Something Will Have To Give

My involvement with our fire department makes it worthwhile for me to follow fire-related people and agencies on Twitter. There is frequently information that is useful one way or another or just interesting to read as was this about city workers, including the fire department in Scranton, PA.

Long story short is that Scranton as serious budget problems and had to cut the pay of city workers, including the fire department, to minimum wage. The article notes that the average fire fighter salary is $56,000 so the (temporary?) drop to minimum wage is profound.

This is becoming a more prevalent conversation in terms of cities having financial problems; three towns in California have recently filed for bankruptcy protection and it seems likely there will be more. There were a few quotes in the article from people from the union but none of them acknowledged that the city doesn't have the money it needs to conduct business. The mayor is quoted as saying he would pay them if he could. 


This is a good microcosm for all sorts of financial matters. If there is not enough money to pay the bills and service the debt then something will have give. It is the same with pension assumptions and retirement plans. Pensions of varying types have return assumptions that seem ridiculous when they are 7-8%, which many of them are. Of course many pensions are underfunded. Underfunding is calculated using return assumptions which as mentioned are often unrealistic in a post-2000 world. 


However if these underfunded pensions apply what would seem to be more realistic return assumptions then the extent to which they are underfunded becomes much larger. For a municipal type of pension this becomes a political issue which won't makes things better. 


A similar dynamic of course exists in personal financial plans. An accumulated piece of money can only be sustainable to a certain point and then it becomes unsustainable. At a time of reason and ration every knows this but when reason and ration disappear, and trust me this happens, people make overly optimistic return assumptions and withdraw at an unsustainable rate.


Regardless of whether it is a personal financial plan, some sort of pension or an entitlement program the combination of being overly optimistic and withdrawing too much is a deathblow. A pension going bust hurts pensioners who might make some back through insurance but if everyone hits up PBGC at the same time there won't enough to pay everyone out. If a personal financial plan blows up then chances are desperation becomes part of the equation. With entitlements we don't know. It could go bust or reduce payments or perhaps pay in dollars that have less purchasing power. Obviously some kind of impairment to entitlements would derail many personal financial plans too.


Our own sensitivities to these potential outcomes should influence how conservative or aggressive we are with these issues. The tone of posts that have been along these lines in the past have been about the self-sufficiency needed to avoid being at the mercy of some plan or market working the way it is "supposed to work." Where markets are concerned "working" means relying on annual returns being what they were in the 1980s and 1990s. 


The recipe here is save more, live below your means, monetize a hobby and where markets are concerned go along for the ride most of the time and try to avoid the full brunt of large declines when they come along.