What Should Obama Do? (WSOD?)

CTK, this Brooklyn Lager is for you.

http://www.cogitamusblog.com/2010/10/david-brooks-doesnt-know-sht.html

18 wrote: David Brooks Doesn't Know Sh-t[/size]

One of the more annoying things in reading your average dead tree bloviator is when they happen to write about something in which you are -- well at the risk of sounding like a dick -- an expert. Multiply this emotion by ten when the columnist is a right wing hack like David Brooks. Brooks weighed in yesterday on the alleged inability of states to undertake necessary projects because they are so deeply in the hole on their pension obligations. He blames the problem on -- what else -- greedy public employees' unions and their Democratic captives. There is not one mention of the financial debacle that was the Bush years, no acknowledgment of the disaster wrought upon us by deregulated markets and a financial services industry run by criminals and incompetents, and no discussion of how these pension plans came to be in such trouble.

I have been working with private sector, multiemployer pension plans for over twenty-five years. The funding of all such defined benefit plans -- whether public or private -- is based on a few moving pieces -- the amount of income coming in from the employer or employee contributions, the amount of benefits being paid out to pensioners, the valuation of the future benefit obligations, the mortality rates of the covered group, and, most importantly, the actuarially assumed rate of investment return on the corpus of the plan. Almost every pension plan that I work with has some degree of funding problems right now -- some of which are quite serious. Now for the first fifteen years of my career -- from 1985 to 2000 -- no such problems existed. Virtually every plan with which I worked was fully funded -- indeed, most were so well funded that from time to time they were virtually compelled by law to increase their benefits. And this was true because they consistently exceeded their assumed rates of return

Of all the funding components listed above, investment return is by far the most important, particularly as plans "mature," i.e. reach the inevitable point where benefit pay outs will exceed contribution income. Investments are also by far the most volatile aspect of these factors -- contribution income, retirement rates, benefit payouts, and mortality rates tend to be pretty knowable within very low error rates. Investments will swing pretty wildly from year to year, which is why pension plan actuaries typically only realize a small amount of excess gains or losses each year, in order to smooth out performance.
Virtually all of the plans with whom I work are funded on the premise that over time investments will return an annualized average of between 7% and 7.5%. (Put crudely, you used to assume a 50-50 mix between stocks and investment grade bonds, with stocks returning on average about 10% per year and bonds about 5% per year.) Some public and private sector plans have been more aggressive in their assumptions, which can be problematic. However, throughout the history of modern pension plans in the U.S. -- roughly from the end of WWII through 2000, funding problems tended to occur only in declining or unusually turbulent industries, where the employer contribution component became problematic. Investments generally took care of themselves.

Private sector pension plans are governed by a law known as ERISA (the Employee Retirement Income Security Act), which was passed in 1974 in response to pension plan failures at Studebaker and A&P Stores --- ERISA strictly and comprehensively governs funding requirements, pension rights, reporting and disclosure rules, and sets forth high levels of legal responsibility on pension plan trustees. Public plans are not subject to its strictures, however -- a bipartisan regulatory failure that is to some minor degree responsible for the plight of public plans.

But the real story of pension plan funding problems is the collapse of the stock market in the 2000s and to a lesser degree, the low interest environment in which we have been operating. As I have posted about previously, the S&P 500 actually posted a cumulative decline of about 27% during the eight years in which George Bush was in office. (To be fair, the slide began and the bubble that helped bring it about occurred during the neo-liberal watch of Bill Clinton, where deregulation dogma was bought into on both sides of the aisle.) Low interest rates on bonds, especially government bonds, meant that pension plans had to be increasingly aggressive in their asset allocations in order to meet their assumed rates of return. When I began doing this work in the high interest rate environment of the mid-1980s, I worked with pension plans that had virtually all of their assets in bonds because they could easily earn 7% to 8% a year in those investments. In an environment where a government bond is only going to pay a 3% interest rate, you cannot saddle your portfolio with too high a percentage of this type of investment. Hence the quest for other sources of return and investments in things like real estate, hedge funds, commodities, junk bonds, and more and more stocks. Investment grade bonds increasingly shrunk to form only a quarter to a third of most plan portfolios.

The S&P 500 began the 2000s with three straight negative years, declining by 9% in 2000, 11.9% in 2001, and (what we thought was the kicker) 22.1% in 2002. That's a cumulative return of -37.5% and the first time that the stock market was negative for three consecutive years since 1929-1932. Literally a once in a lifetime event. Plans were scrapping their way back to financial health -- usually with some form of benefit decreases now thrown into the mix -- when the market collapsed in 2008, with the S&P 500 declining a staggering 37% in a year, the single worst year in the market since 1931, and the second worst year going all the way back to 1926. Another once in a lifetime event, albeit one that occurred within 5 years of a previous once in a lifetime event.

Simply put, pension plans were not designed to withstand this level of market collapse. And it is this, much more than anything else by orders of magnitude, that has put the American pension system, both public and private, where it is today, not the greed of public employee unions. And yes, states have sometimes been imprudent in overimproving pension plans as a sop to unions -- politicians of both parties (New Jersey has had a whole lot of Republican governors over the years) sometimes use pension increases as an inducement to resist wage increases. And states have often irresponsibly failed to make contributions to the plans in the necessary amounts -- again, a bipartisan sin. But these failings are a mere sideshow when compared to the failure of the unregulated financial system and how it has laid the pension system low.

But that tale doesn't fit into Mr. McBobo's world view. And since Brooks is both a lazy and mendacious, it is not something that he himself would bother to study, much less share with his readers.

Posted by Sir Charles at 09:14 AM | Permalink

Can I get assurance that any defense cuts will result in deficit reduction?

Unless I become convinced it would be for infrastructure or something that genuinely makes us competitive, I don't want the savings to just be spent elsewhere in the government.

Boygabriel wrote:

All I hear are leftish talking points.

As opposed to your rightish ones?

labeling talking points is a version of ad hominem attacks: completely useless as far as substantive discussion of ideas goes.

It seems your best suggestion so far has been to cut taxes.

Understood, noted, retracted from here forward, but again, tell me if I'm wrong... I presented my idea for what Obama could do, you came back immediately w/ a snarky + vague + ideological response

I've been posting just what I see as logical responses... admittedly poking fun at your leftist sensibilities, because you seem to be emotionally attached to the left + speaking from that view point, but also mainly just speaking from the POV I know as an engineer: looking at a situation, seeing what the problems are and looking to solve them. Your (seemingly) emotional responses about how evil the Republican tax cuts have been & how Afghanistan will cost x amount of dollars (representing a huge 5-6% of the federal budget) just don't make sense to me in the context of the actual problems out there. So that's why I dismissed them as talking points, esp since that article + your subsequent post didn't do much to address any of the points me or David Brooks brought up.

You seem just as caught up in the "my side vs theirs" ideological wars as the Repubs you detest. Bear in mind I'm no right winger or tea partier... I'm a black engineer who was raised by first gen Ghanaian immigrants in NYC. My dad is as opinionated as me but leans left so if anything I should be left leaning too. But what the left (and right) scream often doesn't make sense. Responding to a suggestion that the gov't needs to scale back by saying "what about Afghanistan" seems silly to me.

So yea... as I've said about 10 times... if Obama wants to make a real + meaningful change in gov't, he should reduce the size + reach of the federal gov't, identify and get rid of wasteful spending & push for more accountability. Again, we've been heading in the opposite direction and in doing so have only created more problems than solutions

Boygabriel wrote: You speak of generalities but this seems as non-descriptive as anything else that's been written.

As I wrote a while ago, I think this kind of thing is very easy to say and very hard to implement. I think it's a shortcut that doesn't map a realistic way to increase government efficiency.

Obviously as someone who only has a civilian's view into the machinations of our gov'ts I can only be so specific. But let's not act as though points of waste are hard to identify. I'm pretty sure you've seen this article in some form:

http://hoguenews.com/?p=4834

Boygabriel wrote:
Furthermore, I think an overarching belief that the private sector almost always does things more efficiently and cheaply than local or federal government(s) is flawed, to say the least. From the subprime mortgage crisis to Enron to the reconstruction contracts handed out in Iraq to our godawful health care system, the examples of private waste, fraud an inefficiency are myriad.

It can be argued that the private sector does not act in its own long term interests, but def not so much that it doesn't act to be efficient + profitable. At least any less than gov't entities w/unlimited budgets and zero accountability. The examples you chose, at least not immediately, were not undone by inefficiency or a lack of accountability, because in the end the houses of cards collapsed and people were rightly (or wrongly) held accountable.

Not to mention the fact that in some cases the catalysts for the undoings of said entities were the governments' intervention into private markets. The subprime meltdown was brought to us (in part) by the pressure applied by the CRA onto banks/lenders. Healthcare costs are high for many reasons, but one of which is the fact that insurers cannot sell plans across state lines.

The fact of the matter is the private sector, especially in industries/companies that aren't protected/subsidized/contracted with the gov't, HAS to be more efficient/accountable, because it has no safety net to fall on.

Boygabriel wrote:
Two generalities I view with equal disdain are "corporations are evil" and "the government is wasteful and inefficient".

5 words. Lobbyists. Department Of Motor Vehicles.

I still think if we make cuts elsewhere in the gov't and spend more on servicing + eliminating the debt to the point that we are working with a surplus, we would be in a much better position.

I mean seriously, think about if the 8-10% of the federal budget just went into an interest bearing surplus account instead of going to servicing interest laden bond debt. It's analogous to using a credit card vs having savings... savings always win out + it really doesn't make sense to use credit when most of what you're paying is going to interest.

think about if the 8-10% of the federal budget just went into an interest bearing surplus account instead of going to servicing interest laden bond debt. It's analogous to using a credit card vs having savings... savings always win out + it really doesn't make sense to use credit when most of what you're paying is going to interest.

This is how the naive believed the social security fund was set up.

....we know it wasn't.

Social Security Benefits Again Won't Go Up

By Amy Goldstein Washington Post October 16, 2010



For the second year in a row, the nearly 54 million retirees and other Americans who receive Social Security benefits will not get any cost-of-living increase in 2011 in their monthly checks, government officials announced Friday, renewing debate over whether the system offers enough help in a weak economy.

The absence of any growth in Social Security checks for consecutive years is unprecedented in the 31/2 decades that payments have been adjusted automatically based on the nation's inflation rate.

The news that retirement benefits will remain static was part of a trio of developments on Friday that drew attention to lingering effects of the recession. Taken together, the new reminders of the country's economic fragility carry large political stakes, coming 21/2 weeks before a midterm election in which the deficit and jobs are paramount concerns among voters.

In the White House and on Capitol Hill, Democrats immediately responded with fresh calls to give extra money to older Americans, a potent voting bloc, and other people who depend on Social Security. Republicans disparaged the idea, contending that it would deepen the deficit and skirt a more fundamental need to put the retirement system on solid financial footing for the long term.

While the parties argued in Washington, Federal Reserve Chairman Ben S. Bernanke signaled during a speech in Boston that the Fed was prepared to undertake a new round of unconventional efforts to spur economic growth, with inflation persistently low and unemployment high.

Separately, the Obama administration reported that the federal budget deficit for the fiscal year that ended in September hit $1.29 trillion, in part because of lagging tax collections. The budget gap was lower than the record of $1.4 trillion for 2009 but, as a percentage of the overall economy, was the second-highest since World War II.

The static Social Security payments are a side effect of the nation's low inflation. The Social Security Administration made its announcement moments after the Labor Department released the latest figures for the consumer price index. They show that prices for the third quarter of this year rose by 1.5 percent compared with a year earlier, but fell by 0.6 percent compared with the same period in 2008.

Last year marked the first time consumer prices fell since the automatic adjustment formula has existed, and Social Security recipients did not get an increase in their checks.

This year, the picture is more complicated. Consumer prices have risen slightly from a year ago. But under the government rules, consumer prices must have risen past their level when the last Social Security increase was awarded - in this case, 2008 - for another boost in benefits to take effect. The Labor figures show they did not increase that much.

About 73,000 District residents receive Social Security benefits, while Maryland and Virginia have about 826,000 and 1.2 million beneficiaries, respectively.

Leaders of the AARP, the influential lobby of Americans age 50 and older, said the organization has been deluged lately with complaints from members who depend on Social Security.

"It's like being stuck in neutral," said John Walker, 62, of South Arlington, who was laid off in 2008 from his trucking job and now lives on veterans' benefits and the early Social Security payments he began to collect this year. "I have the same income, but . . . seems like the basic necessities we have from day-to-day living go up. I don't think it's fair."

In early 2009, as part of its efforts to stimulate the economy, Congress approved a one-time $250 payment for each person on Social Security, even though the size of monthly checks had gone up that January by nearly 6 percent.

In his 2011 budget, President Obama proposed another such payment, and many congressional Democrats, courting older voters before the elections, have called for the same thing. So far, Congress has not acted.

On Friday, the White House renewed its call for another payment. "Many seniors are struggling in the face of the economic downturn, having seen their savings fall," White House Press Secretary Robert Gibbs said in a statement. "Today's news that the Social Security Administration will for a second year not provide a cost of living adjustment for social security benefits highlights these struggles."

In July, Rep. Earl Pomeroy (D-N.D.), chairman of the Ways and Means Committee's Social Security subcommittee, introduced legislation to provide a $250 payment to the program's recipients, at a cost of about $14 billion. House Speaker Nancy Pelosi (D-Calif.) said Thursday that she will schedule a vote on the measure when lawmakers return for a lame-duck session after the election. The legislation has 127 Democratic co-sponsors and none who are Republican.

In the Senate, which defeated a similar proposal in March, Majority Leader Harry Reid (D-Nev.) said that chamber would consider a $250 payment in its lame-duck session, as well.

GOP leaders oppose the idea. Don Stewart, spokesman for Senate Minority Leader Mitch McConnell (R-Ky.), said, "He has a real deficit concern about this," noting that the $14 billion price tag is greater than the entire Kentucky state budget.

House Republican leaders on Friday avoided direct comments on the $250 payments. Instead, they attacked Democrats for not passing a measure earlier, if it was a priority for that party.

And Rep. Dave Camp (R-Mich.), the ranking Republican on Ways and Means, said: "It will be difficult for many seniors to deal with the lack of a COLA for a second year in a row, but that will pale in comparison to the actual hardships future Social Security recipients will experience if Congress continues to ignore the program's underlying financial problems."

In addition to the nation's 38 million retirees age 65 and older, the lack of a cost-of-living adjustment will affect several other groups of people. They include family members of workers who died prematurely who receive Social Security survivors' benefits, as well as people who qualify for Social Security disability payments.

The formula that determines whether Social Security payments go up also is applied to benefits paid to retired and disabled veterans and retired railroad workers.

The typical retiree receives a Social Security payment of nearly $1,200 per month, or roughly $14,400 a year. A $250 payment would amount to a 1.7 percent increase.

http://www.washingtonpost.com/wp-dyn/content/article/2010/10/15/AR2010101506348_pf.html

Which brings us back to getting a dog and pickup truck....

Boygabriel wrote: I think defense spending is far more wasteful and unsustainable than, say, social security, but it's a topic that's probably more complicated than anyone wants to deal with here.

I agree that in many ways defense on the whole is way bigger than we ever need it to be, and that our military involvements often cause more trouble than solutions.

But I don't think it's unfair to say that the problems facing SS & MC probably trump the entire defense budget cost wise.

I certainly agree it's not unfair. I do, however, think it's highly debatable.

But I don't think it's unfair to say that the problems facing SS & MC probably trump the entire defense budget cost wise.

Pretty much agree with all of that.

As a progressive who never had high hopes for Obama's platforms, here's what I don't get:

For the last two years Republicans have openly stated that they will oppose everything he proposes. But he still spent 2 years trying to be "bipartisan". He rarely achieved this.

Now that he lost the House, is he still going to try this failed strategy?

What outcome does he realistically expect from trying to compromise with a party who's defined themselves by a refusal to compromise on anything?

Would be fine with me. I've argued for years that this country is too big to have an effective govt.

Carnivore wrote: He's not going to get to do much, because the Repugs are going to hijack the Congress to spend the next 2 years on bullshit investigations to distract people and avoid working on the actual problems facing our country.

But this won't really be different from what's happened the past 2 years.

Is Obama just going to keep accepting the inevitability?

This is why I'm a progressive, not a "moderate"

I don't have any doubt that the idealess Republicans will do this, but what do they possibly expect the benefit to be besides very, very short term political points?

Is it going to help their eventual nominee, Sarah Palin, defeat Obama in 2012?