Among the many things I have learned in my
career this fact truly stands out. Psychology matters. It is the swing in
psychology that gets people into the biggest trouble. This is true whether referring to investors whose behavior I have witnessed
for nearly 40 years, or the politics and politicians of the 4 States I have
observed in my adult life. The professionals, the public and the media focus on
hot topics and are caught up in emotions
en masse and invariably swing in the
wrong direction at the wrong time. When things are going well people
become greedy and overly enthusiastic, and when times are troubled, people
become fearful and reticent. They stick their heads in the sand. That’s just
the wrong thing to do. It’s important to control fear and greed.
Another mistake that people
often make is that they compare themselves with others who are making more
money than they are and either conclude that they should emulate the others’
actions by taking risk or seek to “even” the playing field through envious
actions. This is the source of the herd
behaviour that so often gets them into trouble. We're all human and so
we’re subject to these influences, but we mustn't succumb. In my world .This is
why the best investors are quite cold-blooded in their professional activities.
I believe similarly that the best
politicians solve problems through courageous action not from polling and
running ideas of a flag pole.. Rhode Island and the United States have some
very obvious problems currently being uniformly ignored by the elected leaders
of today.
In Rhode Island so many towns and cities
are on the verge of insolvency, that its truly frightening. But it seems this
is just too hard for our leaders to
tackle. No one seems willing to do the right thing. Kicking the can is no
longer working and the idea “du Jour” is to adjust way too little, far too late. Just 10 years ago town finances
seemed ok and the crash of 2000
happened. This should have been a wake up call, but towns just kept on making
promises oblivious to the fact that health care obligations were and are
unfunded and rapidly exploding. Their greed was in full bloom until 2008 when
towns were exposed. Some by town criers and some by the toothless Auditor
Generals reports. Willful ignorance on the part of elected leaders and voters,
as well as beneficiaries continued unabated and have lead to the toxic mix that
now stands before us. Recently our best real effort for reform , such as it is,
was the Towns and Cities Pension Crisis Commission. Their task, as set out by
legislation and by the leadership from Gina Raimondo and Rosemary Beth Galoogly
has been to identify those cities that are in “crisis” or near death.(under 60%
funded) This modest task only addresses liabilities arising from pensions, not health
care. The result of this effort has been revealing and somewhat helpful. Yet
nothing “real” is being accomplished and even the modest goals they have set
out, now appear to be completely unattainable. The last two meetings of this
group have been cancelled without explanation. Have we now as a State shifted
the moral burden from where it should be? On the voters and the taxpayers ? Have
we now let elected leaders off the hook
for lying about finances? I fear this commission is yet another delay tactic. The
time has come to face facts.
In the investment world we can infer
psychology from investor behaviour, and that allows us to get an understanding
of how risky the market is, even though the direction in which it will head can
never be known for certain. Yet Rhode Islanders have deluded themselves
into believing that they can guarantee salaries many years in the future as
well as health care costs. I know we
can not and by now you should also know they can not. But more importantly ,why
do we do this for 12% of our population, guarantee millions? and let the rest
figure it out on their own? The reason lies in the psychology of uninformed
town leaders and politicians for the last 50 years. In the early 1970”s they
were influenced by union advances in the Northeast and within the first 20 years of the programs , no problems existed. The dual tailwinds of
favorable demographics and inflation made promises appear easy to achieve. Soon retirees of all stripes realized
inflation was a killer. So within the construct of politics politicians handed
out promises for votes .They handed out our promise to 12% of the elite
government workers. And so on. But now,
the game is over. Inequities exist of laughable proportions. It makes little
sense for a middle school librarian to receive a million dollar annuity when
masters and PHD librarians that are not publicly financed have retirements of roughly $50,000 total.
Should Janitors have retirements guaranteed by you in the hundreds of
thousands? While the hard working private sector worker has no such guarantee?
Why are we doing this and why isn’t anyone addressing this?
I believe the answer to such lack of leadership is obvious. Voters do
not reward politicians for telling the truth. (witness the results of Doherty
vs Cicilline). A real leader would be courageous and would suggest immediate action.
·
Eliminate town run Defined
Benefit Plans for new hires.
·
Create Defined Contribution plans or hybrid plans fair to the active employees.
·
Do not haircut anyone who is more than 10 years retired or earns
less than 35000 a year.
·
We should haircut all those who earn more than 35,000 but not by
much maybe 10 % per year.
·
Freeze all colas for 10
years.
·
Then tax residents ( 15% to
20% of current UAAL) in a big chunk
in 2014 for allowing this tragedy to
continue and for continually voting in incompetent or cheating politicians.
·
Fire every town manager who was in charge for the whole period
during the explosion in liabilities over the last 15 years.
·
Mandate every Town Council pay
Annual Required Contributions going forward
before any raises are allowed or they are subject to recall.
Remember the following advice so that we can make this mess less likely
for our children and grandchildren. Mass emotion is very predictable and there
are those individuals who are
unscrupulous enough to take regularly advantage of it. Too
little skepticism by voters and too much
eagerness by leaders in an up-economy –
just like too much resistance and pessimism in a down-economy – can lead to very bad investment results.
Warren
Buffett once said, "The less prudence with which others (government)
conduct their affairs, the greater the prudence with which we must conduct our
own affairs." Let all of us handle our own retirements and don’t obligate
us to guarantee others.
Do the right thing fix this…now ..
barry schiller
On low fees, Mike R makes a good point its not a good idea to put all pension fund resources in stocks. But firms such as Vanguard have a wide selection of low cost diversified bond funds as well as real estate to balance a portfolio at low cost. I juat don't see why the public needs to pay 2%+ plus 20% of profits. The lead sentence on the post, if accurate, says fees of about $580,000 were paid on an investment of about $5 million. The time frame is not given but it shows the order of magnitude of the problem, if Vanguard's .14% were used on $5 million over 7 years that would total about $50,000 not $580,000.