March 20, 2023
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Fiscal reform needed as pension time bomb ticks away


America’s summer of fiscal discontent is coming to a close on a downbeat note.

The California legislature is preparing to wind up its session having stirred up a lot of controversy but done almost nothing to address the state’s ongoing pension crisis. The burgeoning shortfall now adds up to $139 billion in the CalPERS fund alone and it grew again after a dismal return of 0.61 percent for the year ended July 31.

If the building deficit is not addressed, CalPERS and other pension liabilities will eventually crowd out funding for the social programs that are drawing self-congratulatory remarks at politicians’ Labor Day speeches across the Golden State.

Similarly, Apple Computer’s $14.5 billion fine at the hands of European Union regulators, announced Aug. 30, speaks volumes about gaping loopholes in the U.S. tax code. Apple is being fined for illegally booking revenue and profits in Ireland, where taxes are vastly lower than stateside. The scheme would unravel completely if U.S. corporate taxes were set at a level that makes sense in a globalized economy — instead they are too high with no fix in sight.

Faced with historic gridlock and fuzzy logic, Fed Chairwoman Janet Yellen has little choice but to talk tough on interest rates and then do very little. Another increase in interest rates has pretty much come off the table for September; a rise in December would put the Federal Funds rate at a paltry one-half-of-one-percent but that would be the highest level since the financial crisis.

The persistence of zero or near-zero interest rates is creating a negative feedback loop that means pension funds continue to underperform their targets – typically 7.5 percent or more – because their vast bond portfolios yield less and less and their international stocks remain in the tank. As America’s largest pension fund, CalPers is a poster child for the unintended consequences of zero interest rates and a global slowdown.

In the absence of a corporate tax fix, American companies are parking $2.4 trillion abroad that they can’t touch to make investments back home. Among those with multibillion dollar overseas cash holdings is Amgen, based in Thousand Oaks, which on Aug. 30 learned it would face biosimilar competition for its Enbrel drug from Novartis, a Swiss firm that doesn’t have to go through monetary gyrations in order to find the cash to invest in developing copycat drugs.

To keep the economy moving forward, Yellen has little choice but to stick with ultra-low rates, rising pension deficits and hope that there is enough forward momentum in the economy to keep deflation at bay and keep employers hiring.

One of the few upsides of the near-zero policy is that mortgage rates are low and home prices, particularly in cities with a technology focus and decent job growth, are posting steady gains. That has a number of experts, including the editors at The Economist, worried.

Their concern is that banking industry reforms passed after the financial crisis did not address the federal government’s implicit backstop for trillions of dollars in financial instruments tied to the single and, in some cases, the multi-family mortgage market. To the extent there are billions of dollars of capital at risk in the quickly cooling apartment market, there is the potential for another real estate-related bubble to form — if it has not already.

The upside to Yellen’s gamble is that consumer confidence is rising and employers are stepping up to add jobs as the economy inches ahead. But the pension time bomb is ticking away and fiscal reform remains on the shelf waiting for a breakthrough in Washington.

It is worth noting that Yellen’s husband won a Nobel Prize in economics for a 1970s paper called “The Price of Lemons.” George Akerlof’s paper had nothing to do with citrus but it was an early insight into how consumers behave. His conclusion was that shoppers will discount the price of all used cars of a certain model when a few are declared lemons.

The persistency of consumer expectations is something to think about as we contemplate how long the near-zero interest policy has been in place. It is not easy to take a deep breath and muddle on through, but we don’t have much choice.

—Contact Editor Henry Dubroff at