Pensions, Social Security
Holiday present for you
via Congress and the Cromnibus.
Tucked into the massive spending bill Congress passed this weekend was legislation that reversed 40 years of federal law protecting retirees’ pensions. The change will allow benefit cuts for up to 10 million workers, many of them part of a shrinking middle-class workforce in businesses such as construction and trucking. There wasn’t a single Congressional hearing on the plan before it was slipped into the spending bill, outraging senior’s advocates…including NCPSSM. “Allowing plans to break the fundamental ERISA promise – that pensions paid to retirees and their surviving spouses will not be reduced – represents an extreme response to a problem that can be addressed through other means by strengthening the funding of the Pension Benefit Guaranty Corporation. Additionally, the National Committee is deeply concerned that this provision could set a dangerous precedent for other defined benefit programs, such as single employer plans, public sector plans and Social Security …
Coberly here….When I saw this mentioned in the news, it was described as Congress addressing the “retirement crisis.” Yep. Take away their pensions. No crisis.
Yeah, it’s all OK because….compromise. Everyone gained and lost equally. Your loss is equal to my gain! Ha, ha, ha….
Taxation without representation.
kinda late on this story, no ?
Not much time to get this out as this bill was crammed through Congress without much being said about any of the particulars. There was no time to get much going to fight back on some of the provisions of this spending bill.
Cromnibus related but somewhat off topic, part of my weekly communique on gas & oil fracking emailed this morning:
the media and the blogs have been covering a lot of the economic issues that will arise with falling oil prices, such as job cuts in the oil industry, losses by financial firms that invested in oil companies, state budget troubles for oil dependent states, and the losses that will be incurred by pension funds and others that are heavily invested in oil…one financial problem that seems to be off the radar are the complex financial derivatives tied to oil…these include futures, or contracts to buy oil at a set price some date in the future, options on futures, or the right to enter into a specific futures contract at a given price over the life of the option, structured notes tied to crude oil prices, and a plethora of more exotic and complex contracts that are no more than sophisticated bets on the fluctuation of oil prices over time…the nominal market for oil related derivatives is huge; it’s probably 5 times the size of the market for oil itself, and while most of the players are banks, some oil companies are speculators, too; BP is said to trade 10 times the paper oil than they sell of the real black stuff….total derivatives held by the largest US banks have a paper value of $280 trillion, about 15 times the value of our GDP…normally, it would be the least of our concerns if the high-stakes gamblers lose a pile of money…but the week before last, legislated funding for government operations was running out, and the lame-duck session of Congress took up & passed a budget bill which was dubbed by the press as the "Cromnibus", or a combination of a CR (continuing resolution to fund the government) and an omnibus budget bill…in the horse trading that went on during budget reconciliation, a provision to deregulate derivatives owned by banks written by Citigroup was inserted into the bill by Rep. Kevin Yoder of Kansas, effectively repealing the section of the Dodd Frank financial reform legislation that required the big banks to spin off the most risky portion of their derivatives business into non-FDIC-insured subsidiaries….as a result of this bill’s passage, banks are now allowed to leave the riskiest derivatives in the same corporate entity as other banking functions such as savings that are insured by the FDIC…saver’s deposits up to $250,000 are supposed to protected by the FDIC, but the FDIC fund has just $46 billion to cover $4.5 trillion worth of deposits, which itself is an amount dwarfed by the derivatives outstanding, and under the bankruptcy reform act of 2005, should a bank fail, derivatives get paid first…and while derivatives are normally hedged against one another such that overall profits and losses are minimal; the models the banks used when building these financial products (which are traded automatically based on quant algorithms) may not account for a 50% downward price move in prices, and should they fail, we’d have another unpredictable and unresolvable financial crisis on our hands, and likely another bank bailout..
Harp and complain; harp and complain: we cannot do anything about anything. Nobody is listening — and nobody will be listening until we have equal campaign financing and legislative lobbying to go with our 99% of the votes. And you know what that means — one thing and one thing only: RE-UNIONIZATION!!!
Unlike freedom of COMMERCIAL SPEECH (e.g., advertising soft drinks) which ranks significantly short in importance of POLITICAL SPEECH (e.g., Gettysburg Address), freedom of COMMERCIAL ASSOCIATION is so much an organic component of a free life (e.g., maxing out what the market will pay for your economic input), that it ranks just short of freedom of POLITICAL ASSOCIATION on economic grounds alone — but should be recognized as ranking fully equal to political association because unionization is where the great majority create their political effectiveness (e.g., organized campaign financing and legislative lobbying).
What to do with this? Wont do much good to find current federal labor law unconstitutional on grounds it actually frustrates unionization (e.g., fire a worker for organizing; worker gets job back years later; most often fired again for something else; gives up trying). Can’t force Congress to pass a constitutional law. 🙂
One small thing: laws that bar state workers from collective bargaining (Wisconsin?) are unconstitutional on their face. Ditto for Illinois law requiring teachers to have 75% to strike (they did).
Big possibility: turns out Europe is a right-to-work continent — and it apparently is just as legal in the US for a NON-MAJORITY UNION (no election — no election to target) to negotiate a contract for only the employees it represents (something resembling this my happen with VW down south) — employers normally spread contract to all employees (just like in Europe).
Far Western states where Repubs don’t rule and ruin may facilitate minority bargaining and perhaps facilitate diverse employees getting together for centralized bargaining by whatever means UNDER FREEDOM OF ASSOCIATION — TRUMPING THE FEDERAL PRIORITY LABOR LAW? (Take a while to get a grip on this).
Freedom of assembly covering any kind of association is accepted interpretation.
I have to read The Blue Eagle at Work: Reclaiming Democratic Rights in the American Workplace, by Charles Morris to learn more about minority unions.
RJS – Don’t worry about the exchange traded futures and options on crude. That is all re-margined on a daily basis. The risk of Over the Counter derivatives on crude is also fairly small.
The BIS has a report on global OTC derivatives. The gross number of OTCs is a mind blowing $690T. Of that amount only $1.9T is related to commodities like oil. copper, silver & agricultural. products. Assume oil derivatives globally are at $1T. This is not such a big number any longer. By comparison, interest rate derivatives total $536T.
The biggest derivative on crude is the one that a contract was never written on. Global consumers were “short” oil. As a result of the price drop those consumers are now realizing a big gain. The hidden “longs” in this derivative are all of the producers who can’t fully hedge their bets.
Some producers will go bust. There will be some in the USA who will fail. A big one is Venezuela. Vz is set to go up in smoke in a month or so. (The reason why Cuba changed its tune).
I also worry about Mexico and Indonesia – Big (and hungry) populations. Nigeria is also at risk. Iran and Russia will be hurt badly. Will they lash out in response? The drop in crude is a huge win for China. It’s (net) neutral for the US economy.
I would not worry about the banks and oil derivatives. It’s the ones who were un-hedged that you have to worry about.
The BIS report:
Nice comment Krasting. And I mean that.
Look forward to some SocSec jousting once the 2014 numbers are in Feb 1. Of particular interest are last quarter receipts as compared to either OACT or CBO projections and how both models react to sub 6% Unemployment for 2015. Because as you know the financials are very sensitive to employment and real wage, both of which seem to be coming in higher than most consensus projections. But for a few reasons haven’t had time to dive in to the numbers recently – something which for other reasons I am free to do in the New Year.
“Are you reaaady to ruuummmmble!?” Cause I am.
Webb – my 2014 #s:
PR taxes = 759b
ToT = 30b
% = 99B
Total in = 888b
Benefits = 848b
overhead = 6b
RR = 5b
Total out = 859b
TF balance = +29B
Cash flow deficit = 70b
These results are slightly ahead of the 2014 TF Intermediate case. $6b+ on payrolls and $-5b on benefits.
These estimates will change, but not by much. SS is ‘predictable’ when there are no significant surprises in the economy.
SSA has set a high bar for its results for 2015. It believes that 2015 will be ‘better’ than 2014. We shall see.
The link to GAO audit of federal debt schedules, see print page 30. SS rose by ~56B to $2,712B from FY13 to 14.
OPM retirement rose by $130B to $843B with about $2B cash from employees the rest mostly funny money from congress. Half of this for pentagon employees!
Military Retirement Trust rose $62B to $483B no cash from anyone but congress funny money. Miltary retiree health is up to $200B no employee contributions all congress acts…….
I have been remiss followoing this to date.
SS numbers are sensitive to employment, but with so many workers not looking, sub 6 percent employment does not make me happy yet.
BK, sorry for taking so long to get back to this, but i couldn’t remember where i got the impression that oil derivatives were a problem…
well, i found it; it’s here: Russian Roulette: Taxpayers Could Be on the Hook for Trillions in Oil Derivatives | Ellen Brown
the usually accurate Ellen Brown cites Michael Snyder in coming up with $3.9 trillion of speculation on the price of commodities…so my source had a bad source (i accept BIS as the authority on derivatives), and hence i blew the problem out of proportion…so, i’m sorry, all, for the unnecessary hysterics…
RJS – I’m not so sure about Ellen Brown. A quote from the article you cite:
“the Federal Reserve sets the prime rate.”
“The Fed obliged after the 2008 credit crisis by dropping the prime rate nearly to zero”
Actually, the Fed has nothing to do with setting the Prime rate. That is a rate the banks set. The Fed controls the Fed Funds rate and sets the level of interest on Excess Reserves (IOER). To get these labels/descriptions mixed up shows a lack of understanding of basic money market rates. This is not a typo, just a bad guess.
That said, there are some things worth noting in the article and the related links. I’ll try to put a few thoughts together on this later.
RJS – The drop in crude prices has been very dramatic. I follow markets – I have for years. This drop is different than past plunges. There has been a lack of liquidity in the crude markets. This has added to the instability. Yes, the drop will produce benefits, but as we’ve discussed, there is a downside to the volatility.
Why are markets less liquid? In part because of regulations.
The article that Brown quotes from is about the entrance of 2nd tier banks into the oil derivative business. Why are small banks getting into this? Because the big banks are leaving it. From the Reuters link:
“The ability to deal in barrels of crude oil or piped natural gas was once a big selling point for Wall Street’s giants. But several major banks, including JPMorgan, have announced they are quitting the business due to sliding margins, and tougher regulation, including from the Federal Reserve”
“the treasurer of oil refiner PBF Energy, John Luke, recently wrote a comment letter to the Fed claiming that limiting banks’ ability to trade in physical commodity markets would “make it very difficult for end-users of physical commodities to efficiently transact in these markets and effectuate hedging strategies.”
Absense of the big players means a lack of liquidity. One day we will talk about the soaring price of crude (it will happen again in a few years). I will say then what I say today – There is a shortage of risk takers – unwanted volatility in the capital markets will be the result.
Note: I see evidence that the same volatility may come to the FX markets. The Yen has lost 50% of its value in just two years. The stresses that this is causing are much bigger than anything in the crude market. Once again regulatory issues are a factor. Big banks are downsizing their role in this market.
i dont know markets much, Bruce, so you’re the expert there….so based on what you’ve told me, that the volatility in oil is due to big banks getting out of the oil derivative business, i’d have to assume oil prices were wild as all hell before the big banks got in…is that true?
interesting that a post about removing the protections to retired persons pensions
turns into a discussion of oil prices and derivatives
with no howls about “off topic” from the monitors.
i think you will find that when there is no security to retirement pensions the people will be subject to new levels of anxiety and misery. and of course turning the government over to the financial industry has something to do with that.
it is just possible that “expanding Social Security” could be an answer to the insecurity of private pensions. but only if the people are willing to pay for that expansion themselves. the Left does not seem willing to explain that to people… calling for expanding Social Security by taxing the rich: that is turning it into welfare.
well, heck. it’s your future.
It is your post
hey coberly, you have to blame me for taking your thread off topic, mea culpa…i had just written about another piece of legislation snuck into the Cromnibus and that’s all that was on my mind when i saw this post, about the pension legislation snuck into the same bill…
like bill said, it’s your post, it’s my mistake, so just delete my comments, tomorrow’s a new year…
i hadn’t realized it was my post. In any case I don’t have the power to remove comments.
Nor would I if I did. I believe in free expression. And if oil is what people want to talk about, so be it. I was just observing.
Meanwhile, of course, your pension is at risk.