If the article I wrote on this topic on November 26, 2013 wasn’t “depressing” enough, this more brief follow-up piece may lead to my being labeled “Dr. Doom”. I reiterate, normally, I am an upbeat, positive and energetic guy, who looks askew at most things “alarmist”. However, this ongoing saga in the USA and its possible ripple impact on the Ecuador lifestyle, simply cannot be ignored.
In the previous related article, I alluded to the then ongoing judicial hearing, as the City of Detroit pushed for bankruptcy “protection” from creditors and look to extinguish its debt obligations. Part of those debt “obligations” included the lifelong commitment to public pension fund employees. That’s right, Detroit’s own “Joe Plumber”, if he was on the city payroll, could be seeing a dramatic cut in his pension plan payout. Imagine, for a moment, giving 45 years of your life, planning carefully to survive on, say, $2,000/mo. and then…bam! You find out in one fell swoop that your pension income is to be cut by 30%, 50% or 70%.
Far out, crazy talk, right ? Wrong ! In fact, the only issue which remains in play is the exact amount of the percentage cut. The judicial hearing took place and the ruling came down. The courts were very clear: Detroit was granted its bankruptcy petition and, further defining the ruling, the courts specified that nothing inherent in bankruptcy law, prevented debt obligations jettisoned to include pension payment obligations. In short, Detroit got its bankruptcy protection and city workers got the shaft. The exact percentage of the cuts in pension income is yet to be publicized, but Detroit city officials have already stated that it is a matter they are considering.
As my previous article stated, the “hope” is that the Federal government will step in and bail out the deficit for the Detroit pension fund. The same USA Federal government that is already $17 trillion USD in the hole. Even worse, this now establishes a precedent that other USA cities, who have mismanaged funds due to excess, may now follow. Feed the avarice, get reelected and then let Uncle Sam bail you out. However, it is still the same USA taxpayer taking the ultimate hit and piling on more debt.
Why does this matter to life in Ecuador? The answers are numerous. Only some will be addressed here. However, first, we must look at the broader follow-up to the Detroit verdict story.
Several USA cities were mentioned in my original piece, which were clearly in almost as poor economic shape as Detroit. All likely candidates to be facing the same dire circumstances as Detroit. I singled out that many, rightfully so, thought Philadelphia could be next. While in my top 3 “Bail Out Candidates” list, I cited Chicago as the city I felt most likely to succumb next.
As if in lockstep with my own thoughts, less than a week after the Detroit verdict, “in the know” pundits began to speculate on Chicago’s future. Against the backdrop of the Illinois State Legislature passing a landmark measure to keep the severe shortfall of the Illinois public pension fund afloat, questions arose as to how Chicago, already amongst the highest taxed cities in the nation, would address its own multi-billion dollar pension fund.
Rachel Barkley, a credit analyst for the respected Morningstar, Inc., noted that, “Chicago sticks out for all the wrong reasons”, specifically noting that the Chicago pension fund system is only funded at the paltry 35% level required. Even another city in serious financial trouble, such as New York City, is funded to 60% of current pension fund obligations. Not exactly comforting, but far better than Chicago.
The point to this is that we can close our eyes and click our heels, but we aren’t in Kansas anymore. These public pension shortfalls are real. The Detroit ruling has all the earmarked signs of the onset of a “domino effect”, where bankruptcy may appear an attractive alternative to financially troubled USA cities. Additionally, if you don’t think this will have an impact on lifestyles in Ecuador, particularly on the real estate market, think again. I will limit my analysis to three basic impact points.
Recap. Remember, I am in the real estate field and my hometown is Chicago. Hard for it to hit any closer to home, but I promised our members candor. So, first, dwindling pension funds, public or private (I referenced the Stroh’s private sector pension debacle in the previous article), will impact the available funds that USA based expats will have to spend in Ecuador. Those planning for a comfortable retirement, with a nest egg to by an oceanfront condo and live on $2,000/month, may now need to dip into that nest egg to survive, as their pension payments are cut in half.
Whether this happens in 2014 or 2016 or 2018, the impact is coming Ecuador’s way, as it will to any global retirement hot spot. This latter development will particularly hit hard those original buyers in the $150,000 and under price range, which represent the bulk of “bargain buyers” living on fixed incomes.
While many industry colleagues continue to shovel the sunshine, I am here to warn that this submarket could be in for some difficult times. I know many current owners, who were shoved into $125,000, 30+ year old fixer-upper condos that may have a hard time getting a decent return on investment any time soon, if the incoming pension buyers can’t afford to pay. The current owners, in this market sector, likely don’t have the residual funds for an extensive rehab. Even if they did, they are competing with a rising inventory of newer units. What if in addition to a dwindling resale market, the current homeowners in the $150,000 and under submarket also take a hit to their own pocketbooks, if they are under public pension plans? Caveat emptor when buying this asset class. You will need to work with the right professional, buy in the right location and pay the right price to avoid substantial risk.
Second, more public pension failures would likely mean USA Federal bailouts, at least partial ones to mediate the financial sting. This is no better than the original problem and may be worse. The resulting consequence is more USA debt, further requiring the already strained USA printing presses to crank out more USDs, which means a further erosion of the currency’s value. Ecuador is on a USD economy and any significant further erosion of the USD could lead to considerations of “new currency options” in Ecuador. While President Correa is steadfast against this option, currently, for steadfast and prudent economic reasons, how long can Ecuador endure a plummeting USD, if like lemmings, USA city after USA city follows Detroit’s lead?
Lastly, any continued erosion of the USA public and/or private pension systems will make it harder to relocate, for expats who continue to play the “waiting game”. The future odds do not look favorable and time does not appear to be on the side of the retiree. If this matter gets serious enough, will the USA come looking for other retirement funding sources, such as IRAs, in order to balance the growing pension shortfall. Ridiculous? No more than my saying in Detroit’s auto “heydey” that the city was doomed to bankruptcy. If retirement funds dwindle and more and more USA residents, which currently make up the bulk of buyers in Ecuador, are financially trapped inside the USA, then Ecuador’s lifestyle market and real estate sector will suffer.
Grim, no? Not necessarily. There are still booming real estate and lifestyle submarkets within Ecuador, which are attractively valued. There is a smaller, but well capitalized, baby boomer generation USA market sector that never relied on traditional pension funding for the retirement years. More prosperous global economies such as China, Colombia, Brazil, Chile, Germany and other rising economic powerhouses are recognizing the attractiveness of Ecuador as a retirement haven and real estate investment hot spot. So, all is not lost. However, while shovelling sunshine is easy and candor can be ugly, the truth is that caution is king when making an investment in Ecuador.
Know your market. Know your real estate professional. Most importantly, know your own financial situation and don’t overreach. The global markets are volatile and prudence is advised.