The Jimmy Buffett Approach to Pensions and Fiscal Policy

In South Florida there is a constant background theme of everything Jimmy Buffett. His music emanates from stores and restaurants while land shark and parrot-head references abound.

This doesn’t bother me, because I’m a fan of his music, most of which is concerned with sunshine, beach drinks, and enjoying yourself in everyday life. But there’s one line from an old song that haunts me as I read daily financial headlines… “I keep laughing so they don’t pick me.”

It’s not a happy sentiment.

Every time a politician stands up and claims that his proposal is going to help “us,” I have the sneaking suspicion that I am considered one of “them.” I pay federal income and capital gains taxes.

Just those two facts alone put me in a minority and make it more likely that I’ll keep less of my earnings in the years ahead as the cost of running our national government goes up

While this is always a general concern, I really get nervous when I see big fiscal problems looming and no one is offering solutions. The latest thing on my radar is pensions, or more specifically, the unfunded pensions of cities and states.

This topic isn’t new, which is the problem. I covered it extensively eight years ago in our special report, The Death of Pensions, and little has changed since then. Some states and cities have worked on the issue half-heartedly, raising some employee contribution levels and appointing commissions to find solutions.

But few have done the hard work of raising pension sponsor contributions (what the cities and states must pay) or working with current and future retirees to set these plans on sustainable paths. Meanwhile, the pension plans in the most trouble keep falling further behind.

Bloomberg — as well as many other information organizations — ranks the states by their pension funding level. Anything at 70% or below is considered at risk of not being able to meet its obligations.

Based on 2013 funding levels (the last year available), 26 states fall under the 70% threshold. The winner in this category is Illinois, which has a mere 39.3% of the assets it needs to meet its obligations. That’s down from 43.4% in 2011, and 50.6% in 2009.

This is an ugly trend, but you might be wondering what it has to do with me, as I listen to Jimmy Buffett in the Sunshine State. When financial problems get too big, everyone looks for the deepest pockets, which, of course, exist at the federal government.

The last governor of Illinois at least tried to address some of the issues facing the pension system, but his proposals were deemed unconstitutional at the state level. Do we have to wait for a state to declare bankruptcy over these issues before we put some sort of structure in place to deal with the problems?

Oddly enough, the answer is probably, “Yes.” State constitutions govern how cities, counties, and states deal with their pensions. For those states with a constitutional guarantee of their contracts, any vested pension is ironclad… up to a point.

A judge in California ruled that the city of Stockton could adjust pensions for current and future retirees because the city was in bankruptcy, which is a federal statute. The city backed down, not wanting a protracted legal fight with the California Public Employees’ Retirement System (CalPERS), but the ruling is still out there.

But if it comes to pass that Illinois, or any other state for that matter, declares it can’t pay its pensions, would the federal government allow the pensions to be cut? Or would our elected officials come up with some way to backstop the payments? It turns out that just last month a little light was shed on the subject.

U.S. Congressman Jason Chaffetz from Utah offered up House Resolution 41 last month, wanting to shine a bright light on the looming public pension issue and the role of the federal government.

The resolution, which doesn’t have the force of law but is meant to frame debates in session, called for recognizing that the federal government operates with huge debt and deficits of its own, and that federal legislators have no intention of bailing out state and city pension plans or retirement health care systems.

As several government tracking websites have put it, this resolution has zero chance of passing. Our elected officials have zero interest in reminding cities and states that their obligations are exactly that… theirs.

Hmm.

It could be that no one wants to think about it right now. It could also be that because there is no easy solution, talking about it seems pointless. But… not talking about it only leaves the problem for another day, and it’s getting bigger, not smaller.

At the low end, using very rosy estimates of future returns and state contributions, the size of the gap in funding for public pensions is $1 trillion. Only 15 of the states are making their required pension contributions.

It’s true that none of the state pension funds will go broke this year or next, but do we have to wait until all the assets are gone before we work on solutions?

It could be that 2015 brings us all some answers. Next year, the city of Chicago will have to increase its pension contributions from roughly $430 million to $1 billion, which is almost impossible.

This leaves the city in a quandary. They cannot afford to make their payments, but workers and retirees have signaled they aren’t willing to negotiate. What’s a city to do?

It won’t take unionized city workers long to figure out that the U.S. government rode to the rescue of United Auto Workers (UAW) in 2009, guaranteeing their gold-plated pensions at 100% while selling white-collar workers and non-UAW members down the river. These union dues-paying employees and retirees will ring up their local Congressmen and demand some sort of federal bailout as well.

When Congress looks around for how to pay for all of this, I’ll be the one in the back, singing old Jimmy Buffett songs.

Seriously though… if all of this causes your eyes to glaze over and makes you a little angry, there is one way to stop the money grab from reaching too far into your wallet — shrink your taxable footprint.

I know that I say this about once a quarter, but there simply is no substitute for getting Uncle Sam — or any other taxing authority — out of your financial planning. I don’t try to push my taxes to zero, but I do try to be efficient with my household finances and investments.

Every penny counts!
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Rodney

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Categories: Retirement

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.