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Americans Don’t Grasp The Magnitude Of The Looming Pension Tsunami That May Hit Us Within 10 Years

By Blurtman following x   2017 Sep 20, 4:44pm 4,329 views   85 comments   watch   sfw   quote     share    


Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade.

You read that right—not doubled, tripled, or quadrupled—quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe.

You will also notice in the chart that much of that change happened in 2008.

Why was that?

That's when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments.

According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”).

Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50–60% next year.

That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25%—a step in the right direction but not nearly enough.

Think About This as an Investor: How Can You Guarantee 6–7% Returns These Days?
Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of course you don’t. Yes, some strategies have a good shot at doing it, but there’s no guarantee.

And if you believe Jeremy Grantham’s seven-year forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years.

Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return—about the average for most pension funds—then that means in 30 years that $1 million will have grown to $8 billion (approximately).

Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%.

Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it.

Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is huge cuts to other needed services or with massive tax cuts to pension benefits.

The Situation Is Dire Even in the Best-Case Scenario. But What If…
The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart:

The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere.

What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all?

That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference.

But wait, it gets worse.

The graph we showed earlier stated that unfunded pension liabilities for state and local governments were $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns?

Now the admitted unfunded pension liability is $4 trillion.

But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.

We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion.

After the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues.

Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work.

We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.

It Goes Beyond a Financial Crisis. It’s a Social, Political Catastrophe
Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them.

What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep.

Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona.

This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smack down.

http://www.mauldineconomics.com/editorial/americans-dont-grasp-the-magnitude-of-the-looming-pension-tsunami-that-may/zhb#

#NoPensionForYou

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46   anonymous   ignore (null)   2017 Nov 2, 7:52pm   ↑ like (0)   ↓ dislike (1)   quote        

Strange how Muslims weren't bombing the USA in 1930.
47   curious2   ignore (1)   2017 Nov 2, 7:53pm   ↑ like (1)   ↓ dislike (0)   quote        

anon_acf85 says
Strange how Muslims weren't bombing the USA in 1930.


Duh, they didn't have Petrodollars back then. They do now. Pakistan has nuclear weapons, and is already using them for traditional Islamic extortion and terrorism, and Erdegun can take the American missiles stationed in Turkey, thus joining in the same game.

anon_acf85 says
The reason they over here is because we are over there.

Ugh. More idiocy, useful only to apologists. Read about the Islamic conquest of India, for example. Read about what's happening in the Pacific archipelagos. None of those countries ever invaded the desert land of the dead charlatan Mohamed, but they have nevertheless been conquered mercilessly by his deluded followers.
48   Strategist   ignore (1)   2017 Nov 2, 7:57pm   ↑ like (1)   ↓ dislike (0)   quote        

anon_acf85 says
The reason they over here is because we are over there.


LOL ROFL. The reason they are over here is because we let them in.
49   anonymous   ignore (null)   2017 Nov 2, 8:11pm   ↑ like (0)   ↓ dislike (0)   quote        

One wonders if US wars lead to terrorism, refugees, debt, and tyranny.
50   Strategist   ignore (1)   2017 Nov 2, 8:20pm   ↑ like (0)   ↓ dislike (0)   quote        

curious2 says
anon_acf85 says
Strange how Muslims weren't bombing the USA in 1930.


Duh, they didn't have Petrodollars back then. They do now.


They were living in tents and milking camels back then. They gained petrodollars since then, but still lack intelligence.
It's very difficult to civilize low IQ people.
51   Strategist   ignore (1)   2017 Nov 2, 8:23pm   ↑ like (0)   ↓ dislike (0)   quote        

anon_acf85 says
One wonders if US wars lead to terrorism, refugees, debt, and tyranny.


If you have to wonder, you must need a lot of help.
52   anonymous   ignore (null)   2017 Nov 2, 9:09pm   ↑ like (1)   ↓ dislike (0)   quote        

Americans think their danger is terrorists. They don’t understand the terrorists cannot take away habeas corpus, the Bill of Rights, the Constitution. The terrorists are not anything like the threat we face from our own government in the name of fighting terrorism.
53   Ceffer   ignore (1)   2017 Nov 2, 11:50pm   ↑ like (2)   ↓ dislike (0)   quote        

I think you guys are arguing with a propaganda bot.
54   anonymous   ignore (null)   2017 Nov 3, 12:03am   ↑ like (1)   ↓ dislike (0)   quote        

You know the US is doomed when Americans would rather attack those who defend freedom instead of criticizing the government that is enslaving them.
55   TwoScoopsOfDragonEnergy   ignore (1)   2017 Nov 3, 12:38am   ↑ like (0)   ↓ dislike (0)   quote        

Ceffer says
I think you guys are arguing with a propaganda bot.
Ceffer says
You know the US is doomed when Americans would rather attack those who defend freedom instead of criticizing the government that is enslaving them.


Only by investing in GPUs to mine Bitcoin, and refusing to drop down from 90 to 40 in a school zone, can America forge a bright future.

That, and buying Iraqi Dinars (that scam is STILL going). People who don't think Gold is going to $20,000/oz next week are part of the problem, or that Hitler/Stalin/Genghis Khan is right around the corner, are sheeple.

How come nobody ever brings up Timurlane anymore? "You can't vote for X, he could be the next Great Khan of the Golden Horde! He likes horses!"
56   curious2   ignore (1)   2017 Nov 3, 12:44am   ↑ like (0)   ↓ dislike (0)   quote        

Ceffer says
I think you guys are arguing with a propaganda bot.


Yes, it has posted exactly the same comments elsewhere on PatNet:

anonymous says
One wonders if US wars lead to terrorism, refugees, debt, and tyranny.


anon_acf85 says
One wonders if US wars lead to terrorism, refugees, debt, and tyranny.
57   anonymous   ignore (null)   2017 Nov 3, 2:07am   ↑ like (0)   ↓ dislike (0)   quote        

Americans think the answer to tyranny is surrender.
58   Blurtman   ignore (1)   2017 Nov 3, 3:07am   ↑ like (0)   ↓ dislike (0)   quote        

anon_c1e56 says
Americans think the answer to tyranny is surrender.


Clearly its watching This is Us and gorging Triple Caramel Chunk and half pound bacon cheeseburgers.
59   anonymous   ignore (null)   2017 Nov 3, 5:32am   ↑ like (1)   ↓ dislike (0)   quote        

A nation of sheep will beget a government of wolves.

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