Here is a video from Tech Ticker discussing how the Social Security Administration released details last Friday about how Medicare will be financially defunct by 2024. This is a train wreck in the making. We can act now with some nasty castor oil or be forced into worse remedies when the train hits the wall. I know this is a hotbed political issue, but it does not matter if you are a Democrat, Republican, Socialist, Libertarian, Communist or Bull Moose Party member. Our government is bankrupting this country. Every American will feel it through reduced purchasing power as our dollar depreciates or loses value.

My fix for Medicare (an all insurance) is to create a large deductible, possibly $5,000. For the truly despondent (about 12% of seniors), we can refund this deductible through a refundable tax credit. However, this upfront deductible will get all Americans to become consumers. We will question testing and search out the low cost (but effective) provider. We will also start to see a more preventative environment. Right now, Americans run to the doctor and undertake unneeded tests because they don’t see the bill. We just figure someone else is paying. If we had to hand over our cash on the spot, we would start thinking differently.

This isn’t to say that there aren’t other issues that need addressing like medical malpractice reform, pharmaceutical costs, etc., but this one move will radically alter the cost structure for medicine.

I was reading an article today titled, “Amid Crisis, state workers say ‘Don’t Blame Us“”.  Public pensions are going to come under enormous pressure in the coming years. The pension systems are underfunded and facing a generational tsunami (thanks to the Boomers retiring in mass). Many reporters try to pin the attempted pension cutbacks on the recent recession. While the reduction of state revenue hasn’t helped the pension system, it isn’t the reason reform is needed. The problem is structural. The outflow of money is going to escalate drastically as the boomers retire, and there is no way the pensions can be funded even with an overly optimistic return projection of 8%. The article points out:

New Jersey Governor Chris Christie has called the state’s long-term pension obligations “fairy tale promises” that are unsustainable,” saying the state’s unfunded pension liabilities — $46 billion and growing — threaten the system with collapse….

Christie, whose aggressive budget-cutting has made him a national star in the Republican Party, wants to help balance the budget by paring the benefits of employees like Perpignan.

Without reform, New Jersey’s unfunded pension liabilities would grow to $181 billion in 30 years, he says.

Perpignan, whose is mentioned in the above quote, was profiled in the article. She is a clerk who helps disabled children. As you can imagine, the article is portraying the public sector workers as victims, and who could ever be cold hearted enough to criticize someone who helps disabled children. Says Perpignan,

“There’s more stress because you don’t know when they’re going to call you in and give you a pink slip (dismissal notice),” said Perpignan, a single mother and 20-year employee suddenly faced with reduced benefits. “I’m always stressed, wondering if 20 years means anything to them. I have a child in college plus two other kids.”

While I feel for Ms. Perpignan, her fear is something private workers face on a daily basis. Many will argue that public sector workers shouldn’t face these threats since they sacrifice for the public. They voluntarily take a lower pay for the security. Of course, most government employees receive salaries as high or higher than their private sector compatriots. Coupled with superior health and pension benefits, the pay package is much better for government workers. The only part of the government this may not apply is the top government executives whose counterparts make much more in the private sector. If pay and benefits are as good or better than the private sector, then the job security should be on par with the private sector.

Government workers also expect to work far fewer years than the private sector employees. The article also focuses on Dennis Ahern, a public transit cop in NYC:

Many pensioners who retired under one set of rules are now facing reductions years after they stopped working. Their unions typically negotiated more modest salary packages in exchange for better retirement benefits.

“It’s ridiculous the way they’re attacking the pensions,” said Dennis Ahern, 69, a retired New York City transit police officer who had a gun pulled on him twice and lost seven friends who were killed on the job. “They have us on the beach of Bermuda because we have a pension. No. You’re paying your bills. I live modestly. I can buy a Hyundai.”

In 21 years on the job, Ahern said he never made more than $36,000 a year and retired in 1987. He collects a pension of $26,000 a year plus a variable supplement that amounted to $12,000 last year. Mayor Michael Bloomberg wants to eliminate that supplement.

“That isn’t fair. That wasn’t the agreement. It wasn’t a bonus. We paid for it. It was negotiated. It’s fair and square,” Ahern said.

Again, I feel for Mr. Ahern, but is it really realistic to work 21 years then get a pension for the next 40 or 50 years. Sure, he had a gun pulled on him a couple times, but he was the one who chose to be a police officer. Would he have chosen to be a police officer if he had to work at least till age 60? Maybe not. However, most officers I know do it because they love it.

For both Ms. Perpignan and Mr. Ahern, the basic argument is they were promised the security and a generous pension. My parents were teachers, and both receive pensions. They too mention how they were promised the pension. When they do I ask them the same question I would ask Mr Perpignan and Mr. Ahern (and all other government employees), you got a promise from a politician and you believed him (or her).

A recent article came out in the USA Today yesterday detailing how government workers earn double what the private sector does.From the article:

Federal workers have been awarded bigger average pay and benefit increases than private employees for nine years in a row. The compensation gap between federal and private workers has doubled in the past decade.

Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation, according to the Bureau of Economic Analysis. The data are the latest available.

The federal compensation advantage has grown from $30,415 in 2000 to $61,998 last year.

It use to be the government workers enjoyed greater job security and a healthy pension as an award for earning a smaller salary than their private sector coutnerparts. That is no longer the case. Now, they enjoy higher pay as well. When I was at Coast Guard Headquarters, I use to get sick of civilian employees whine about how they could make more in the private sector. I had to bite my tongue to keep from daring them to leave. Today, the public unions have a new argument why government workers get paid more along with the hefty benefits and pension.

Public employee unions say the compensation gap reflects the increasingly high level of skill and education required for most federal jobs and the government contracting out lower-paid jobs to the private sector in recent years.

“The data are not useful for a direct public-private pay comparison,” says Colleen Kelley, president of the National Treasury Employees Union.

I am highly doubtful of that argument, but one thing no one is doubting is how the guaranteed pensions are wreaking havoc on government budgets.  The New York Times ran an article title, “Battle Looms Over Huge Costs of Public Pensions.” In the article, the author points to a study done by the Pew Center claiming the current shortfall in pension funding is $1 Trillion dollars ($1,000,000,000,000). Other economists argue it is two or three times that much. What scares me is most pension fund managers are assuming an 8% return over the coming years. With interest rates low and equities overvalued, this is unreasonable in my opinion.

The article profiles a recent decision in Colorado to slow the cost of living increases for current retirees. Rather than increase the pension annually at 3.5%, Colorado municipal retirees will only receive 2%. The reason this is so rare is it affects current retirees. Most states will probably alter the retirement benefit for new hires or extend the retirement age for younger employees, but Colorado took the step of affecting current retirees pensions.

The retirees are none too happy and have filed a class action lawsuit (imagine that – lawyers getting involved). From the article:

Gary R. Justus, a former teacher who is one of the lead plaintiffs in the case against the state, asks taxpayers in Colorado and elsewhere to consider an ethical question: Why is the state so quick to break its promises?After all, he and others like him served their neighbors dutifully for decades. And along the way, state employees made big decisions (and built lifelong financial plans) based on retiring with a full pension that was promised to them in a contract that they say has the force of the state and federal constitutions standing behind it. To them it is deferred compensation, and taking it away is akin to not paying a contractor for paving state highways.

Mr. Justus raises some good points, but I have a few questions for him. Public employees may have based their financial plans on the annual increases, but what about the private sector employees who have seen their retirement plans devastated by the market downturn? Can you ask them to pay higher taxes to fund a retirement for a public sector that earns higher wages than they do? Is that fair?

Mr. Justus, 62, who taught math for 29 years in the Denver public schools, says he thinks it could cost him half a million dollars if he lives another 30 years. He also notes that just about all state workers in Colorado do not (and cannot) pay into Social Security, so the pension is all retirees have to live on unless they have other savings.

Another question for Mr. Justus. Doesn’t it seem unreasonable that he works for the state for just 29 years, but he expects a rising pension for 30 years or more. Isn’t that a bit unreasonable? In the previous paragraph, Mr. Justus talked about serving his neighbors as a justification for the pension and its annual increases. How is it serving your neighbors when you get higher pay, better benefits, and a heftier pension? Sounds like your neighbors are serving you. If you had much lower pay or benefits, maybe it is a service. The argument of public service is not only worn out; it is patently false.

If you are digging sand out of your backside each day in Iraq or Afghanistan wondering if today is the day you die, then you are serving your country. If you take the Metro to work each morning for 30 years with other beltway bandits, you are not serving your country. You just happened to be employed by a government agency. I remember going to a retirement party for a civilian employee when I was in the Coast Guard who worked 35 years at CG Headquarters. Everyone talked about his service to the country. I had to bite my tongue. He never had to travel or spend one night away from his family.  He never worked more than 40 hours a week. The only time his life was in danger was when he had to park outside the parking garage (CG HQ was in the hood of Southeast DC). Today, the municipal worker can’t even point to lower incomes as the sacrifice of service. They get paid more than private sector workers with total job security.

I understand it is disappointing, if not outright frustrating, for government workers not to get every dollar they were promised. In an ideal world, everyone would get what they were promised, and my wife would be married to someone who looks like Brad Pitt, not Elmer Fudd. But, we aren’t in an ideal world. Sacrifices will have to be made. Is it fair or even politically prudent to ask the private sector to pay higher taxes to fund a pension for a public sector that gets paid higher wages? I don’t see the populace going along with that. A reduced cost of living is a fair sacrifice to make. After all, the few private companies that offer a pension rarely include a cost of living increase. Also, if the private company’s plan falters, the Pension Benefit Guaranty Corporation (PBGC) takes it over, and the retirees only receive a portion of their promised benefit. At least the government workers will get their guaranteed base.

With trillion dollar shortfalls, we will see some serious battles between the private sector and municipal workers. The government workers usual  propaganda of sacrifice and lower wages isn’t going to cut it this time as it has in the past.

Eileen Ambrose of the Baltimore Sun wrote an article recently about 50 year olds that haven’t started saving for retirement. I am not profiling the article just because I am quoted in it; rather, it brings up an interesting topic. Many boomers haven’t saved adequately for retirement. It is estimated the average boomer only has $54,000 saved for retirement. This isn’t going to do it.

Ambrose looked at late bloomers to see if they can make up for lost time. The answer is probably. It depends on how much the markets return and how much the boomers can muster to save. For a motivated boomer with low savings, they can still come out ok. The key is to get started. Too many folks look at saving for retirement as such a daunting task that they never begin. This is a natural instinct. If a task seems so big, we often feel to frustrated to begin. Remember, that a journey of a thousand miles begins with a single step.

The boomers have some wind at their backs. Many boomers have just finished off paying their childrens’ college costs so they have disposable income for the first time in their lives. Lots of boomers are coming close to paying off a mortgage as well, which only frees up more money. The boomers are also in their highest earning years as well now that they are at the top of the business food chain compared to years earlier when those grumpy old WWII and Korea Vets were. Heck, the past two Presidents are boomers so that shows you that they are top cheese today.  Even the recent unemployment mess hasn’t hit the boomers as hard as younger folks. The unemployment rate for folks over 55 years of age is 6.8% compared to 10% nationally. Of course, those boomers that were laid off are finding it harder to find a job.

Granted, boomers saving for retirement now have an uphill battle and won’t match the results of counterparts who began a couple decades ago, but boomers may not need as much as they think. I often find that once the mortgage is paid off many retirees only need between $4,000 to $6,000 per month to live. If the average social security is $2,300, then a married couple could expect between $3,450 and $4,600 per month from social security (depending if both spouses receive their own working benefit or if one spouse just receives the spousal benefit).  This means that a couple may only need $1,000 per month in cash flow from investments each month. This could be satisfied with a portfolio of $400,000. This may seem daunting if you don’t have anything saved, but if you have $50,000 or $100,000 saved along with $200,000 in home equity, this isn’t bad.

Even if you have nothing saved and don’t plan to move to a smaller home to access home equity, you would have to save $28,629 per year for ten years to get there assuming a 6% return. At 8%, this number drops to $25,566. This is really the size of a mortgage payment or annual tuition bill.  This analysis doesn’t include part-time work after retirement. Not only does part-time work help financially, it can help you physically and mentally as well. Staying engaged and active increases longevity and maintains health and mental capacity.

So if you are a boomer who feels you are behind, remember that it isn’t too late. You just need to do the toughest thing and take that first step.

Great article from Minyanville discussing the fiduciary standard, which I have been hyping for weeks now. Here is the meat from the article:

The distinction between a fiduciary and a broker is simple. The broker mainly owes his allegiance to the company and is generally compensated by selling you financial products. A fiduciary’s model is typically to place the client’s best interests before their own and they typically don’t charge a commission.

Current laws give you little guidance and protection. Chances are, your financial adviser is not a fiduciary. There are more than 630,000 registered representatives in the US, brokering everything from mutual funds to variable annuities. Among the biggest brokerage

houses in the US are Merrill Lynch (BAC), Wells Fargo (WFC), and Morgan Stanley Smith Barney, which is owned by Morgan Stanley (MS) and Citigroup (C). The vast majority of the folks at these firms are broker-dealers who are paid commissions on certain products they sell.

Registered investment advisers and certified financial planners, in contrast, are nearly all fiduciaries. Since there’s only about 60,000 authorized certified financial planners and about 11,000 registered investment advisers, you really have to search them out.

Will Washington protect Main Street or cave to Wall Street? The House version of the bill, which has already passed, delved into the fiduciary question in some detail. It laid out definitions as to who should be a fiduciary and attempted to bring many financial advisers under that umbrella.

But it’s less clear what the Senate will do. Senate Banking Committee Chairman Christopher Dodd’s original template for reform took up the fiduciary issue, but it has since withered as the financial services

lobbyists worked against it. Banks, brokers, and insurers are generally against making their representatives fiduciaries. Not only would it involve more training, it would create more liability for them if their customers are sold unsuitable products.

Hopefully, more mainstream press will pick up on this issue.

Finally, some regulations in the financial services world that actually benefit Americans. The Department of Labor (DOL) recently released proposed regulations that would limit the ability of financial advisers of providing advice to 401(k) participants if the adviser receives compensation from the product provider. What does this mean to you? Imagine you go to a lunch meeting with a financial adviser who runs your 401(k) plan. He or she stands up there and shows you some pretty graphs and uses technical jargon about investing and retirement. This adviser then sits down with you personally and recommends you invest in Fund A, B, and C. Well, the adviser can no longer do this if they get compensated by Fund A, B, or C. In other words, DOL wants you to get objective advice, not advice where you are pushed to funds that pay the adviser the most moolah.

This may seem like common sense to many Americans. An adviser shouldn’t be telling people how to invest their money if they can steer them into products that pay them more. It’s a no-duh, don’t you think? Except, this is exactly how Wall Street works. Wall Street or commission brokers and advisers attempt to build rapport with clients through likability or tossing around “sophisticated” financial terms and charts then drive them into a product that pays them the highest commission. There was talk of limiting this behavior in the non-401(k) market, but Senator Chris Dodd railroaded that one. The 401(k) market is a bit different though because it is guided by the Employee Retirement Income Security Act (ERISA), which is stricter on behavior since it was created to protect employees. The government wanted to be sure that an employer couldn’t touch employees retirement savings for their benefit or skew the plan in the employer’s favor at the expense of employees. ERISA protects employees by defining “prohibited transactions”. An example of a prohibited transaction is the employer or plan provider cannot borrow funds from the plan unless it is the employer’s personal account. This keeps the employer from taking employee money and possibly losing it due to bad business decisions, poor investment choices, or a crazy weekend in Vegas.

This new regulation will be seen as a prohibited transaction. Of course, the Security Industry and Financial Markets Association is disappointed with the proposed regulation.

“We are disappointed the Department of Labor decided to move in this direction after having withdrawn the previous final regulations and class exemption,” Elizabeth Varley, managing director of government affairs of the Securities Industry and Financial Markets Association, said in a statement. “The proposed regulation, if approved, will do little to expand American’s access to investment advice.”

What surprises me is this is the same organization that backed a fiduciary standard for all advisors and brokers . As mentioned previously, Chris Dodd railroaded that. So, this group believed it was good for all people giving financial advice to individuals to put their interests first, but when it comes to giving advice to retirement plans and the employees in those plans, the fiduciary standard shouldn’t apply. Hmmm, makes me think that they publicly promoted the fiduciary standard for individuals because they knew they could derail the legislation. I am sure they will do their best to hijack these regulations. But, I guess I am just a crusty old cynic.

Many believe that this move will open up 401(k) plans to index funds. To that, I say bravo. I have seen so many 401(k), 403(b), SEPs, Simple IRAs, and Money Purchase Plans that are loaded with expensive, under-performing funds. I have even seen these plans invested in annuities. The retirement plan market is a boon to the commission world and insurance industry. Most companies, and especially small companies, are inundated with fees that are hidden from the employers. With pensions a thing of the past and Social Security facing some sort of cut or alteration within the next 20 years, employees need to have solid retirement plans. It will be the core of their retirement. I applaud the DOL for taking this step. I just hope the lobbyists for the financial service industry doesn’t derail this regulation, but I am sure they will give it their best college try.

Here is a link to the a recent article in the Baltimore Sun where I discuss how the recent market downturn has affected people’s retirements.

http://www.baltimoresun.com/business/columnists/bal-bz.ambrose06jan06,0,3108163.column

Many people who recently retired or are rapidly approaching retirement feel that the recent market downturn will prevent them from retiring in the manner they dreamed and desire. What I have found is the market decline has impacted folks’ net worth, but in most cases it hasn’t derailed the retirement plans. The key is to run the numbers so you can see exactly where you stand. By running the numbers, you will know your situation. It will remove any doubts. If the projection shows that the downturn indeed affected your retirement success, then at least you will know what you need to do to get back on track. But, you may just find you are still ok. Either way, knowing your actual position is empowering. Not knowing leads to fear and frustration, which often leads to panic. And decisions made in panic are never good.