Justo Rodriguez is a Spaniard who has a problem. Six years ago he mortgaged his property and his father’s property to install solar panels.
He did that because the Spanish governrnment promised to pay anyone who generated electricity from renewable sources a guaranteed rate for the next 25 years.
A little math showed Justo that the amount of electricity he could generate would pay all the mortgages on a monthly basis as well as provide extra income. This was an annuity arbitrage. Right up until the governrnment backed out of the deal…
The Spanish governrnment has greatly reduced the rate it will pay producers of electricity from renewable sources, and is even considering charging them for their effect on traditional energy companies.
The new math of the situation bankrupts Justo, leaving him and his father broke and homeless.
This is what can happen when people rely on one source of income. And it’s not just something that happens across the pond, in a country reeling from a credit implosion. It happens right here. Just ask retirees in Pritchard, Alabama; Central Falls, Rhode Island; and now those in Detroit, Michigan.
Each of the cities listed above had made pension promises. Over time, it became obvious they could not pay those pensions. Yet each city continued to send money out the door, year after year, sometimes noting that the path was unsustainable… sometimes not.
Both Pritchard and Central Falls have had to cut or simply eliminate some pension payments, leaving those who were relying on them to fend for themselves. Retirees in Detroit are facing the ugly prospect of defending their claims on the city as just one more unsecured creditor. Good luck with that.
A quick calculation of Detroit’s assets and liabilities show that retirees are in line to get about 30 cents on the dollar. It probably won’t end up that bad, but it won’t be pretty.
When it comes to retirement promises, the federal governrnment is just as guilty of unilateral changes as the towns above. When Social Security was passed it was supposed to be voluntary, it was never going to be taxed, and the funds were never going to be commingled with the general funds of the U.S. That didn’t work out so well.
In the early 1970s, inflation was eating away at the purchasing power of Social Security payments, so Congress voted to add cost-of-living adjustments, or COLAs. Every year, Social Security payments are adjusted to reflect the change in the consumer price index (CPI) from the previous year (unless it fell, but that’s a different story).
The point is to allow those who receive Social Security to maintain their standard of living, however meager it might be.
Now the governrnment is working to change this calculation from the move in CPI to the move in chained-CPI, which is a measure of how wages have changed in the previous year.
Given that wages, adjusted for inflation, have actually fallen for half a decade and are now back to the levels of the mid-1990s, this change doesn’t bode well for retirees.
The point is that, just like in Spain and Central Falls, Rhode Island, there is no “iron clad, always will be paid, never to be broken” contract. Even with the U.S. governrnment.
There is always a way for the other party to pay less or simply not pay at all… especially if the other party controls the legislature and the judiciary.
For those of us who have to plan our retirement, trying to develop ways to pay for decades out of the workforce, not being able to rely on counterparties makes things difficult. It means we have to find more than one source of income, never relying too heavily on one group or company, and never falling for the word “guaranteed.”
And it means continuing to read Survive & Prosper and Boom & Bust because we’re all about helping you find ways to make extra income without breaking the bank or your back, or risking everything.
P.S. Were you able to watch Harry’s interview about the great American reset this mornrning at 10 a.m? If not, watch it now.
Managing Editor’s Note: I love Gremlins when they’re furry and cuddly. When they mess with our emails… not so much. Unfortunately we had a little glitch in yesterday’s issue of Survive & Prosper, which resulted in several paragraphs being duplicated. I apologize for the inconvenience. The correct article is in our archives or you can read it here. – Teresa
|Follow me on Twitter @RJHSDent|
Ahead of the Curve with Adam O’Dell
Diversification means different things to different investors.