It’s the Net Result That Matters

It’s been a tough five years for teachers.

As the financial crisis rolled through the economy, everyone looked around for someone to blame or bear the cost of downsizing. The private sector looked for a culprit in the profit centers from the housing boom, namely the banks and financial firms. The public sector, where tax revenue fell like a rock, looked at their largest employment expense, typically in education.

There are many teachers. They tend to have decent retirement plans and healthcare. And since private sector wages have been stagnant or falling for a decade, teachers also have comparable salaries to private sector workers.

And that’s where the fight starts…

Florida governrnor, Rick Scott, froze teachers’ pay in an effort to control costs.

So far, so good.

Then he went on to attack the rising cost of healthcare and pensions by increasing the amount teachers had to pay to keep the same benefits.

On paper, it can certainly be said that teachers retained their salary but had to pay more for the same benefits. On different paper – meaning one’s paycheck – teachers are pretty certain they got a pay cut. They keep the same job, they keep the same benefits, but their paycheck is smaller.

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The same thing is going on with the Fed and pension funds.

Private pension funds are having great years… sort of.

There is no doubt that the multi-year run up in bond and equity prices, driven by the Federal Reserve, has given pension funds a huge boost in returnrns. With such force behind you, how can you lose?

Oh, I know how… look at what else the Fed is doing.

Yes, it’s true that pension funds are boasting great investment returnrns. In fact, the 100 largest private pension funds just earnrned a whopping 1.78% in April alone. But, at the same time, the funding status of pensions fell, meaning they have even less money required to pay all of their pension payments over time.

The reason for this drop in funding, from 82.8% of what they need to 81.2% of what they need, is because the discount rate for their liabilities has changed. Stick with me on this one…

The discount rate is the interest rate used to figure out what all future payments are worth today. Put another way, the discount rate is the interest rate used to figure out how much you need to invest today to meet an obligation in the future. The lower the discount rate, the more you need to invest today.

Given that the Fed has held long-term interest rates low for almost half a decade, the discount rate for pensions keeps falling, so the amount of money they need to sock away today to pay pensions in the future keeps going higher.

What the Fed provides with one hand (better returnrns), it takes away with the other (higher required contributions from the employers).

So what does this mean?

It means that companies have to write big fat checks to their pension funds to cover the shortfalls. So the same companies have less money to spend on research and development, or dividends, or capital investment, or anything else. All of this is courtesy of the Fed.

Net, net, thanks for nothing, Ben.

Rodney

P.S. Given the circumstances with pensions, don’t get too cozy with dividend stocks. Yes, they have provided a handsome returnrn in the last few years, but their costs are shooting higher as pension costs and other costs rise too. One logical place to cut, in order to pay such costs, is dividends. This is yet another reason that the days of simply buying and holding are behind us!

 

Ahead of the Curve with Adam O’Dell

A Real-Time Inflation Indicator

The topics of inflation, deflation, and speculation of the Fed’s next move pretty much dominate our in-boxes on a daily basis. Our readers want to know who they should believe!? Us? Them? No one?

Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.