United States: Avoiding default

US Treasury secretary says he has begun tapping federal retiree pension fund to avoid default

Star Tribune,

20 May, 2013

WASHINGTON - Treasury Secretary Jacob Lew said late Monday he will begin tapping into two government employee retirement funds to buy more time before the U.S. Treasury is faced with the prospect of defaulting on the national debt.

In a letter to congressional leaders, Lew said that he would tap the civil service retirement and disability fund and a similar fund that covers retired postal workers. The law allows him to remove investments from these funds to clear room for more borrowing until Congress votes to raise the debt limit

Under the law, any investments diverted from the pension funds must be replaced with interest once Congress approves raising the debt limit.

Lew has said the various bookkeeping measures he is allowed to employ should provide enough maneuvering room to keep the government from defaulting on its debt until after Labor Day. Other estimates say Lew may be able to forestall a default until as late as November.

In January, Congress voted to temporarily suspend the debt limit but that suspension ended Sunday.

Before the suspension, the debt limit stood at $16.4 trillion. The government has borrowed $300 billion since the suspension took effect. On Sunday, the debt limit reset at the higher level of $16.7 trillion.

The government has run annual deficits of more than $1 trillion for the past four years. But the Congressional Budget Office last week estimated that this year's deficit will drop to $643 billion, an improvement that reflects increased revenue from a stronger economy and the effect of tax increases that took effect in January.

Republicans want to reduce future deficits by cutting back on spending. Democrats have proposed a mix of spending cuts and tax increases, which Republicans oppose. The dispute has led to the current budget impasse.

A standoff over budget issues in August 2011 pushed the country close to its first-ever default before President Barack Obama and Republicans reached a last-minute compromise. That battle prompted Standard & Poor's to issue the first-ever downgrade on long-term Treasury debt. The administration has vowed to prevent Republicans from using the need to raise the borrowing limit as leverage in the current budget battle.

"I respectfully urge Congress to protect America's good credit and avoid the potentially catastrophic consequences of failing to act by increasing the debt limit in a timely fashion," Lew said in his Monday letter.

Australia - robbing the citizens

The Next Domino: Australia Doubles Tax On Retirement Savings

Zero Hedge,

8 April, 2013

Submitted by Simon Black of Sovereign Man blog,

Though Australia’s national balance sheet is comparatively quite strong, the government has been running at a net deficit for years... and they’re under intense pressure to balance the budget.

The good news is that Australia now has a goodly number of investor-friendly immigration programs designed to bring productive foreigners into the country, similar to the trend we’re seeing across Europe.

On the flip side, though, the Australian government has just announced new rules which penalize citizens who have responsibly set aside savings for their own retirement.

Any income over A$100,000 drawn from a superannuation fund (the equivalent of an IRA in the United States) will now be taxed at 15%. Previously, all such income was tax-free.

The really offensive part about this is that the government is going to tax people’s savings ‘on both ends,’ meaning that people are taxed on money they move INTO the retirement fund, and now they can be taxed again when they pull money out.

The Cyprus debacle drew a line in the sand– fleecing people with assets, or income, in excess of 100,000 dollars, euros, etc. is now acceptable. This is the definition of ‘rich’ in the sole discretion of governments.

And make no mistake– if it can happen in Australia, which still has reasonable debt levels despite years of deficit spending, it can happen in bankrupt, insolvent nations like the US.

As you may know, US tax code allows for several different types of retirement accounts… and there has been a lot of talk lately about a ‘Roth conversion’.

This is to say that a US taxpayer can convert his/her traditional IRA to a Roth IRA. And the implications are enormous.

A traditional IRA is not taxed on the way in, but it’s taxed on the way out. So if you contribute $3,000 annually to your IRA, you won’t pay income tax on that $3,000. But the accumulated retirement savings is taxed in the future when you withdraw the funds at retirement.

Conversely, contributions to a Roth IRA are taxed each year with the rest of your income. But the accumulated savings are NOT taxed when you withdraw the funds at retirement.

A few years ago, Congress inked a deal to allow US taxpayers to CONVERT their traditional IRA to a Roth IRA. In doing so, Americans were allowed to pay tax on the accumulated gains in their traditional IRA up through that point, then switch to a Roth.

Congress was essentially saying, “We promise that we will only tax you now in exchange for not taxing you later.”

It certainly begs the question: How much do you trust your government?

Can we really expect the country that has racked up more debt than any other in the history of the world to keep its word? Can we really expect that 5 or 10 years from now, they won’t make another grab for cash?

If the Australian government can unilaterally change the rules and start double-taxing retirement accounts, so can the US. And the trillions of dollars in retirement savings in the Land of the Free is far too irresistible for them to ignore.

Retirement in the United States

R.I.P. Retirement: 28% Of Americans Are Raiding Their 401k Plans

Mike Krieger

Zero Hedge,

15 January, 2013

Via Michael Krieger of Liberty Blitzkrieg blog

,

This trend has been in place since the financial crisis, but the fact that it is accelerating is extremely disconcerting.  First off, this is not the kind of behavior that should be witnessed in an “economic recovery.”  Second, we need to remember the huge percentage of Americans on food stamps and/or disability.  As we have discussed previously, many of them also have jobs.  So essentially, a wage and a check from the government is still not enough to survive.  They still need to tap into a loan from their 401k plans.

From the Washington Post:

More than one in four American workers with 401(k) and other retirement savings accounts use them to pay current expenses, new data show. The withdrawals, cash-outs and loans drain nearly a quarter of the $293 billion that workers and employers deposit into the accounts each year, undermining already shaky retirement security for millions of Americans.

 

A report due out this week from the financial advisory firm HelloWallet found that more than one in four workers dip into retirement funds to pay their mortgages, credit card debt or other bills. Those in their 40s have been the most likely culprits — one-third are turning to such accounts for relief.

 

Fresh data from Vanguard, one of the nation’s largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008.

 

The most common way Americans tap their retirement funds is through loans, which must be repaid with interest. Those who withdraw money face hefty penalties. In most cases, they not only incur a 10 percent federal tax penalty but also pay income taxes. The costs are financially harmful to families even as ­money-management firms reap massive fees for handling retirement accounts that ultimately are not used for retirement.

Hint, banksters win again.

In 1980, four out of five private-sector workers were covered by traditional pensions that paid them a fixed benefit based on their salary and length of service once they retired. Now, just one in five workers has a pension, leaving 401(k)s and similar retirement savings accounts as the primary vehicles for retirees to supplement their Social Security benefits.

 

But millions of Americans, caught between flat wages and high expenses for everything from sending children to college to making home repairs, feel as though they have little choice. The withdrawals have grown substantially in the wake of the financial crisis.

 

In 2010, 28 percent of participants reported having an outstanding loan against their retirement accounts, an all-time high, according to a survey of 110 large employers by Aon Hewitt, a human resources consultancy.

 

Fellowes said workers would be better served by establishing emergency savings accounts that steered clear of the potential tax penalties, investment fees, and other risks and costs associated with having money in retirement accounts. Only after establishing an emergency savings fund, he said, should workers plow their money into retirement savings.

If people did the above, then the financial parasites couldn’t take their fees.  Let’s not forget that many employers automatically put people into these 401k plans without even asking them.  From the same article:

In 2006, employers were given broader latitude to enroll employees in 401(k)-type plans unless workers asked not to participate.

This happened to me at Bernstein and I had to call up to tell them I wanted out.

What a joke this nation has become…

Full article here.

Number of working poor families grows as wealth gap widens

"The number of U.S. families struggling with poverty despite parents being employed continued to grow in 2011 as more people returned to work but mostly at lower-paying service jobs, an analysis released on Tuesday shows."

Presenting The Working Poor Of America

Travel Cuts at AmEx Point to End of Era

"The belt-tightening in American corporations that made relics of pension plans, in-house cafeterias and even many holiday parties is squeezing another victim: American Express Co.'s travel business."

Ugly Choices Loom Over Debt Clash

"The showdown over the nation's debt ceiling could force the government to consider drastic steps to manage its limited cash, including delaying trillions of dollars of payments to employees, Social Security recipients, contractors and others."

Homeless Seek Shelter, Crops Suffer Amid Southwest Cold Snap

Obama "No Ransom For Crashing Economy"; Republicans Threaten Default

Consumers Cut Back on Toilet Paper, Pampers, Huggies; Payroll Tax Bite to Subtract .8% from GDP

General Dynamics Issues Layoff Notices for 139 Workers at Anniston, Ala., Site

U.S. Postal Service Told To Speed Up Cost-Cutting Measures, Could Run Out Of Money By October

Postal Delay in Congress Hastens Risk of Mail Stoppage

Bernanke: Raise debt ceiling, no strings

Biden: W.H. readies 19 executive actions on guns

Colorado Enacts Tough New Fracking Measures

Morgan Stanley defers bonuses for high-earners

New York manufacturing remains in a funk

Retirement funds rules turn on workers

"Nearly a quarter of funds U.S. workers stash in retirement accounts each year are withdrawn to pay current bills and meet other needs, a study indicates."

Why Americans Are Broke, And Getting Further In Debt

Obamacare Sticker Shock; Expect Insurance Premiums to Soar; Aetna CEO

Says Some Rates Will Double

Hey Wall Street, get ready for more layoffs

Obama budget office: Prepare for job cuts

Why U.S. might be ‘a nation of deadbeats’

"Consumers have been paying down debt, but walking away from more"

Lack of Infrastructure Investment Threatens U.S. Economic Growth

UK pensions

"“For all our UK readers, who hope some day to collect pension benefits, we have two messages: i) our condolences, and ii) you won't.”

The UK's Most Disturbing Number: Total Unfunded Pension Obligations = 321% Of GDP

Zero Hedge,

12 November, 2012

For all our UK readers, who hope some day to collect pension benefits, we have two messages: i) our condolences, and ii) you won't.   Why? The answer comes straight from the ONS:

The new supplementary table published by ONS in Levy (2012)10 includes the following headline figures for Government pension obligations as at end December 2010:

• Social security pension schemes (i.e. unfunded state pension scheme obligations): £3.843 trillion, being 263 per cent of gross domestic product (GDP) (£3.497 trillion at end of December 2009)

• Centrally – administered unfunded pension schemes for public sector employees (i.e. unfunded public service pension scheme obligations): £852 billion, being 58 per cent of GDP (£915 billion at end of December 2009)

• Funded DB pension schemes for which government is responsible: £313 billion, being 21 per cent of GDP (£332 billion at end of December 2009).

In summary, the estimates in the new supplementary table indicate a total Government pension obligation, at the end of December 2010, of £5.01 trillion, or 342 per cent of GDP, of which around £4.7 trillion relates to unfunded obligations.

Or visually:

Of course, US-based readers should not get their hopes up too much either. With total underfunded liabilities - including SSN and healthcare, in the US well over $100 trillion (on under $16 trillion of GDP) it is only a matter of time before the entire welfare state ponzi scheme blows up.

Australian superannuation fund scandal

Superannuation funds deducting huge fees on millions of lost super accounts

Millions of Australians are being ripped off by their super funds and they don't even know it, a Treasury analysis reveals.

News.com,

19 October, 2012

The nation’s $18 billion pot of lost superannuation savings is being raided by funds deducting hundreds of dollars in unnecessary fees and charges that, in some cases, will drain accounts dry in just a few years.

As the federal government prepares to gradually increase the rate of compulsory superannuation from 9 per cent to 12 per cent, beginning next July, the superannuation minister, Bill Shorten, is understood to be looking at ways to safeguard the money in these lost accounts.

The Treasury analysis, obtained by News Limited, reveals a person aged 30 who has lost track of an account containing just $1000 is having an average of $169 a year deducted in insurance premiums alone. At that pace, the lost account would be drained dry in less than six years.

In one instance, Treasury found a fund deducting as much as $312 a year in insurance premiums.

The head of research at information firm Rainmaker, Alex Dunnin, said most Australians would be unaware they even had lost super, let alone that it came with insurance cover for death or disability.

“If you have a lost account you have no idea what’s happening to it. The key question is after how long should a fund keep deducting premiums if the member is not making contributions?”

Mr Dunnin said super funds had little incentive to hunt down lost members: “A big lost account is a good money spinner for a less than scrupulous fund.”

A super account is deemed “lost” when a super fund reports it to the Tax Office as inactive - receiving no contributions - for five years or the account holder is uncontactable.

Treasury figures show that there are about 3.6 million such accounts containing $17.68 billion in super. Of this, $16.8 billion is held by super funds and $881 million at the Tax Office, which looks after lost super accounts with balances less than $200.

The chairwoman of consumer group Choice, Jenni Mack, said young Australians, low income earners and women were most at risk of having lost super accounts because they did multiple part-time or casual jobs with different employers.

“It’s a huge problem. People’s superannuation is part of your wage package. It’s money that you’re entitled to and for too long too many fees have been eroding people’s balances.”

Ms Mack encouraged people to go to the Tax Office’s website and enter their tax file number into the  SuperSeeker tool to see if they have any lost super accounts

US pensions

Pension Crisis Looms Despite Cuts

Almost Every State Trims Public-Employee Benefits but $900 Billion Retirement Funding Gap Remains

WSJ,

21 September 2012

lmost every state in the U.S. has made cuts to its public-employee pensions, seeking to dig out from the economic downturn, but so far the measures have fallen well short of bridging a nearly $1 trillion funding gap.

Since 2009, 45 states have rolled back pension benefits for teachers, police, firefighters and other public workers, including cuts by Michigan and California this month. Next week, Republican Ohio Gov. John Kasich is expected to sign legislation requiring, for example, that certain teachers work longer and pay more toward their pensions.

The state measures show how economic forces are reshaping traditional rivalries, convincing lawmakers and labor leaders that past public pension plans are unsustainable. In Ohio and elsewhere, politically potent unions have locked arms with state officials over the pension cuts.

But the new laws have trimmed just $100 billion out of the $900 billion gap between what the states and their workers put into their retirement plans and what the states owe in retirement benefits, according to estimates prepared for The Wall Street Journal by researchers at Boston College.

Unfunded liabilities in many states grew to troubling levels after investment losses in the 2008 financial crisis depleted pension assets. While most states have approved some form of pension cuts, many have opted to apply those changes only to workers who have yet to be hired.

That means most of the savings won't be realized for decades, when the most expensive retirement benefits come off the books. Changes made to the retirement plans of newly hired workers are expected to reduce pension costs by 25% over the next 35 years, according to Boston College estimates.

For years, part of the attraction of public service jobs has been guaranteed pensions and other benefits. That remains largely intact for current workers. Only a handful of states have replaced some guaranteed pension benefits with 401(k)-style retirement accounts that are commonplace in U.S. corporations.

Experts say the differences between public and private retirement benefits will eventually narrow as cuts to new workers' plans take hold.

Many states have avoided reducing benefits for current workers or retirees, saying the plans have legal protections. Courts in Minnesota and Colorado have ruled that cost-of-living raises can be reduced.

"There is a lot of gray area,'' said Alicia Munnell, director of the Center for Retirement Research at Boston College. More states could try to cut future benefits for current workers because the laws aren't clear, she said.

Earlier this month, California Gov. Jerry Brown, a Democrat, signed pension reductions he called the "biggest rollback to public pension benefits in the history of California pensions." The changes, mostly for newly hired workers, are expected to save the state retirement system as much as $55 billion over the next few decades. But the measures won't immediately reduce unfunded liability, said spokesman for Calpers, the state pension fund.

A spokesman for the California department of finance said the pension changes would achieve some immediate savings, but they are largely designed to address the long term sustainability of the retirement system. He said pensions of current workers were "vested rights" that can't be altered

The $100 billion reduction in unfunded liabilities comes from such states as Rhode Island and New Jersey, which suspended annual cost-of-living raises for retirees, according to the Boston College estimates.

States also have shifted more pension costs to employees. As of 2010, state workers were paying 10% more toward their retirement plans compared with three years earlier, according to Boston College. These increased contributions will gradually reduce unfunded liabilities.

Some states say they need more immediate relief.

On Friday, the Teachers Retirement System of the State of Illinois said its pension bill to the state would increase by about $300 million in the fiscal year that starts next July. The higher costs derive from a pension board decision to lower its assumed rate of investment return, citing the "volatility of the world economy."

The lower the expected return, the more the pension's unfunded liabilities grow—unless the state fills the gap with higher contributions from employees or taxpayers, or tries to cut benefits.

Illinois lawmakers had a chance to address the deepening hole last month but they couldn't agree on a bill to limit cost-of-living adjustments. "Changes of some sort are necessary and everyone expects them to happen,'' said Richard Ingram, executive director of the Illinois teachers' pension fund.

In Ohio, lawmakers this month passed a series of changes that touch current and retired workers, along with new hires.

Many of the state's public-employee unions supported the pension cuts less than a year after they fought a bruising battle with Republican lawmakers to retain their current rights to collective bargaining. But on the pension issue, many state labor leaders agreed that their members' retirement benefits needed to be trimmed.

"It is a tough pill to swallow,'' said Kevin Griffin, who is president of the local teachers union and an English teacher in Dublin, Ohio.

An educator since 1994, Mr. Griffin will now have to retire later and pay more of his salary to receive a smaller pension.

"We had to make the math work," he said. "It came down to the question of whether there will be a pension there for me when I retire or not."

Not all unions are cooperating.

Rhode Island, for instance, shifted some workers into a retirement plan that combines traditional pension benefits with 401(k)-style accounts that leave investment choices to employees.

A group of labor unions and retired public workers have filed lawsuits in state court challenging the pension changes passed a year ago.

Pension Funds

The Global Demise of Pension Plans

by Raul Illargi Meijer

the Automatic Earth,

27 August, 2012

We have been saying for a long time that anyone in the western world who's 10-15 years away from collecting their first pension payments, shouldn't expect to get much, if anything, when the time comes. This is because, obviously, the economy has deteriorated as much as it has. It's also because, in essence, pensions plans are the ultimate Ponzi schemes.

What doesn't help are the central bank and government policies that are in fashion today that are based on pushing interest rates about as low as they can get.

The reactions to all this are interesting in their range of variation. Last week I picked up an article (more on that later) that made me refer back to a series of bookmarks I had made over the past month or so. Here are a few quotes that, when put together, paint the picture pretty accurately; you add up the details and numbers and you get an idea of what's going on. Not necessarily for the faint of heart. First, Michael Aneiro for Barron's:

Top Pension Fund Sends a Warning

The California Public Employees' Retirement System, the nation's biggest public pension fund at $233 billion, reported a mere 1% return on its investments in its fiscal year ended June 30. Earlier this year, in an attempted acknowledgment of today's realities, Calpers had lowered its discount rate–an actuarial figure determining the amount that must be invested now to meet future payout needs—for the first time in a decade, to 7.5% from 7.75%. That represents combined assumptions of a 2.75% rate of inflation and a 4.75% rate of return.

Needless to say, a 1% annual return didn't come close to hitting any of those figures and doesn't engender confidence in the assumptions of institutional or individual investors alike. Calpers was quick to note that its 20-year investment return is still 7.7% and that the past year was challenging for everyone. But Calpers is a bellwether, and other systems are expected to report similarly disappointing returns, necessitating higher annual contributions in the years ahead to meet funding needs.

Later in the week, S&P Dow Jones Indices said that the underfunding of S&P 500 companies' defined-benefit pensions had reached a record $354.7 billion at the end of 2011, more than $100 billion above 2010's deficit. The organization reported that funding levels at the end of 2011 ran around 75%, on average, and that future contributions will constitute a "material expense" for many companies.

Fitch Ratings later released its own study of 230 U.S. companies with defined-benefit pension plans and found that median funding had dropped to 74.4% in 2011 from 78.5% in 2010, and that corporate pension assets grew just 2.9% in 2011 amid sluggish returns and a 6% decline in contributions.

This is not pretty. What we see is hugely unrealistic annual return assumptions combined with equally huge underfunding. Both ends burning. More from Marc Lifsher at the Los Angeles Times:

Pension funds seriously underfunded, studies find

Corporate and public pension funds across the country are seriously underfunded, threatening the retirement security of workers and straining the financial health of state and local governments, according to a pair of independent studies.

In 2011, company pensions and related benefits were underfunded by an estimated $578 billion, meaning they only had 70.5% of the money needed to meet retirement obligations, according to a report by S&P Dow Jones Indices.

Funds generally don't need to have all the money needed pay future pensions because returns on investments vary over the years and people retire at different ages and with different levels of benefits, experts said. But a funding level in the 70% zone is considered dangerously low.

The looming shortfall, and the move by corporations to 401(k)-type plans in which the level of investment is controlled by employees, could keep many aging baby boomers from retiring, said Howard Silverblatt, a senior S&P Dow Jones Indices analyst and the report's author.

"The American dream of a golden retirement for baby boomers is quickly dissipating," Silverblatt said. "Plans have been reduced and the burden shifted with future retirees needing to save more for their retirement.

"For many baby boomers it may already be too late to safely build up assets, outside of working longer or living more frugally in retirement."

While the cost of retirement is out of reach for many older workers and growing more expensive for younger ones, it's becoming less of a burden for employers, according to the report issued Tuesday.

Employers are paying less into pension funds despite the fact that company cash levels remain near record highs and cash flows are at an all-time high," Silverblatt said.

Meanwhile in the public sector, a separate pension-related report by the national State Budget Crisis Task Force warned that public pension funds in the U.S. are underfunded by $1 trillion to $3 trillion, depending on who's making the estimate.

There's no consensus on the amount by which pensions funds are underfunded. According to Reuters' Jilian Mincer, the funding shortfall may be as high as $4.6 trillion (2011 numbers).

Public pension funds to face calls to set realistic targets

Public pension funds are expected to report poor annual returns in the coming weeks, results that are likely to increase calls for more realistic retirement promises for teachers, police officers and other public workers.

At least three of the nation's largest U.S. public pension funds have already announced returns of between 1% and 1.8%, far below the 8% that large funds have typically targeted.

The fund's targets have been "unrealistic," said Michael Lewitt, a portfolio manager at Cumberland Advisors in Sarasota, Florida. "They've been fooling themselves because there is no realistic case they can make that." [..]

Low returns will further aggravate funding shortfalls for hundreds of pension plans, adding to pressure on cities, counties and states that are already facing lower tax revenue and rising costs.

The vast majority of states have cut pension benefits or increased contributions from workers, or are trying to.

"Failing to understand the scope of the pension crisis sets taxpayers up for a bigger catastrophe in the future," said Bob Williams, president of free-market think-tank State Budget Solutions, in Washington. "Without government action, states, counties, cities and towns all over America will go bankrupt," he said. [..]

Major public pensions typically assume an average return of about 8%, but the median annual return in 2011 for large pension funds was roughly half that amount, 4.4%, according to data provided to Reuters by Callan Associates.

Median returns were only 3.2% for the last five years and 6% for the last 10. Before the 2007-09 recession, market performance was often above the 8% assumptions. Average returns for the last 20 or 25 years as a whole still reach that level. But with losses in 2008 and 2009 and uneven returns since then, analysts say pension funds should adjust to what seems to be a new reality. [..]

The funding status of public pensions has dramatically slipped over the last decade. Barely more than half were fully funded in 2010. At the end of that year, the gap between public sector assets and retirement obligations had grown to $766 billion, according to a report by the Pew Center on the States.

Ratings agency Moody's Investors Service calculated this month that if it used a 5.5% discount rate, a rate closer to the way private corporations value their pensions, it "would nearly triple fiscal 2010 reported actuarial accrued liability" for the 50 states and rated local governments to $2.2 trillion.

Other estimates put the shortfall even higher. State Budget Solutions estimated it in a recent study at $4.6 trillion as of 2011.

In San Francisco, they don't mince words, writes Heather Knight at SFGate:

More bad news for San Francisco’s city pension fund

A preliminary report of how the city’s pension fund performed in the fiscal year 2011-12, which ended June 30, shows it earned a meager 1.6% — far below the assumed rate of return of 7.5%. For a fund currently worth $15.3 billion, that’s a big difference.

"This is even worse than anyone predicted," said Public Defender Jeff Adachi, who offered a competing, failed pension reform measure that would have raised more money through employee contributions. "If this was a movie, it would be a disaster movie called ‘Pension Armageddon.’"

Canada, which faces similar problems ("massive shortfalls"), despite an ostensibly far better performing economy (how on earth does that add up?), apparently takes a somewhat different approach than the US, where, essentially, the favorite approach is moving the goalposts, which "lets companies use a 25-year average of the discount rate rather than two years".

You don't have to be a genius to see that the - financial - world was a totally different place 25 years ago than it is today. So using 25 year old stats to calculate today's required pension funding rates is a highly risky affair. If you find two years too short a period, you can go for 5 years, perhaps, I can see an argument being made for that. But 25? That looks like a desperate attempt at a cover-up more than a serious effort to find accurate accountancy methods.

Well, Canada resists such desperation. So far, at least, and despite strong opposition, that wants a sweet deal like the US gets. Louise Egan and Susan Taylor for Reuters:

Ottawa shrugs off pleas for pension fund relief amid

massive shortfalls

Canada is taking a different tack than Washington on the thorny issue of helping companies fund their widening pension gaps, shrugging off corporate pleas for relief even as the United States lets businesses slash their contributions.

A frightening prospect for workers, retirees and companies, yawning pension deficits have gone from arcane accounting entries to front page news on fears that massive shortfalls could even cause some corporations to fail.

As a growing number of employers look to roll back benefits to the alarm of unions, others are pouring cash into their pensions funds only to see the hole get deeper.

Canada is not unique, and as in the United States, generous public sector pensions are a hot-button issue. But the federal government is taking a more hands-off stance than U.S. President Barack Obama, who signed a bill last month that changes how companies calculate what they must contribute to their pension funds, effectively allowing them to pay less.[..]

 

Softening the rules implies letting plans stay underfunded for longer, a risk financially prudent Ottawa may be reluctant to accept. After all, the country’s conservative banking culture helped it survive the global financial crisis better than most.

As in other countries, the scope of the Canadian problem is huge. 90% of the roughly 400 defined-benefit pension plans overseen by Canada’s federal regulator are underfunded, meaning they cannot meet their liabilities should their plans be wound up today, as is required by law. [..]

Historically, Canada has preferred relief measures such as lengthening amortization periods. Permanent rule changes in 2010 let companies average their solvency ratios over a three-year period instead of one, so that a sudden bad year doesn’t force them to make big cash infusions.

But some critics say it is dancing around the real problem – the very low "discount rate" used to assess a plan’s solvency, which is the focus of the recent measures in the U.S., Denmark and Sweden. This rate, based on long-term government bonds, helps actuaries judge how much assets will earn over time.

Companies complain the rate has never been lower and artificially inflates a plan’s deficit. The lower the discount rate, the bigger the deficit. Air Canada’s chief financial officer, Michael Rousseau, told analysts on a recent conference call that a 1.5% or 2% rise in the rate would eliminate more than $3-billion from the airline’s deficit.

That wishful thinking effectively became reality last month, not for Canadian companies but for their U.S. competitors. The new law there lets companies use a 25-year average of the discount rate rather than two years.

In Europe, Denmark and Sweden have tinkered with how the discount rate is used and the United Kingdom is thinking of following in their footsteps. [..]

 

Bob Farmer, who represents 250,000 pensioners as president of the Canadian Federation of Pensioners, says softer rules for companies mean bigger risks for workers. Tough luck about the low yields, he says. "That happens to be the world we’re living in." [..]

 

"The biggest social issue in the next 10 years is going to be pensions," said Rick Robertson, associate professor at the Richard Ivey School of Business, part of the University of Western Ontario. "What do I tell the 64-year-old person who may not have a chance to rebound if the company doesn’t succeed. Who’s my duty to? There’s no easy answer."

Whereas in Japan, with the world's fastest ageing population, the world's biggest pension fund has taken a dramatic route: selling off assets. It hopes to make up for this by moving into riskier assets. That's of course a big gamble no matter how you look at it. Monami Yui and Yumi Ikeda at Bloomberg:

World’s Biggest Pension Fund Sells JGBs To Cover 

Payouts

"Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash," said Takahiro Mitani, president of the Government Pension Investment Fund, which oversees 113.6 trillion yen ($1.45 trillion). "To boost returns, we may have to consider investing in new assets beyond conventional ones," he said in an interview in Tokyo yesterday.

Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and become eligible for pensions. That’s putting GPIF under pressure to sell JGBs to cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year, Mitani said in an interview in April. As part of its effort to diversify assets and generate higher returns, GPIF recently started investing in emerging market stocks.

Now, remember that the level of funding for US public pension plans has fallen as low as 70% or thereabouts. And that brings me to the article from last week which made me return to the pension topic.

In the Netherlands, pension funds are by law required to maintain a 105% funding level. And there is little enthusiasm for changing this. Right after the autumn 2008 crisis peak, some leeway was provided by the government, but only for a short period. Now, there are other steps being taken:

Civil service pension fund ABP may cut pay outs by 

up to 15%

One of the biggest pension funds in the world, the Dutch civil service fund ABP, may have to cut pensions next year and again in two years time in order to keep its finances in order, the Volkskrant reports on Wednesday.

The paper bases its claim on confidential documents from the pension fund, which covers some three million workers and pensioners.

The current method of calculating pension funds’ coverage ratio - the amount of assets needed to meet pension obligations - could mean ‘reductions mount up to between 10% and 15%’, the document states.

The fund has already agreed to cut pensions by 0.5% next year. However, talks are under way between ministers and the central bank on changing the way interest rates used to determine the coverage ratio is calculated.

The document also states that if nothing is done to change the calculations, premiums for 17 big funds could rise by 28.5%.

Hundreds of thousands of pensioners are likely to get smaller pay-outs next year because pension funds have been hit by lower interest rates and the economic downturn.

There is no need to explain how tough it will be for many people to see 15% cut off their fixed income. And that will be just the beginning. Some pensions plans may temporarily do better if and when they're allowed to invest in risk(ier) assets, but just as many will do worse for that exact same reason. Changing coverage ratio calculations is not a magic wand; it's just another layer of creative accounting, and we've already got plenty of that.

For younger generations, which over a broad range have lower income jobs, if they have any, seeing pension plan premiums rise 28%, and then some more and so on, will become unacceptable, fast. They will soon figure out that the chances they will ever get any pension decades from now are close to zero. So they’ll ask themselves why they should pay any premiums, from the pretty dismal wages they make in the first place.

Over the next few years, this is a battle that will play out in our societies, and it will have no winners. We need to be very careful not to let it tear those societies apart. In a world where just about everyone has to settle for much less than they have or thought they would have, that will not be easy. Realistic accounting standards would be a good first step, but they will also be very painful. It will be very tempting to hide reality for as long as we can, in the same way we already do with issues ranging from Greece to real estate prices to bank losses to derivatives to our own personal debts.

The best, or even only, advice for those of us who belong to younger generations is: don't count on getting a pension when you reach retirement age. It’ll probably have been moved to age 85 or over by the time you get there anyway.

This is not something that can or will be fixed overnight. It was doomed from the moment baby boomers started producing the number of children they have. It simply hasn't been enough to keep the pension Ponzi going. And those baby boomers, with far too few children to provide for their pensions, have only just started to retire now, as the plans are already in such disarray. I'm sure you can see where this will lead.