As if the world needed another dangerous and volatile factor in the mix of looming economic downturn.
Unfunded liabilities for pensions have been a problem for a while now, but as investors continue to face fleeting returns, many states and cities are facing the music… and when it stops, there won’t be enough money to go around.
Someone will lose their savings, their standard of living, their retirement and maybe their future. Others will be taxed to death to clean up the mess of the many places were the system is cracked, fissured and falling apart.
According to FT:
The US public pension system has developed a $3.4tn funding hole that will pile pressure on cities and states to cut spending or raise taxes to avoid Detroit-style bankruptcies.
[…] the collective funding shortfall of US public pension funds is three times larger than official figures showed, and is getting bigger.
Devin Nunes, a US Republican congressman, said: “It has been clear for years thatmany cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks.”
Mr Nunes… added: “When these pension funds go insolvent, they will create problems so disastrous that the fund officials assume the federal government will have to bail them out.”
Large pension shortfalls have already played a role in driving several US cities, including Detroit in Michigan and San Bernardino in California, to file for bankruptcy. The fear is other cities will soon become insolvent due to the size of their pension deficits.
The inevitable result is, of course, tax increases and spending cuts – potentially on important and vital services.
Regardless, it is likely that many more governments will face bankruptcy and difficult choices… with the prevailing wisdom to kick the can down the road and pretend that funds will make extraordinary returns in the years to come despite continue misuse in schemes leveraging pensions in various funds and schemes….
Olivia Mitchell, a professor at the Wharton School at the University of Pennsylvania said: “I do believe that US cities and towns will continue to suffer, and there will be additional bankruptcies following the examples of Detroit,” she said.
Mr Rauh’s study claims the “true extent” of funding problems in US public pension system has been obscured because plans calculate both their costs and liabilities on the assumption they will achieve returns of between 7 and 8 per cent a year. The academic believes this rate is “wildly optimistic and unlikely to be achieved”.
In a perfect world, all this stuff would have been responsibly managed, and the returns would be modest and predictable.
But in the real world, pension managers have run with Wall Street sharks; they invest in derivatives together, and when things turn upside down (as they tend to do), it isn’t the fund manager who is out, but the diffuse and de-personalized millions have their retirement built into a dangerous system.
As negative interest rates are still trending, it is an atmosphere that ripe for disaster.
The problem is that so many are held captive by this financial system, and the lot of us will face the consequences, while the usual suspects head for the exits.
Courtesy of SHTFplan.com