Detroit Questions Really Answered

Some have been asked, others unasked, but the striking aspect of this dialogue on Detroit’s pending default on benefit promises is that nobody seems to want to provide (or hear) Real Answers, though most of them are out there for those who look…….and reason.  Here are mine.

Q1: How can a plan that is 96% funded be in trouble?

RA1: Most people hear ‘fully funded’ and assume that there is enough money to pay an annuity for life.  Those people are correct.  However pension funding ‘experts’ have convinced themselves that the plan is not terminating at any point in time so you don’t need to have the full annuity price on hand.  Those ‘experts’ are wrong.  Annuity values if priced properly (which they’re not since the insurance monopoly inserts a generous profit margin for themselves) theoretically already consider future mortality and interest assumptions in their rates.  Using higher interest assumptions for determining equivalencies is a stratagem to understate costs which is what all stakeholders are seeking.

Q2: How will Obamacare help with the $5.7 billion liability for retiree health-care costs?

RA2: I don’t know much about Obamacare but the references to taxpayers saving money in yesterday’s NYT article seem misplaced. Unless there are real benefit cuts then some taxpayers will still pick up the tab though it will be a different set of taxpayers. And if it works in Detroit it will mean that every other government would be stupid not to go the Exchange route since otherwise their taxpayers would not only be paying for the cost of health care of their own retirees but, through their federal taxes, also subsidizing retirees in other municipalities.

Q3: How much will Detroit retirees wind up getting?

RA3:  Probably effective January 1, 2014 (since we have the six month vow of no reductions) pensions will be reduced on a sliding scale from 50% to 10% based on how much the current monthly payout is now with an outside chance of a flat cap ($50,000 annually?).  Cost-of-living adjustments will be gone.  This should buy Detroit about five more years of payouts at those reduced amounts before the next default.

Q4: Is it time to scrap defined benefit plans for public employees?

RA4: Yes.  Not because they’re expensive since you can design Defined Contribution plans that are just as costly but because you can lie about the costs of Defined Benefit plans when the dense and the dishonorable and the venal are in charge of funding them.

And lastly the strangely unasked:

Q5: Where is that Milliman report supporting a $3.5 billion liability number that everyone seems to take as gospel?

RA5: Never to be released to anyone likely to question why Milliman is using one set of assumptions for when the idea is to get a high liability number and another set for every other public plan client they service.

 

7 responses to this post.

  1. Posted by Anonymous on July 30, 2013 at 1:12 pm

    Q4: Is it time to scrap defined benefit plans for public employees?

    RA4: Yes. Not because they’re expensive since you can design Defined Contribution plans that are just as costly but because you can lie about the costs of Defined Benefit plans when the dense and the dishonorable and the venal are in charge of funding them.

    This is what I have been trying to convey to Tough Love and she does not understand that even after the pensions are gone the dishonorable crooks will remain and she will be in no better position than she was before. Oh well

    Reply

    • Posted by Tough Love on July 30, 2013 at 2:17 pm

      I understand this quite well. Ending the DB Plans takes away the most effective avenue these “dishonorable crooks” have to benefit themselves while screwing the Taxpayers (with few Taxpayers understanding that they are being screwed) …… seems like that is a very good idea, even if the Citizen-voters are still too dumb to throw these crooks out of office.

      And while Mr. Bury is correct in saying that the problem is not DB Plans per se, but the Moral Hazard of our self-interested elected officials, his responding to the question of whether it’s time to scrap defined benefit plans for public employees by saying “Not because they’re expensive ….:”, was (in my opinion) an unfortunate choice of words.

      While any DB or DC plan can be designed to be very modest or very generous by ANY and all reasonable metrics, the typical Public Sector DB plans is indeed VERY VERY generous ….and hence VERY VERY costly.

      Reply

  2. Posted by Eric on July 30, 2013 at 11:24 pm

    Be Careful of defined contribution plans in light of the “bail in” of Cyprus. Remember, the government wants to convert your 401K and IRA plans into worthless US government securities since no one but the US Fed would make this purchase. The Fed only makes this electronic purchase to prevent failed auctions at the Treasury. The money printing also serves to make the debt on the books of the “too big to fail banks” seem valuable by artificially suppressing interest rates. If rates were to rise as per the market, the debt instruments would plunge in value and hence the banks’ would appear to be insolvent even to a moron. The issue has never been a liquidity problem, but rather a solvency problem. These nameless banks are insolvent.
    Be mindful of your investments!
    I am awaiting a drone attack for my comments.
    Eric

    Reply

  3. Posted by Eric on July 31, 2013 at 8:48 am

    TL:
    Just be mindful of your 401 K and IRA accounts, if you have them. China is not selling, since a huge sale of treasuries would destroy the value of those which remain on China’s books as assets. However, China is not purchasing new treasury debt, and is quietly buying gold. It is also unlawful to remove gold from either China or Russia. Both are buying gold hand over fist on the open market when the paper gold smash takes place on the COMEX. The paper determines the physical price, FOR NOW.
    Japan has followed the lead of Washington in currency debasement by printing the Japanese Yen into oblivion.
    Just watch your retirement accounts closely from any news from DC.
    Washington sees all of this money sitting in these accounts, meaning deferred compensation, and wants its fat, little hands on all of it. Soon.
    This will get ugly very fast.
    Eric

    Reply

    • Posted by Tough Love on July 31, 2013 at 10:21 am

      I’m aware of this …. and that there are big potential problems for the US in 5, 10, 15 … years. Unfortunately only significant shared pain can resolve this …. and few want to share even a small piece of that pain. I fear for my children’s future.

      Reply

  4. Posted by Eric on July 31, 2013 at 5:22 pm

    TL:
    More like 5 years rather than 10 or 15. Make sure that they know Mandarin. That is the best gift you can give to them. In the meantime, keep fighting!
    Eric

    Reply

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