Sunday, February 26, 2012

As Greece goes, so goes California

A column by @BorensteinDan in the Mercury News, Feb. 26:

The average California household's share of the debt for underfunded state and local government employee pensions comes to about $30,500.

Stanford University studies released last week and in December for the first time aggregate public pension shortfalls statewide. Using moderate assumptions about future investment returns, the unfunded liability is about $379 billion.

To calculate the contributions, actuaries and pension boards make assumptions about future investment returns and pension costs. Unfortunately, they've been wrong.

They have overestimated investment earnings, underestimated pension costs and retroactively added benefits without proper funding. As a result, pension systems across California have huge unfunded liabilities.

Keep in mind that the shortfall is for pension benefits employees already earned. Like salary and health care benefits, it's a cost that should be paid when labor is performed.

Instead, the shortfall has been converted into debt to be paid off over time, up to 30 years. Government agencies make those payments, diverting money that would otherwise go for government services. So we're depriving current and future generations to pay off past labor costs.

Most California public pension systems anticipate they can earn about 7.75 percent annually. Every year they fall short of that target they go deeper into debt.

• When pension systems assume a 7.75 percent return rate, they have only a 42 percent chance of meeting or exceeding that target. But even using that optimistic assumption, the systems are currently only 77 percent funded, with a $180 billion shortfall. That averages $14,500 for each of California's 12.4 million households.

• Many argue that pension systems should base investment projections on much-less-risky bond rates, about 4.5 percent. The chance of reaching that goal is 81 percent. Using that rate, California pension systems are currently 48 percent funded, with a $658 billion shortfall, or about $53,000 per household.

• Investment gurus such as Warren Buffett have argued for a midpoint, about 6.2 percent. The chance of reaching that goal is 63 percent. Using that rate, California systems are currently 61 percent funded, with a $379 billion shortfall, or about $30,500 per household.
Another in a series of outsourced commentaries during these difficult economic times.

Sunday, February 19, 2012

When will the 'temporary' raid on Social Security end?

Another in a series of outsourced political commentary — this time from an unexpected source, Michael Hiltzik of the Los Angeles Times:

[W]ith every extension of the payroll tax holiday, which was first enacted in 2010, the prospect that Congress will ever restore the tax to its statutory 6.2% of covered income recedes a little bit further over the horizon. And that's bad medicine for Social Security.

To be fair, thus far the payroll tax holiday hasn't impaired Social Security's fiscal resources one bit. By law, 100% of the cut must be compensated for by transfers from the general fund; those transfers have come to about $130 billion since 2010, covering the original "temporary" one-year holiday and a two-month extension passed late last year.

The new extension will require a further transfer of about $94 billion, according to the Congressional Budget Office.

Yet because of the unique features of the program's financing, tampering with its revenue stream is playing with fire. The payroll tax is currently set at 12.4% of wages, split equally between employer and employee, up to a maximum of $110,100. The tax holiday cuts the employee's 6.2% share to 4.2%.

Sen. Tom Harkin (D-Iowa) put it well when he excoriated President Obama and his fellow congressional Democrats for approving a measure that places Social Security's financial stability on the table. "I never thought I would live to see the day when a Democratic president ... would agree to put Social Security in this kind of jeopardy," he said. "Never did I ever imagine a Democratic president beginning the unraveling of Social Security."

Even conservatives who aren't fans of the program's current structure acknowledge how hard it will be at any point in the foreseeable future to restore the old rate.

"Who is ever going to say, 'Now the economy's so strong that it's the right time to raise taxes'?" Andrew G. Biggs, a former Social Security official who is now a resident scholar at the American Enterprise Institute, told me.

But the worst aspect of the payroll tax holiday is that it erodes Social Security's standing as a unique government program with its own revenue stream, a tax dedicated to its upkeep alone. …

The more the program has to rely on general income tax revenue, the shakier becomes its claim to being a special case among government expenditures. When program-slashers sharpen their axes in Washington, the line has always been drawn at Social Security because it's funded by a source distinct from the income tax.

"If the holiday doesn't automatically expire," says [social security activist Eric] Kingson, "you're risking long-term economic security for a short-term economic gain, however important that is. We hope people understand that."

Sunday, February 5, 2012

Best and worst of the Super Bowl ads

The SuperBowl was unusually close tonight — so much so that I decided to finally watch the game during the final four minutes. However, for the first three hours of the broadcast, I only watched the ads (plus the Geritol halftime show).

Many of the ads were intended to build a brand image — which works best when you’re trying to create name recognition rather than any particular product perception. I thought Sketchers (the shoe company) and Century 21 did perhaps the best job of making their point, at least for those who did not already know the respective brands.

However, most of these brand building ads fell flat, including Coke, GoDaddy and MetLife. Pepsi ran an incomprehensible ad involving Elton John as a king (why not a queen?) The etrade talking baby should have been spanked years ago, and (as always) the beer ads were ineffective with anyone who was even remotely sober (or who had seen the same genre at any point during the past 20 years).

The car ads were unusually awful this year (including related products like Bridgestone and Toyota and especially Government Motors wasted millions of dollars on ads that neither stood out nor communicated an effective message. Even by the standards of Super Bowl hyperbole, it was impossible to believe any of the claims made by Chevy as they pushed their overpriced subcompact out of an airplane.

Meanwhile, I wanted to like Clint Eastwood’s two-minute patriotic paen to Detroit and the US of A. But despite the praise of the Wall Street Journal, the ad failed Chrysler has gone to that well too many times. As in last year, they should be making better products rather than resorting to “the last refuge of a scoundrel”.

It’s not that the other car (or beer ads) were much better: The VW ad was not as good as last year, but at least better than Chevy or GM. The best car ad was that for the forthcoming Acura NSX, which combines over-the-top humor with two celebrities and a trick ending. (In an obnoxious trend, both VW and Acura don’t post their actual commercial but only an “extended version”).
One of the surprises was the Best Buy ad with various innovators from mobile phones and mobile platforms. Supposedly inspired by the Apple “think different” campaign, the ad was more interesting (and genuine) by featuring actual innovators like Phillipe Khan and Ray Kurzweil.

This was nearly as good as the best ad of the afternoon. One ad that aired during the pregame — the Kauffman Foundation ad “Will it be you?” — offered a testimonial to the power of individuals in a free economy to create new businesses and new jobs. In an afternoon of wildly implausible antics, it stood out with its sincerity and the power of its ideas.