simple to do: Work to end the taxpayer guarantee for pension payments to retirees. Currently, state and local taxpayers are on the hook for shortfalls in pension performance.

Well, if these pension funds are expected to rise by an average of 8 percent per year, then there’s no problem; there’s no need for a taxpayer guarantee.

Memo to “TruthSquad”: As we say in America, Put your money where you mouth is.

The following 3 minute video explains what’s wrong with government debt. It specifically concerns the federal debt of $15.2 trillion (the number has gone up since the video).

But it also applies to California’s $500 billion debt for government-worker pensions.

Where’s all that money going to come from?

Jan. 7, 2012

As I keep reminding people, California isn’t the world’s “eighth largest economy,” as our politicians like to flatter us, but an integral part of the United States and its economy. And that economy, despite a minor ongoing “recovery,” is sick. A second downturn is on its way. When it hits, California’s state budget deficit, currently $25 billion, will grow even larger.

Which means that Gov. Jerry Brown’s call for increasing taxes $12 billion to help cut the deficit (plus $12 billion in spending cuts) won’t work. There still will be a deficit. Plus, the tax increase will slam businesses and citizens just as they’re hit by another round of layoffs and drops in housing prices. In fact, the latter already is here.

On his blog, Powder Blue Report, my friend Allan Bartlett writes of the realities:

This is one of the most important posts that I will ever write. I don’t say that lightly because over the years I have spilled a lot of electronic ink on a lot of different subjects. This one has been building for awhile and it’s time for me to unleash it.

The United States will soon be bumping up against the statutory limit of the debt ceiling. … this means that the United States Treasury can’t float bonds over and above a limit set by a law passed by Congress.

Let’s go over some numbers and some simple math. I like to say that “math doesn’t lie” and it’s true. Currently (as of 2010), the United States takes in $2.2 trillion dollars in revenue and spent $3.5 trillion. This means that the US government must borrow the difference of $1.3 trillion….

If we don’t pass a debt limit increase, the Congress will be forced to live within its means (i.e, spend only what comes in and nothing more). It would be like passing a balanced budget amendment. The deficit spending would end immediately.

You and I both know that this scenario will never happen. Congress will pass a new increase in the debt limit despite the rhetoric coming out of the new GOP majority. Am I skeptical? You bet I am. I know the track record of all these idiots in both parties. Past performance is indicative of future results.

What if the debt level isn’t increased? Would the sky fall down? Bartlett:

We are still taking in $2.2 trillion in taxes and various revenue that flows into the Treasury. What would have to happen though is that every line item in the budget would have to get cut by 37%. That’s right….37%! Medicare would get cut 37%. Patients would have to make up the difference to doctors. Social Security would get cut 37%. Retirees would see their monthly paychecks get cut by 37%. Spending on defense, foreign aid, FBI, Homeland Security, and all discretionary programs would have to take a 37% whack.

Do you see this actually happening? No way, Jose.

We’ve painted ourselves into a corner. We’ve run out of string. We’re at the end of our tether. We’ve run out of rope. We’re at the end of the line. (Throw in a few more cliche analogies if you want to.)

The House Republican “revolutionaries,” now that they’re actually in charge, only can muster $58 billion in cuts. So a deficit well above $1 trillion will remain. Which means soon the national debt will be more than $16 trillion — and rising.

There’s no good way for this to end, for California or America.

(Bartlett has more analysis in his full article.)

Jan. 7, 2011