Social Security Funds as Government Milking Cow: Spain Edition

I previously pointed out what seems as Ponzi financing scheme where the Spanish government has raided its pension reserve fund in order to boost Spanish bonds or to lower bonds yields, by buying up to government debt up to 97% share of its assets.

For the cash strapped Spanish government, this hasn’t been enough, as they squeeze money from the social security fund to finance state pension.

According to a report from Reuters: 

Spain tapped its social security reserve fund for the second time in a month on Monday, the Labour Ministry said, to help with extra summer pension payments as unemployment and retirement costs deplete government funds.

The government turned to the fund for 3.5 billion euros ($4.6 billion) on July 1 then for a further 1 billion euros on Monday. Spanish pensioners receive two cheques in summer and two over the Christmas holidays.

Spain was forced to tap the reserve for the first time last year to help pay pension costs, using some 7 billion euros.

Record high unemployment, which hit over 27 percent in the first quarter, and a growing number of retirees on a state pensions have put an unprecedented strain on Spanish social security funds.

Social security or pension funds have become a favorite tap for governments, especially for the cash strapped variety. These funds are not only subject to to government’s predation, they can also be used as instruments to effect political agenda. For instance, in the Philippines, government retirement fund the GSIS has been used as a tool to promote the popularity of the incumbent government via stock market purchases. Not only does the GSIS intervene directly via actual purchases, they also provide signaling mechanism to the marketplace by pledging to buy stocks at certain levels.

And like the Detroit saga, if the Spanish government defaults on their debt, pension fund beneficiaries will get cleaned out.

It’s sad to know how government tapping of or dabbling with people’s savings would eventually lead to hardships.

Detroit: US Largest City to File for Bankruptcy

As US stock markets soar to record highs, Michigan’s most populous city of Detroit once the cradle of the US automobile industry files for bankruptcy

From the BBC:

The US city of Detroit in Michigan has become the largest American city ever to file for bankruptcy, with debts of at least $15bn (£10bn).

State-appointed emergency manager Kevyn Orr asked a federal judge to place the city into bankruptcy protection.

If it is approved, he would be allowed to liquidate city assets to satisfy creditors and pensions.

Detroit stopped unsecured-debt payments last month to keep the city running as Mr Orr negotiated with creditors.

He proposed a deal last month in which creditors would accept 10 cents for every dollar they were owed.

But two pension funds representing retired city workers resisted the plan. Thursday's bankruptcy filing comes days ahead of a hearing that would have tried to stop the city from making such a move.

A Wall Street Journal report estimates “Municipal-worker retirees are set to get less than 10% of what they are owed under the plan.” Ouch.

Detroit's riches to rags synopsis from the same BBC article:

The city, once renowned as a manufacturing powerhouse, has struggled with its finances for some time, driven by a number of factors, including a steep population loss.

The murder rate is at a 40-year high and only one third of the its ambulances were in service in early 2013.

Declining investment in street lights and emergency services have made it difficult to police the city.

And Detroit's government has been hit by a string of corruption scandals over the years.

Between 2000-10, the number of residents declined by 250,000 as residents moved away.

Detroit is only the latest US city to file for bankruptcy in recent years.

In 2012, three California cities - Stockton, Mammoth Lakes and San Bernardino - took the step.

In 2011, Harrisburg, Pennsylvania tried to file for bankruptcy but the move was ruled illegal.

But Thursday's move in Detroit is significantly larger than any of the earlier filings.

Detroit ranks 9th in terms of highest taxes based on US cities according to the Marketwatch.com. On the obverse side of high taxes has been unsustainable government spending from bureaucracy to welfare.

From Reuters:

Detroit's state and local tax burden as a percentage of annual family income surpassed the average for other large U.S. cities. For example, the tax burden at the $25,000 income level was 13.1 percent in Detroit versus an average of 12.3 percent.

Buss said that Detroit has seen a significant expansion in deficit spending over the last two years, reaching an accumulated $326.6 million at the end of fiscal 2012 from an accumulated deficit of $196.6 million in fiscal 2011. The city has had a budget deficit every year since 2003…

Total revenue in Detroit has fallen sharply over the last 10 years by over $400 million or 22 percent, according to the analysis. State revenue sharing has also been cut, although the city, which accounts for 7 percent of the state's residents, gets by far the biggest amount on a per capita basis -- $335 per resident -- far more than other Michigan cities with populations over 50,000.

Half of Detroit's top 10 employers are governmental entities, led by the city itself with nearly 11,400 workers, down from 20,800 in 2003, followed by the Detroit Public Schools at 10,951, the report said. Two health care systems and the federal government round out the top five. Chrysler, the only automaker in the group, ranks eighth, employing 4,150 workers, a drop of more than a half from 2003.

Also part of the decline of Detroit has attributed to “raced based” policies which sparked a “White Flight” according to economist Walter Williams.

Local politics shaped by labor activism or labor unions likewise compounded on the loss of competitiveness.

So Detroit seems as the US version of Greece: declining economy predicated on the lack of competitiveness shaped by repressive social policies and by excess political baggage via the welfare and bureaucratic state.

Detroit signifies a harbinger for a world addicted to debt based 'political' consumption spending.

Nonetheless The USA Today lays out “What happens next” or the possible legal steps on the Detroit Bankruptcy 

And furthermore, while Detroit represents the largest city or the largest municipal bankruptcy in history, there are yet other local troubled spots (graphic from New York Times).

Yet if the current inflationary boom in the US morphs into a bust, then we will see even more candidates similar to Detroit. 

Worse, even the US government is at the risk of becoming a Detroit, especially if interest rates (as expressed by the bond markets or of the return of the bond vigilantes) continue with its upside trek.