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Let’s get this straight: AIG execs got bailout bonuses, but pensioners get cuts

No one has accused city workers in Chicago or Detroit of bringing down the economy, but they could face pension cuts

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A pensioner protests pensions cuts in Detroit

City of Detroit pensioner Donald Smith sits across the street from the Federal Court House, to protest cuts in city workers’ pensions. Photograph: Rebecca Cook/Reuters

As we passed the fifth anniversary of the peak of the financial crisis this fall, the giant insurance company AIG was prominently featured in the retrospectives. AIG had issued hundreds of billions of dollars of credit default swaps (CDS) on subprime mortgage backed securities. When these mortgage-backed securities failed en masse, AIG didn’t have the money to back them up.

This would have forced AIG into bankruptcy. However Lehman had declared bankruptcy the day before and the world was still engulfed in the aftershocks. The Bush administration and the Federal Reserve board decided that they would stop the cascade of failing financial institutions and bail out AIG. As a result, the government agreed to honor all the CDS issued by AIG and effectively became the owner of the company.

Chicago has been in the news recently because its mayor, Rahm Emanuel, seems intent on cutting the pensions that its current and retired employees have earned. Emanuel insists that the city can’t afford these pensions and therefore workers and retirees will simply have to accept reduced benefits.

If the connection with AIG isn’t immediately apparent, then you have to look a bit deeper. Folks may recall that AIG paid out $170m in bonusesto its employees in March 2009 with its top executives receiving bonuses in the hundreds of thousands of dollars.

These were people who not only shared responsibility for driving the company into bankruptcy; they also had been at the center of the financial web that propelled the housing bubble into ever more dangerous territory. In other words, the bonus beneficiaries were among the leading villains in the economic disaster that is still inflicting pain across the country.

The prospect of executives of a bailed out company drawing huge bonuses at a time when the economy was shedding 600,000 jobs a month provoked outrage across the country. President Obama spoke on the issue and said that unfortunately no one in his administration was smart enough to find a way that could keep the bonuses from being paid. The problem according to Larry Summers, then the head of President Obama’s National Economic Council, was that the bonuses were contractual obligations and they had to be honored.

This provides a striking contrast to what might happen to current and former city employees in Chicago and may happen to current and former employers of the state of Illinois and Detroit. In these cases, it seems that the contracts workers had with their employers may not be honored. Employees who worked decades for these governments, with part of their pay taking the form of pensions in retirement, are now being told that these governments will not follow through on their end of the contract.

The differing treatment of contracts in these situations is striking for several reasons. First, the AIG executives stood to gain much more money with their bonuses on a per person basis. In contrast to the six-figure bonuses going to top executives, pensions for Detroit’s workers average just $18,500 a year. Pensions for Chicago’s workers average over $33,000 a year, but almost none of these workers will get Social Security, so this will be their whole retirement income.

In contrast to the top AIG executives, who played a role in bankrupting their company and sinking the economy, no one has accused workers in Chicago or Detroit of doing anything wrong. These were people who taught our kids, put out fires, and picked up garbage. They did their jobs.

They also might be excused for thinking that they could count on the governments involved to fulfill their end of the contract. After all, both Michigan and Illinois have provisions in their constitution stating that pensions earned by public sector workers cannot be cut. Since cities like Detroit and Chicago are creations of the state governments, workers for these cities, like workers for the state government, might have thought the state constitution protected their pensions. Apparently they should have hired lawyers who could have explained to them why this is not the case.

There is yet another connection between the plans to cut pensions and AIG. The bond rating agencies played a prominent role in both cases. In the case of AIG meltdown, the bond rating agencies gave investment grade ratings to trillions of dollars of mortgage backed securities (MBS). They often gave these ratings to dubious issues for the simple reason that they were being paid. As one analyst from S&P said in an e-mail, they would rate a new MBS if it “was structured by cows“.

The bond rating agencies played a similarly disastrous role in the pension problems facing state and local governments. In the stock run-up in the 1990s, they green-lighted accounting that essentially assumed that the stock bubble would continue in perpetuity, effectively growing without limit. This meant that state and local governments didn’t have to contribute to their pensions since the stock bubble was doing it for them. States like Illinois and cities like Chicago clung to this habit even after the bubble burst.

There is one final noteworthy connection between AIG and the Chicago pension situation. Chicago’s Mayor, Rahm Emanuel, was President Obama’s chief of staff at the time that no one could figure out how to avoid paying the AIG bonuses. Apparently Emanuel has learned more about voiding contractual obligations now that it is ordinary workers at other end of the commitment.

 

 

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5 Questions to Ask To Determine Pros and Cons of Long Term Care Insurance

elder-care-41c78c676765b6932191b5118eb63517edcbdbff-s6-c30By  -

Is long term care insurance a wise purchase? You’ll need to evaluate the pros and cons of long term care insurance to come up with your own answer. Here are five questions to ask to help you determine the pros and cons of long term care insurance.

    1. Do you lead a healthy lifestyle? Believe it or not, healthy may mean you are more likely to need care. The healthiest people are often the ones that end up needing long term care assistance later in life, whereas heart problems or cancer may take the unhealthy ones sooner. One of the pros of long term care insurance for a healthy person is it can allow you to stay in your home and maintain your independence longer. This is because most policies issued today cover the cost of in-home care, which can provide someone to help with many of the activities of daily living.
    1. What does your family‘s health history look like?What is longevity and health like for your grandparents, parents, aunts, uncles and siblings? Has anyone needed care later in life? Who was there to assist them? What if they had needed care? How would it have affected the family? A pro of long term care insurance is that it reduces the burden of care that may other wise fall on loved ones.
    1. Are you willing to spend your own assets down and then become a dependent of the state, or dependent on your family, should you need care?What if you break a hip later in life? What if your mind remains fully alert, but you need help cooking, cleaning and dressing, and you do not want to move in with a family member? Who would help and how would you pay for their help? Full time long term care assistance can run $6,000 – $10,000 a month or even more if medical care is needed. If you have sufficient assets to cover this cost, then you have no need for long term care insurance.
    1. Can you afford a premium that would provide you a reasonable amount of coverage?Long term care insurance has features that you can adjust. Like buying a car, you can get all the extras, and pay for them, or you can buy a base model that costs less but still provides decent transportation. The major con of long term care insurance is the same as any insurance: you may pay premiums for years and never use the coverage. You need to look at it the same way you look at any other type of insurance. After paying for homeowner’s insurance for years, are you upset that your home never burned down and that you never used your insurance?
  1. What do the long term care statistics say about how many people will need care, and how long they will need it for? According to long term care statistics “the lifetime probability of becoming disabled in at least two activities of daily living or of being cognitively impaired is 68% for people age 65 and older.” It is good to look at the statistics, but your personal odds are either zero or 100%. You either will need care or you won’t.

Summary of Pros and Cons of Long Term Care Insurance

  • The pros of long term care insurance are that it allows you to maintain your independence and reduces the financial and psychological stress that a long term care need causes a family.
  • The cons are the cost of the premiums.

Whether you buy insurance or not, you’ll want to have a plan in place so you and your family know what to do if you need care. That plan involves talking to family and friends about their ability to help, if and when help is needed.

 

 

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Is this the dawn of a potentially catastrophic insurance bubble?

Lloyds of London chairman John Nelson issued an eerie warning on Wednesday. The huge amounts of money flowing into the insurance industry right now “on a scale not seen before” (paywall), he suggested, could pose a systemic risk to the financial system. ”We all vividly remember the systemic problems that arose in the banking industry, where capital became detached from the underlying transaction of risk,” Nelson said. “The insurance industry must avoid these traps.” So is this the dawn of a (potentially catastrophic) insurance bubble?

capital invested in reinsurers

Capital invested in reinsurance—in which investors or companies provide capital to insurance companies, betting that most claims won’t be filed—has increased at a rapid clip since 2008.Aon Benfield

It’s little surprise that money is flowing into reinsurance, the business of buying up the debt of an insurance company. Essentially, reinsurance is a bet that a segment of the companies or individuals being insured (by investors or other insurance companies) won’t file claims during a certain time period. It’s an attractive area for several reasons: Money managers have had a hard time gaming the equity markets; for example, hedge funds haven’t convincingly beat the S&P 500 since 2009. Low interest rates and monetary easing around the world have left investors desperate for yield. And many investors have mistimed investments thanks to erratic moves by central bankers and policymakers.

In a murky market environment, investing in disaster can seem like a smarter bet. Investing in reinsurance debt securities like catastrophe bonds (which bet that homeowners or companies won’t file claims that exceed a certain amount of money) can yield as much as 7% to 8% for three years, compared to the approximately 3% you might earn investing in US Treasurys now for the next 10 years.

“Reinsurers have begun the process of incorporating these new capital flows into their capital structures and we expect the pace of these activities to increase,” Aon Benfield, one of the world’s largest reinsurers, said in its June to July 2013 updateon the insurance market. Capital invested in reinsurance increased by 2% in the first quarter of 2013 alone, and increased by 11% over the course of 2012. Hedge funds and pension funds alone invested $35 billion in the last 12 months.

The worry is that new investors won’t understand the risks that accompany investing in insurance, and that they’ll invest far more money into it than they should. Individuals and companies—particularly those affected by disasters—do occasionally file claims en masse. Investors who become convinced that these investments aren’t that risky could be in for big losses.

 But would this distortion in risk produce losses that rival the financial crisis? It’s unclear. First, it would take serious losses—perhaps a series of big catastrophes—for investors to lose a lot of money from reinsurance. It’s also worth noting that the size of the global reinsurance industry is about a quarter of the size of the market for US mortgage-backed securities. But the more the world grapples with rising seas, harsher weather and an unprecedented number of natural disasters, the likelier big losses become.

 

 

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Startups: Does My Business Have To Register For Workers Compensation?

startups                                                                                                                                        Starting a new business can be a daunting process. In many cases, new business owners must not only deal with the task of getting the organization off the ground, but also establishing proper insurance requirements. But what exactly are the insurance needs for a start-up company—for example, is workman’s compensation a must? Those who are establishing a new organization should familiarize themselves with the basics of workman’s compensation, when it is needed, and how it can be beneficial.

What is Workman’s Compensation? 

As suggested by the name, workman’s compensation is a type of insurance policy that pays the wages for men and women who are injured while performing the tasks required by their job. In addition to covering weekly wages, workman’s compensation may also cover medical bills and other similar expenses that occur as a result of an injury on the job. Finally, general damages for pain, suffering, and employer negligence may also be included in a workman’s compensation package. Depending on the severity of the injury and the specific insurance plan, these payouts may vary quite a bit.

Who Needs Workman’s Compensation?

Obviously, workman’s compensation packages are a must for large corporations who employ hundreds, or even thousands, of workers. But what about a relatively small start-up company that is just getting its feet off the ground? According to Entrepreneur, nearly any company that has at least one employee is required by US regulation to provide workman’s compensation insurance. Of course, there are always exceptions—for example, businesses in Texas and New Jersey are not, at least in theory, required to have a compensation policy. In addition, start-ups that are owned by sole proprietors or are filed as partnerships may not need to possess a workman’s compensation insurance plan.

Benefits of Workman’s Compensation

Though there is a small group of start-ups that are not required by law to have workman’s compensation, there is no question that they can still benefit from the insurance plan. In fact, there are a number of perks associated with having a workman’s compensation policy—including the protection that it offers in the event that an accident does occur. Similarly, employers that possess workman’s compensation plans are often more attractive to potential workers, as they may be used as part of the benefit package. It may also be useful as a basic insurance plan for sole proprietors who cannot afford medical insurance for themselves.

Establishing Workman’s Compensation

In most cases, start-up business owners who are interested in purchasing a workman’s compensation insurance plan can do so by consulting with any professional insurance agent. Some states, however, do require employers to work with specified state-run grants when applying for workman’s compensation insurance. Those who are unfamiliar with these types of insurance plans should be sure to speak with an expert in the field of workers compensation. In most cases, these professionals can provide assistance when it comes to choosing the best plan for the company.

Featured images:
  •  License: Image author owned

About the Author:
Andrew Miller is a passionate member of the End Ecocide movement, an avid legal blogger and Environmental Law Student. He has worked in marketing for over a decade and finds his passion in bringing concepts to life. As a Socialpreneur, he is an agent for positive social change through both his writing and business endeavors.

 

 

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