Mish's Global Economic Trend Analysis

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• Recently Introduced Actuarially Unsound Methods Hide Pension Mess in Illinois, Texas, Ohio; $3 Trillion Pension Deficit in Total
• New IRS Reporting Rules to Hit eBay and Paypal; Government Crackdown on Trinket Sellers; Campaign Bribes and Tax Policy
• Sunday Funnies 2010-09-19 Understanding Taxes
• America's Lost Decade - Another One in Progress Now

Recently Introduced Actuarially Unsound Methods Hide Pension Mess in Illinois, Texas, Ohio; $3 Trillion Pension Deficit in Total Posted: 19 Sep 2010 05:46 PM PDT It's no secret that Illinois, New Jersey, and numerous other states have massively underfunded pension plans. The problem is far worse than it looks because of ridiculous assumptions like 8% or higher returns. Moreover, states like Illinois, Texas, Rhode Island, and Ohio have gone one step further by recently adopting actuarially unsound methods specifically designed to disguise the mess. The New York Times tackles the issue in The Illusion of Pension Savings Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget. Texas saved millions of dollars this year after raising its retirement age for future hires and barring them from counting unused sick leave in their pensions. More savings will appear in coming years. Rhode Island also raised its retirement age for future retirees last year, after being told it could save $90 million in the first year alone. The technique is fairly innocuous in normal times, allowing governments to smooth out their labor costs over many years. But it becomes much riskier when pension funds have big shortfalls, when they need several decades to pay down their losses and when they are cutting benefits for future workers — precisely the conditions that exist today. "In a plan that is not well funded, I wouldn't recommend it," said Norm Jones, chief actuary for Gabriel Roeder Smith & Company, an actuarial firm that helps Illinois and a number of other states that have adopted the method. He said the firm's actuaries informed officials of the risks and it was the officials' decision to use the technique. Cuts for workers not yet hired do not save much money in the present — but that's where actuaries can work their magic. They capture the future savings for use today by assuming, in essence, that 100 percent of today's work force is already earning tomorrow's skimpier benefits. When used in actuarial calculations, that assumption has a powerful effect. It reduces the amount a government must put into its workers' pension fund every year. "Responsible funding methods do not work this way," said Jeremy Gold, an independent actuary in New York who has been outspoken about the distortions built into pension numbers. He said the technique was much like the mortgages with very low teaser rates that proliferated during the housing bubble. Dubious pension numbers in Illinois are not easily shrugged off after a warning shot fired by the Securities and Exchange Commission in August. The S.E.C. accused New Jersey of securities fraud, saying the state had manipulated its pension numbers to look like a better credit risk, while selling some $26 billion worth of bonds. Problem is Now The problem is now. The only way to have savings now is to reduce benefits now. Three states have acted now, at least in small ways. Colorado, South Dakota, and Minnesota all recently reduced pension benefits. All three states face legal battles. Please see Uncharted Territory" in WA; Calpers Bargains with Schwarzenegger; "Fairy-Tale Promises" in NJ; "No Choice" in NY; Lawsuits in CO, SD, MN over Pensions for a partial list of the big mess we are in, and what a few states are doing about it. Illinois, along with Texas, Ohio, Rhode Island, New Jersey, Arkansas, and for that matter every state but those three, are at best dealing with the current problem by making small changes that will matter 30 years from now. The math does not work. $3 Trillion Deficit According to a report by the American Enterprise Institute, public pensions are underfunded by more than $3 trillion. Please see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State? for details. Changing rules for new pension plan participants is a small step in the right direction, but even getting rid of them entirely would not cure the $3 trillion deficit today. As always, Illinois refuses to tackle this massive issue, instead seeking solutions to hide the severity of its problems. Texas, New York, California, and New Jersey are not much better. Hopefully the SEC will have something more to say about never-ending foolishness to mask the huge and growing public pension problems. Whether that stirs any brain waves in Springfield, Illinois or any other state capitols is unfortunately another matter. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

New IRS Reporting Rules to Hit eBay and Paypal; Government Crackdown on Trinket Sellers; Campaign Bribes and Tax Policy Posted: 19 Sep 2010 03:06 PM PDT Inquiring minds are interested in 2011 tax policy changes that will affect sellers of merchandise on eBay. John R writes .... Starting next year Paypal will have to start reporting to the IRS. The selling limits will be 200 items or $20K before they report. This tax change was part of the '08 stimulus. Reporting on 200 items annually is a real killer. That's a mere 17 items a month. We've already shut our eBay business down. It's simply not worth the effort. Most eBay/auction site margins are extremely low. Thus, I wonder how many people will set up a business, keep the books, pay state and federal taxes, just to make a few bucks. Thanks, John New Form 1099-K will debut for 2011 tax year John is discussing eBay Sellers and Tax Changes Tax time is upon us again, and this year the IRS has a bit of a warning for eBay sellers: next year you'll be on the hook for the taxes you owe. Enter the 2011 Form 1099-K Though sellers won't have to change their filing habits in 2010, a new Form 1099-K for 2011 promises to change income reporting by online sellers. The draft Form 1099-K for 2011 implements payments reporting to the IRS for PayPal and credit card merchants, much as already happens with forms W-2 or 1099-MISC for employees and independent contractors. Starting in 2011, therefore, sellers will be expected to report gross payments via online or credit card payments that coincide with reported 1099-K amounts, then to make adjustments to account for expenses and cash equivalents, fees, chargebacks, refunds, and so on. Details and Caveats As a practical matter, if you're an eBay seller, this will affect you unless your gross sales are under $20,000 for the year or you receive fewer than 200 transactions. Reporting for small sellers at this level is not required. Otherwise, if you exceed this volume, you'll be required to provide tax identification information (SSN or EIN number, for example) to payment processors like PayPal and will be expected by the IRS to account in your return for the amounts reported on your 1099-K form(s). The 1099-K form wasn't introduced for the 2010 tax year, so as you do your taxes this year, enjoy the last year you'll report eBay income as a purely voluntary matter. Government Crackdown on Trinket Sellers How many hobbyists like John will just say the hell with it? If enough do, it could impact eBay's earnings. Imagine selling 20 items a month, earning a few hundred dollars a year or less in profit, and having to spend time and money keeping track of all the costs associated with the effort. I am not trying to justify non-payment of taxes, I am simply looking at this from a practical standpoint. Corporate Earnings Reported to Shareholders vs. Corporate Earnings Reported to the IRS Just for grins, take a look at big corporation earnings reported to shareholders as compared to earnings as reported to the government. Which one is fiction and which one is real? Is either legitimate? I doubt it, and in opposite directions. If I am correct, where should government be spending its time and energy? Loopholes for the Little Guy vs. Loopholes for Large Corporations Every conceivable loophole, no matter how small, is closed for the little guy, while major corporations have tax avoidance loopholes worth hundreds of billions of dollars. For example, multinational corporations get to defer profits on taxes held overseas. Adding insult to injury, there have been semi-regular "tax holidays" where corporations get to repatriate offshore accounts at low rates, to the major advantage of large corporations and huge disadvantage of small US based corporations. Such policies encourage the flight of jobs and money from the US. So, here we go again, cracking down on the little guy in attempts to pick up pennies to balance the budget, ignoring hundreds of billions of dollars over the years to large corporations. Campaign Bribes and Tax Policy Please note that I am in favor of lower corporate taxes as long as it is done fairly (right now multinationals and large corporations have huge advantages) and as long as we can afford it. Instead, we have a system that rewards capital flight, rewards job flight, and punishes small businesses relative to larger corporations. This mess happens because lobbyists for large corporations write our tax code, with politicians taking campaign contributions (bribes) in return for the favor. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Sunday Funnies 2010-09-19 Understanding Taxes Posted: 19 Sep 2010 01:18 PM PDT Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

America's Lost Decade - Another One in Progress Now Posted: 19 Sep 2010 12:48 AM PDT The US used to point the finger at Japan's "Lost Decade" saying "It won't happen here." But it did. Median wages are nearly 5% lower in real terms than in 2000, the poverty rate is at a 15 year high, and the S&P 500 is about 20% lower than it was a decade ago. Pleased consider the Wall Street Journal article Lost Decade for Family Income The downturn that some have dubbed the "Great Recession" has trimmed the typical household's income significantly, new Census data show, following years of stagnant wage growth that made the past decade the worst for American families in at least half a century. The bureau's annual snapshot of American living standards also found that the fraction of Americans living in poverty rose sharply to 14.3% from 13.2% in 2008—the highest since 1994. Some 43.6 million Americans were living below the official poverty threshold, but the measure doesn't fully capture the panoply of government antipoverty measures. The inflation-adjusted income of the median household—smack in the middle of the populace—fell 4.8% between 2000 and 2009, even worse than the 1970s, when median income rose 1.9% despite high unemployment and inflation. Between 2007 and 2009, incomes fell 4.2%. Lost Decade Lowlights Americans living in poverty rose sharply to 14.3% from 13.2% in 2008 Poverty level is the highest since 1994 43.6 million Americans are living below the official poverty threshold Inflation-adjusted income of the median household fell 4.8% between 2000 and 2009 The number of 25-to-34-year-olds living with their parents rose 8.4% to 5.5 million in 2010 from 2008 Child poverty rose to 23.8% for kids under six in 2009, compared to 21.3% a year earlier Census Bureau Charts Here are a few select charts from Income, Poverty, and Health Insurance Coverage in the United States: 2009, Issued September 2010. click on any chart for sharper image Real Incomes 1967 to 2009 Real income for most groups is back to 1996 levels, a couple years higher for Asians. Poverty Rates 1959 to 2009 In general, the chart shows the "War on Poverty" was a failure regardless of what political party was in office. The odd pair of Clinton and Nixon did the best, while Carter and George W. Bush the worst. Reagan and George H. Bush both had roller coasters ending about where they started, while Ford essentially experienced a flatline. Since the start of the "War on Poverty" in 1964, President Johnson did the best in absolute terms. However, a war on poverty via a "Guns and Butter" policy including an insane War in Vietnam can hardly be considered a success. Ironically, and as is typical of government programs, we made far better progress before the "War on Poverty" started. Since then, some 46 years later, we are just about where we started. Descent Into Poverty The Minneapolis Star Tribune reports on a Descent Into Poverty For Millions Ramsey County human services planner Jim Anderson didn't need Thursday's census report to know that poverty has climbed sharply since the economy collapsed in 2008. Last month he turned away 59 adults with 126 children seeking emergency shelter for families. In a report that confirmed what experts like Anderson have sensed, the U.S. Census Bureau said Thursday that the nation's poverty rate shot to 14.3 percent last year, the highest in 16 years, and that one in five American children were living below the poverty line. With one in seven Americans in poverty, demand for emergency financial help has skyrocketed. Advocates across the Twin Cities say that homeless shelters are overflowing, food shelves are strapped and church basements are filling up. Nikkei Monthly Chart For the Japanese Nikkei Index it has been two lost decades going on three. S&P 500 Monthly Chart For the S&P 500 it has been one lost decade going on two. Given the structural problems in the US, there is no strong reason to think this decade will be much better than the last. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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