"America’s 'Silent' $6 Trillion Crisis"
by Brian Maher
"America’s silent crisis is no longer… silent. MarketWatch columnist Jeff Reeves has warned that “collapsing pensions will fuel America’s next financial crisis.” “This is not a distant concern,” he adds, “but a system already in crisis.”
By some estimates, America’s public pensions alone are sunk in a $6 trillion abyss. According to the Federal Reserve, pensions - public and private combined - were roughly 27% underfunded as of last year. Meantime, vast hordes of pensioners are entering or approaching retirement. Come at the dilemma from any angle... and you come upon a labyrinth.
How has the American pension come to such a sad pass? As far as public pensions run, the answer is close by. Daily Reckoning contributor Charles Hugh Smith: "Corrupt politicos promised the moon to public employees, and now the fiscal chickens of insolvency are coming home to roost. “But I don’t have a pension,” comes your response. “This doesn’t concern me.” Ah, but have another guess - at least if you swear off your taxes in these United States. As the late Canadian Prime Minister Mackenzie King styled it: “The politician's promises of yesterday are the taxes of today.”
Zero Hedge’s pseudonymous Tyler Durden: "Funds collected from taxpaying Americans will be spent to satisfy the ridiculous retirement promises and obligations made over the past few decades, and while the immediate recipients of the funds, i.e., those looking at near-term retirement, will be made whole, everyone else, i.e., taxpayers, will lose."
Just so. It is an iron law of nature, second only perhaps to gravity: Politicians promise… taxpayers pay. And let us add our own corollary: The better the politician… the bigger the promises… and the larger the bill.
Most public pension systems were built upon this rosy-dawn assumption: Their investments would yield a handsome 7.5% annual return. Once upon a time, that may have been realistic. But that was before the 2008 financial crisis… before the Federal Reserve opened its war on savers… and bonds still paid a handsome yield.
Consider… The average public pension plan worked an average gain of 2–4% by 2015. It returned just 0.6% in 2016, according to Bloomberg. 2017 saw an upswing. But according to the Center for Retirement Research: "Even if these plans attain their Pollyannaish 7.5% returns over the next few years... they’ll still be only 73% funded by 2021."
Howard Marks, co-founder and co-chairman of Oaktree Capital Group: "If you walked into a pension fund today which had no investments, and you were given a pile of cash and you invested today intelligently, prudently, but not shrinking from risk, I think you could expect to make something in the vicinity of 5% in the coming years from today."
A highly technical term describes the business… and we apologize if it sends you scurrying for the dictionary: Insolvency.
Briefly turn your attention to the Golden State, for example… California pins its hopes on that pie-in-sky 7.5% annual return. But the state’s pension planners put returns over the next decade at barely 6% a year. 6%, 7% - what’s the difference? From one year to the next, possibly little. But repeat it every year... and the meaning of compounding negative returns eventually becomes clear enough. And these calculations - as far as we understand - do not account for a market downturn.
California’s pension fund lost some $100 billion in the Great Recession. It never fully recovered. What if it happens again?
Smith: "The 2008–09 global financial meltdown was a taste of the reality facing public pension programs: Once annual returns slip from 7% annually to minus 7% annually, the pension plans are soon insolvent."
California is by no means alone. The great state of Illinois, for example, risks sinking into a $130 billion “death spiral,” as Ted Dabrowski of the Illinois Policy Institute describes it.
Meantime, jilted pensioners can generate a good deal of hullabaloo. And jilted pensioners vote. Do you think Uncle Samuel will let the politically strategic states of California and Illinois — with their combined 75 electoral votes - go scratching? And who will he hand the bill to? Consult the nearest mirror… and there you will find your sorrowful answer.
The problems are not limited to California or Illinois, of course. From Portland to Portland, Lake Superior to the Mexican gulf… American pensions are wrecked upon the rocks of actuarial fact.
Illinois Gov. Bruce Rauner has warned that the state’s pension crisis is driving his beloved Land of Lincoln into “banana republic” territory. Of course, the good governor’s mouth ran away with him here. After all... Who would compare the venerable, eminently worthy banana republic… to Illinois?
Below, Nilus Mattive - author of "The Income Bible" - shows you why he believes the pension crisis is “the biggest risk to the U.S. financial system right now.” But he also reveals his three-part “pension crisis shield” to protect you. Read on."
"The Coming Pension Crisis"
By Nilus Mattive
"If you asked me what I consider to be the biggest risk to the U.S. financial system right now, I wouldn’t say misguided monetary policy, the worsening state of Social Security and Medicare, mounting deficits in Washington, or even the student loan bubble. Make no mistake: I am concerned about all of those things. But do you know what scares me the most? The state of pension systems in this country. And even if you aren’t part of a pension plan, you are still likely to be affected. Maybe a lot. You’ll see why shortly.
In a nutshell, even despite the massive stock market rally we’ve had for the past several years, many defined benefit pension plans remain woefully underfunded. I’m talking about millions and millions of retirement promises about to collapse under the weight of cold logic and uncaring math.
Just as a start, Bloomberg says 43 states saw their funding levels WORSEN in 2016 (the latest year for which comprehensive data is currently available).
Here’s more from that report: "New Jersey, Kentucky and Illinois continue to lose ground and now have only about one third of the money they need to pay retirement benefits. And three states had double-digit declines in their pension funding ratios in the past year: Colorado, Oregon and Minnesota - though some of this can be attributed to actuarial changes in the way pension liabilities are calculated. Some of the other most problematic state plans include Connecticut (44.1% of promised benefits) and Pennsylvania (52.6%), where my dad currently collects a pension.
Meanwhile, what about private pension plans, especially those being run by publicly-traded companies? Many are also underfunded. Problems are especially bad at so-called multiemployer pension plans.
As a recent article from The New York Times explains it: "According to Boston College’s Center for Retirement Research, the nation’s 1,400 multiemployer plans are facing a $553 billion ‘hole’ of unfunded liabilities, meaning they don’t have sufficient assets to cover what they owe workers. About a fourth of these plans are in the so-called ‘red zone,’ where insolvency is more imminent, potentially within the next 10 to 20 years. Even some large individual corporate plans remain deeply troubled. General Electric, for example, has a shortfall of roughly $30 billion."
Stock market volatility is now a risk to many pension plans than it was in the past because more funds have allocated larger portions of their money to equities as a way to make up for lost time.
What if the market crashes? So the choices are pretty simple… In the case of public plans, promised benefits will either have to get cut or taxpayers will have to bear the burden. In the case of private plans, it’s the same basic idea. Some companies - including public ones - will take big hits and many corporate plans will ultimately fail. Millions of additional workers will get shafted in one way or another.
Do you have one of these types of pensions? Whether you answer “yes” or “no,” the problem will likely affect you. The ripple effects of this whole situation are a potential national crisis that cannot be brushed aside. At the end of the day, at least some of this is going to hit taxpayers.
Do you live in a state or municipality with a struggling pension plan? Odds are good you’ll end up paying for the promises made by your local politicians over the last several decades. It also fairly likely that the federal government will end up involved in many of these blowups down the line. That will essentially make all U.S. taxpayers somewhat responsible for those same irresponsible decisions.
We may even end up footing the bill for some of the failing PRIVATE pension plans. In fact, according to The New York Times, this is already being discussed in Congress. A committee is exploring possible taxpayer-funded bailouts of 200 different private pension plans despite very reasonable arguments that there are many dangers in doing so.
But I’m not the only one concerned about the looming pension crisis... Buried far down on page 21 of the 2014 Berkshire Hathaway annual shareholder letter was an important warning from Warren Buffett: "Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford.
Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans. During the next decade, you will read a lot of news - bad news - about public pension plans."
In the case of public pension plans, Buffett is absolutely right about both the cause - inept lawmakers making promises in a vacuum - and the future effects - financial pain for millions. Plus, once you add in the additional problems at many private pension plans, the overall impact grows exponentially. So I think it’s absolutely crucial that you understand a few things about this smoldering fire as soon as possible…
First, if you are collecting a pension - or you expect to in the future - this situation could dramatically affect your comfort in retirement. My father spent his entire adult life as a state worker. And I have other friends and family members who are also counting on retirement promises made by various politicians. I also know plenty of people who collect checks from private pension plans. My message to all of them is the same: Hope for the best, but plan for the worst."