[Tyler_JC]

Taxes as "punishment." Seems kinda like a victim mentality.

It's a punishment because you're forced to invest your savings at interest in order to protect your purchasing power.

The government is taxing you on something that is not a real investment gain.

[Pretorian]

Taxes as "punishment." Seems kinda like a victim mentality.

But you, the poor, will gum them to death if they won't pay won't you. What do you think taxes are then? Glorified charity?

[Keith_McClary]

How does the government know you have "anything that keeps its value?"

Can you give some real-life examples?

For example, if you buy something and sell it 5 years later for 34% more, that's just 6% inflation - your item has just kept its value "in real terms".

The 34% gain may be taxable, depending on your tax laws.

Even if you don't sell, tax may be triggered when you die.

[deMolay]

Alabama town Declares Bankruptcy and defaults on Public Pensions. And the shit hit the fan. The new future for for Public Employee Pensions. http://globaleconomicanalysis.blogspot. ... sions.html

[Outcast_Searcher]

Also, if you have anything that keeps its value they will consider it to have increased in value by 6%/year for tax purposes.

How does the government know you have "anything that keeps its value?"

Can you give some real-life examples?

How about a stock portfolio? Over the long run, stocks have beaten inflation by about 7% (past performance no guarantee of future returns, etc).

Capital gains are NOT indexed for inflation.

And how does the government know you have stocks? Stocks trade on exchanges, so 99% of the time you can't go "black market" for such things.

And now the IRS is finally getting smart and having all stock brokers automatically compute AND report trading results. For stocks in 2011, mutual funds in 2012, and options in 2013. (I don't recall where ETF's fall in this timeline). So now the great bulk of such gains will be taxed, as folks won't be able to use "basis computation creativity" to cheat their way out of such gains.

Actually, it will be interesting to see if this has a meaningful bump for capital gains revenue collected.

If they would just index tax rates to inflation (for everything) it would solve this type of dilemna. For example, the AMT wouldn't have become a big middle class issue.

[deMolay]

Ftrom Link"

Alabama Town Defaults on Pensions, Breaks State Law; Renewed Calls For San Diego Bankruptcy; "Prichard is the Future"


The dubious honor of being the first city in the nation to completely default on pension obligations goes to Prichard, Alabama. The city has sought bankruptcy protection twice and is flat broke. It faces a choice of paying to keep city services like police and garbage running or pay pensions. It selected the former.

The New York Times reports Alabama Town’s Failed Pension Is a Warning

This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.

Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.

Prichard stands as a warning to cities like Philadelphia and states like Illinois, whose pension funds are under great strain: if nothing changes, the money eventually does run out, and when that happens, misery and turmoil follow.

The declining, little-known city of Prichard is now attracting the attention of bankruptcy lawyers, labor leaders, municipal credit analysts and local officials from across the country. They want to see if the situation in Prichard, like the continuing bankruptcy of Vallejo, Calif., ultimately creates a legal precedent on whether distressed cities can legally cut or reduce their pensions, and if so, how.

“Prichard is the future,” said Michael Aguirre, the former San Diego city attorney, who has called for San Diego to declare bankruptcy and restructure its own outsize pension obligations. “We’re all on the same conveyor belt. Prichard is just a little further down the road.”

Many cities and states are struggling to keep their pension plans adequately funded, with varying success. New York City plans to put $8.3 billion into its pension fund next year, twice what it paid five years ago. Maryland is considering a proposal to raise the retirement age to 62 for all public workers with fewer than five years of service.

Illinois keeps borrowing money to invest in its pension funds, gambling that the funds’ investments will earn enough to pay back the debt with interest. New Jersey simply decided not to pay the $3.1 billion that was due its pension plan this year.

Colorado, Minnesota and South Dakota have all taken the unusual step of reducing the benefits they pay their current retirees by cutting cost-of-living increases; retirees in all three states are suing.
Default No Surprise

I am not surprised by the default, having written about Prichard a couple of times already, the latest on March 16, 2010 Bankruptcy Court Gives Prichard Alabama 2 More Months To Figure Out How To Pay Pensioners

Rule Number One

You can't pay what you do not have. The problem for Prichard is a declining tax base, loss of population, declining property values, and most importantly a pension plan that was amended by the Alabama legislature more than fifteen times, over the years.

Each modification increased the economic burden on the city, every Alabama city in fact.

Every state in the union needs to stop meddling in the affairs of cities. Cities in Illinois are in the same boat.

Prichard never would have made those promises except they were forced by the state. The question is what to do about it. Expect to see more sad cases like these end up in bankruptcy court. Promises were made that cannot be met. The state forced those promises on cities.

Higher taxes are not the answer. At this point, there is no answer that will satisfy anyone, let alone everyone.

If the court declares the city must pay up in full, perhaps the city should pursue dissolution. What I expect to happen is for the bankruptcy court and the city to agree to pay pensioners some minimum benefit, far less than what was promised.

It's only a matter of time before a major city decides to do what Prichard Alabama and Vallejo California did: declare bankruptcy to shed illegitimate pension promises crammed down city throats by socialist state legislatures.
"Prichard is the Future"

The court ordered Prichard to pay money it did not have with easily predictable results. Prichard defaulted. This is what happens when government interferes in the free market, mandating benefits that cities have no way of meeting.

I agree with Michael Aguirre, the former San Diego city attorney, who says “Prichard is the future.”

Municipal bankruptcies was my top economic theme for 2011 as noted in Ten Economic and Investment Themes for 2011

1. US Municipal Bankruptcies Head to Center Stage

Look for Detroit and at least one other city in Michigan to go bankrupt. Also look for increasing discussions regarding bankruptcy from Los Angeles, Miami, Oakland, Houston, and San Diego. Those cities are definitely bankrupt, they just have not admitted it yet. The first major city to go bankrupt will cause a huge stir in the municipal bond market. Best to avoid Munis completely.
To survive, many cities need bankruptcy. It's Detroit's only hope. Please see Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011 for details.

The money is not there. It can't be paid and it will not be paid, by Prichard, by Detroit, by Los Angeles, by Miami, by Oakland, by the state of Illinois.

How Long Before Illinois Blows Up?

Illinois has pension plans that are 23% funded. For details, please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

How long will it be before Illinois blows up? If the stock market takes another dive, I think about 3-5 years.

We need to do something about existing pensions and future accruing pensions.

One part of the solution, as I proposed earlier, is to tax pension benefits above a certain amount at a very high rate of 90%. I don't know what the level should be but I talked about $120,000 or $80,000. Some wrote that my level was too low, more wrote it was too high. Some wanted to tax everything above the level of Social Security benefits.

As a practical matter, if you set the number too low and you will not get public buy-ins. Set it too high and you do not accomplish much. Left alone, the market will impose its solution and it's called "default", jut like Prichard did.

A second part of the solution is to privatize government services.

In response, several misguided souls wrote things like "what makes you think you know what wages should be?"

The irony is that I don't. The free market does. The solution is simple, let the free market decide.

Others have stated preposterous things like government workers are underpaid because they tend to have more education and skills.

I say let's find out. Let's entirely eliminate the department of energy as a starting point of discussion. The department of education is another one. If those jobs are needed, the free market is virtually guaranteed to pick those jobs up. I suspect a few people would make a lot more than they do now, while most would struggle to find a job.

Regardless of the result, we would have free market discovery, and it would not be taxpayer dollars paying the salaries.

What's Fair?

Numerous people have written me that "You cannot take away what's been promised". Most say things like "It's not fair".

Well Prichard shows you can take away what's been promised. Default or bankruptcy will do it. I will be the first to tell you what happened in Prichard is not "fair". But that's what happens when government interferes in the free markets. It's certainly not fair to perpetually raise taxes for the benefit of overpaid public union workers, many of whom would have a low-paying job in the free market.

The second major point is most of those deals are based on fraud. Public unions bribed, coerced, and fearmongered their way to untenable benefits and salaries. Corrupt politicians went along, buying votes to get elected. Fraudulent contracts need not be honored.

Regardless, they cannot be honored because mathematically the money is simply not there.

No solution will please everyone. In fact, it may not please anyone. However, if nothing is done, there will be more Prichards, lots more Prichards. Public unions better come to grips with that simple reality.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

[Cloud9]

As the cities go, so will go the states. The states will default on unemployment compensation, aid to dependent children and the rest of the social programs.

[vtsnowedin]

I am currently receiving payouts from a state pension plan. I do not expect that it will last well past the peak of oil production and I never expect to see a social security check that has any real value when issued. The problems are twofold. The first and foremost one is the cost of the health care plan that comes with the retirement. It is going through the roof and Obamacare has done nothing to stop that. The second is the over promise of benefits and the rules to determine benefits that are in place. In my case they determine your payout based on the average of your highest three years of work. Fine for most people but some in supervisory positions can choose how much overtime to work and when. The last three years of work you become an OT fiend and can literally double your payout. This is easiest if your a cop and do OT details on construction sites. You get absurdities like the deputy chief putting on a patrolmen's uniform and standing around all night all summer while you pave the roads. Then he retires at 105% of his base Assistant chiefs salary or better yet gets promoted to chief for the last three years and gets 105 % of the Chiefs much higher salary even though the OT was paid in at the lower rate.
Such rules are not actuarially sound and should never been put in place to begin with but it is no surprise that an employee that has been with an organization for twenty five years has learned the rules and plays by them to his and his families best advantage for the last five years of his carrier.
Merry Christmas everyone.

[deMolay]

It is very sad VT. I for one believe in honoring a contract. To me I think that they should honor those in existance but all new hires or maybe even those hired in the last 5-10 years should have a lot of those inflated benefits re negotiated back in line with what the average man/woman recieves in the private sector. I think that would be fair.

[vtsnowedin]

It is very sad VT. I for one believe in honoring a contract. To me I think that they should honor those in existance but all new hires or maybe even those hired in the last 5-10 years should have a lot of those inflated benefits re negotiated back in line with what the average man/woman recieves in the private sector. I think that would be fair.

The pay of public employees being higher then their private sector compatriots is a very recent thing. My pay was always less then what I could get outside but it was a lot more certain. So much so that the state doesn't pay into unemployment insurance. The state union now SEIU always gave away whatever it took to keep gold plated health care. In my thirty years they never once negotiated a pay raise that was equal to or more then the inflation rate. I never missed a paycheck but everyone was too little to pay the bills. So my WW worked more jobs then I care to count between children and I took every OT assignment they would give me (not just the last three years).One consolation prize was that when it came time to apply for college loans and grants we always qualified in the most needy group.
How to change the rules to a firm actuarially sound system without shafting those close to or already retired is a sticky problem and having the union bozos with the pinkie rings at the table won't help a bit.

[deMolay]

VT I think this is the kind of thing that really has people upset. http://hosted.ap.org/dynamic/stories/U/ ... SECTION=US

[deMolay]

Public Pensions Eat over 70% of Decatur, Ill. Budget. http://globaleconomicanalysis.blogspot. ... inois.html

[Cog]

The perfect trifecta of state, local, and federal insolvency. And lets not forget the added benefits of high oil prices, high unemployment, and foreclosures to make it all a rather doomy scenario looking out as far as you can see.

[Newfie]

Right on Cog.

I just turned 60, have a meager 401K and live in Philadelphia, apparently #1 on the big city default list. But some we have some other resources like the boats and land in Canada.

Our principal asset is our Philly house, which is a small apartment building. It remains to be seen what will happen to that asset in the ensuing mess. Perhaps we will be lucky if Philly defaults early on when there are still some resources left.

Who knows?

[IsThisRealLife]

...what will bring back jobs for the unemployed now?

I wish for that too, but I think high unemployment is here to stay.

[the48thronin]

...what will bring back jobs for the unemployed now?

I wish for that too, but I think high unemployment is here to stay.

hunger will

Trading work for food can be as simple as hoeing in a shared growing square in the abandoned lot next door.

For those of us smart or lucky enough to be farther from others the space we have can be reutilized to produce food some unemployed workers might try assembling into co operative growing entities or befriending and becoming a worker for some class of growing entity.. OF course if not, you can stand on the corner with your hand out, or try taking someone else food by force ( of arms or government).

But employment is as simple as picking up a spade and finding some open dirt.

[patience]

The article said that Houston is bankrupt, for all practical purposes. My brother in law retired from the Houstan City Police force a couple years ago. Moved back to Indiana and built a new house (complete with mortgage) for----wait for it----his brand new TRIPLETS!!! Yep, his somewhat younger wife always wanted kids and had fertility treatments. Eventually, they worked, and they were blessed with 3 baby girls. Got a new van to haul 'em around, and a new tricked out pickup for him to drive. I know he sold the huge RV they had at a loss to get out from under the payments, and had the boat up for sale, but don't know if it sold yet. Good luck with that, huh?

This is not going to end well.

[IsThisRealLife]

hunger will

Yeah, but considering all your failed predictions about eminent hunger because the JIT was falling apart ... my money is on that hunger won't.

[IsThisRealLife]

My brother in law retired from the Houstan City Police force a couple years ago. Moved back to Indiana and built a new house (complete with mortgage) for----wait for it----his brand new TRIPLETS!!! Yep, his somewhat younger wife always wanted kids and had fertility treatments. Eventually, they worked, and they were blessed with 3 baby girls. Got a new van to haul 'em around, and a new tricked out pickup for him to drive. I know he sold the huge RV they had at a loss to get out from under the payments, and had the boat up for sale, but don't know if it sold yet. Good luck with that, huh?

Ah ... the beauty of that broken internal clock wounded by peer pressure.

That's insane, and this is not going to end well.

[SeaGypsy]

Across the developed world, the reset butteon is going to have to be hit hard.
Of course we all know it won't happen before default reaches all the way to the federal governments.
The same people making the decisions are the ones with most to lose under a realistic, transparent, funded pension plan.

The frenzy of unionised pensions over the last 30 years was lobbied on the basis of perpetual growth funding; an absolutely unreal basis to fund anything.

Along with that the removal of tarrifs and trade protections in favour of international FTAs has put developed countries directly in competition with countries with no pensions at all or pensions so meager they wouldn't even pay the power bill of an average westerner.

US Veterans pensions are very generous by world standards. Soon there will be millions of ex service pensioners aged between 25 and 45. Up to half of these may qualify for 100% disability payments close to $1000 a week. A lot of these guys are capable of working but they know their rights and if they have been traumatised at work they will eventually qualify. Once qualified, why work?
Currently the VA is creating a huge backlog of disability claims while the backroom dealers try to untie each others hands.

The cited article above is spot on in saying that default is the unavoidable end to all this.
There is not and won't be any political will to do anything else before it's too late. These are the same clowns touting the imminent recovery line. They are 100% full of it. There isn't going to be a 'recovery' in terms of return to sustained growth, which is what these pension plans were based on.
These societies are going to be forced to admit they were either utterly deluded or lieing through their teeth.

How audacious were these plans in the 1st place? They were always unfunded nonsense; only collective wishfull thinking let anyone believe otherwise.