Municipal DB Pension Problem And Human Fertility [Part 4]

On Human Fertility, Part 4 by David Merkel, CFA of The Aleph Blog.

Human Fertility

I write about this every now and then, because human fertility is falling faster then most demographers expect. Using the CIA Factbook for data, the present total fertility rate for the world is 2.425 births per woman that survives childbearing. That is down from 2.45 in 2013, 2.50 in 2011, and 2.90 in 2006. At this rate, the world will be at replacement rate (2.1), somewhere between 2025 and 2030. That’s a lot earlier than most expect, and it makes me suggest that global population will top out at 8.5 Billion in 2050, lower and earlier than most expect.

Have a look at the Total Fertility Rate by group in the graph above. The largest nations for each cell are listed below the graph. Note Asian nations to the left, and African nations to the right.

Africa is so small, that the high birth rates have little global impact. Also, AIDS consumes their population, as do wars, malnutrition, etc.

The Arab world is also slowing in population growth. When Saudi Arabia is near replacement rate at 2.17, you can tell that the women are gaining the upper hand there, which is notable given the polygamy is permitted.

In the Developed world, who leads in fertility? Israel at 2.62. Next is France at 2.08 (Arabs), New Zealand at 2.05, and the US at 2.01, slightly below replacement. We still grow from immigration, as does France.

Most of the above is a quick update of my prior piece, which has some additional crunchy insights. This evening, I would like to highlight two articles that I saw recently — one on troubles with municipal pensions, and one on how some areas of China are dying. They are at root the same story, but with different levels of potency.

Let me start with the amusing question where Arnold Schwarzenegger asks Buffett via CNBC what can be done to solve the municipal defined benefit pension problem, which Becky Quick then asks Buffett. For the next 80 seconds, Buffett says it is a messy problem created by politicians that voted for high municipal pensions, because future generations would pay the bill, and not current taxpayers. The politicians that voted for them are long gone. Buffett offers no solutions, and I don’t blame him because all of the solutions are ugly. Here they are:

  • If state law allows, terminate the current plans and replace them with Defined Contribution plans, or reduce the rates of future accrual. If those can’t be done, create a new Defined Contribution plan for all new employees, who will no longer participate in the Defined Benefit plans. Even the last of these will be fiercely resisted by municipal unions.
  • Cancel the cost of living adjustment, if you can do so legally.
  • Raise taxes — I’m sure younger people will enjoy paying for past services of municipal employees.
  • Impose excise (or something like that) taxes on municipal pension payments, and rebate the money back to the plans.
  • Declare or threaten bankruptcy if you can legally do it, and try to extract concessions from the representatives of pensioners.
  • Amend the state constitution to change the status of pension benefits, including adding an exception adding legality to adjust benefits after the fact. (ex post facto)

Don’t get me wrong. I don’t think the radical solutions could/would ever be done, and the National government would probably slap down any state that actually tried something draconian. Remember, states are practically administrative units of the national government. States’ rights is a nice phrase, but often very empty of power.

Here are some non-solutions:

  • Float pension bonds — just a form of leverage, substituting a fixed liability for a contingent liability, and assuming that you can earn more than the rate paid on the pension bonds.
  • Invest more aggressively. Sorry, taking more risk won’t do it. Returns are only weakly related to risk, and often taking high risks leads to lower returns. The returns you are likely to get depend mostly on the entry prices you pay for the underlying cash flow streams in question.
  • Invest in alternative assets. Sorry, you are late to the game. Alternatives offer little more than conventional assets at present, and they carry high fees and illiquidity.
  • Adjust the discount rate, or salary increase rate assumption. That may make the current problem look smaller, but it doesn’t change the underlying benefits to be paid, or the returns the assets will earn. If anything, the assumptions are too aggressive now, and plan assets are unlikely to return much more than 4%/year over the next 10 years.

Buffett gave one cause for the problem, but there is one more — if the US population were growing rapidly, there would be a larger base of taxpayers to spread the taxes over. Diminished fertility feeds into the problems in the states, as well as other social insurance schemes, like Social Security and Medicare. You could loosen up immigration to the US, particularly for younger, wealthy, and or/skilled people, but that has its controversial aspects as well.

Here’s another way of phrasing it — it’s difficult to create workers out of thin air. Governments would like nothing better than to have more working age people magically appear. It would solve the problem. Alas, those decisions were largely made 20-40 years ago also. There is even competition now for the best immigrants.

That brings me to the article on China. Rudong, a city in China where the one-child policy began, is now an elderly place with few younger people to take care of the elderly. Kind of sad, even if the problem was partially self-inflicted, and partially inflicted by conceited elites who thought they were doing a good thing.

A few quotations from the article:

“China will see more places like Rudong very soon,” said Wang Feng, a professor of sociology at the University of California at Irvine. “It’s a microcosm of the rapid demographic and economic transformation China has been experiencing the last decades. There will be more ghost villages and deserted or sleepy towns.”


“China is quickly turning gray on an unprecedented scale in human history, and the Chinese government, even the whole Chinese society, is not prepared for it,” Yi said. “In many places, including my hometown in western Hunan, it’s hard to find a young man in his 20s or 30s.”

and also:

What’s different in China is that the one-child policy accelerated the process, removing hundreds of millions of potential babies from the demographic pool. China’s old-age dependency ratio — a measure of those age 65 or over per 100 of working age — is set to triple by 2050, to 39.

The one-child policy created possibly the sharpest demographic shift in the world. It is largely irreversible; once women as a culture stop having children, they don’t start having more when benefits are offered or penalties are lowered. It would take a big change in mindset in order to get that to shift, like a religious change, or the aftermath of a big war.

The Christians are growing in China, and many of them would have larger families, but even if Christianity gets a lot bigger, and the Party tolerates it, that won’t come fast enough to deal with the problems of the next 30 years, but it could help with the problems after that.

In closing, there is enough pity to go around. Pity for the elderly that will not get taken care of to the degree that they would like. Pity for those younger who cannot afford the time or monetary costs of taking care of the elderly.

I think the only solution to any of this would be shared sacrifice, where everyone gets hurt somewhat. My question would be what places in the world have the requisite maturity to achieve such a solution. Optimistically, the answer would be many, but only after a lot of sturm und drang.