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


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2017 Sep 20, 4:44pm   17,510 views  57 comments

by Blurtman   ➕follow (2)   💰tip   ignore  

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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10   socal2   2017 Sep 20, 6:30pm  

I've been dealing with this issue for over a decade since I work on public sector water projects. Infrastructure is going to shit because more and more of our tax dollars are going to gold plated pensions. It is a total corruption feedback loop of our tax dollars being funneled off to unions and government workers who in turn support Democrats to keep their gravy train going - while our city services are cut and our taxes go up.

It is the #1 reason why I am not a Democrat.

This is a good site about this issue:
http://www.pensiontsunami.com/
Here is a good site showing the compensation of California government workers. Next time you hear a Democrat moron or union goon pretending that our bloated government bureaucracy is underpaid or their pensions aren't outrageous - just plug in their names.
http://transparentcalifornia.com/
There is no way these cities are going to dig out of this financial mess without trimming pensions. Vallejo filed for bankruptcy and ended up raising taxes, reducing services and shafting bond holders, while the government workers didn't have to give up a thing. Guess what? Vallejo is facing bankruptcy again.

Hopefully the California Supreme Court will rule the right way on the Marin case. This case could break the "California Rule" where pensions are enshrined in our State Constitution.
http://www.latimes.com/local/lanow/la-me-ln-court-pension-20161122-story.html
11   Strategist   2017 Sep 20, 6:33pm  

WookieMan says
Families making 30-50k a year aren't paying the pensions of anyone in IL. If they have kids they're likely not paying any state income tax and if they are the amount is negligible in the big picture, probably under $500 annually. I paid about $7k last year in IL income taxes. I know of at least 4 close friends or family members that pay close to the same amount that have left the state. Not just across the border, straight up went long distance and no where near the region. So complete and total tax dollar loss for IL.


When your friends left the state, they left the Illinois bills for you to pay. Just wait till you get the property tax bill.
12   socal2   2017 Sep 20, 6:35pm  

WookieMan says
Families making 30-50k a year aren't paying the pensions of anyone in IL. If


Sure they are if they pay property tax.

This story is heartbreaking on what the Democrats in Illinois are doing to the people. Can't believe how bad they are getting raped in property taxes.

"How Property Taxes are Crushing Illinois Middle Class"
https://www.illinoispolicy.org/story/home-is-where-the-hurt-is-how-property-taxes-are-crushing-illinois-middle-class/
The Democrats would do this in a heartbeat to us in California if it weren't for Prop 13.
13   FortWayne   2017 Sep 20, 6:49pm  

Prop 13 is free people's last stand against government corruption.
14   Strategist   2017 Sep 20, 6:55pm  

socal2 says
The Democrats would do this in a heartbeat to us in California if it weren't for Prop 13.


California needs a prop 13 for government pensions. The insane pensions are screwing up everything. We moved from OC to North San Diego County last year, and all my utility bills are 4 fold higher. Our water bill alone is $400+ per month. This is fucking insane.
15   WookieMan   2017 Sep 20, 6:57pm  

Strategist says

When your friends left the state, they left the Illinois bills for you to pay. Just wait till you get the property tax bill.

I'd usually be with you on this. I bought my current primary residence for $80-90k (sorry for the range, but not going to dox myself). Appealed the taxes immediately, which surprisingly the people at the county were VERY helpful with. I don't have a mansion by any stretch of the imagination. But for IL I'll take my $2,800/year property taxes. I have a house big enough for 4 of us, a good sized yard and an inground pool. Again, without doxing myself, I live in a community where the average sales price is $220k roughly and the average homeowner is paying about $6k in property taxes, probably slightly higher. So long story short, I ain't paying for shit here compared to most of my neighbors. I do choose to live more frugally than others, housing wise, because I'm looking to retire at 52-55 years old.

socal2 says
Sure they are if they pay property tax.


You are correct. I was more talking about the income tax. I don't have a link, but I'm pretty sure a pretty good chunk of just the income taxes IL residents are paying, are for pensions. I vaguely recall something like 25% of the income taxes are going towards pensions and I think I could be low on that. Property taxes of course are going to the local school district. I do believe IMRF is pretty much fully funded, but I believe that's a non-union represented fund/group. So there's that factoid.
16   Strategist   2017 Sep 20, 9:02pm  

socal2 says
California has some of the highest combined taxes in the country, but also the highest poverty rate, worst performing schools, and the worst infrastructure.
http://www.politifact.com/california/statements/2017/jul/11/travis-allen/mostly-true-californias-taxes-among-highest-nation/

How does that happen?

Could it be...........wait for it............we have total Democrat political control that pisses too much of our tax dollars away on gold plated government salaries and pensions instead of providing us good schools, services and infrastructure?


Welcome to the Socialist Republic of California. No more need to be said.
17   HEY YOU   2017 Sep 20, 9:42pm  

So how many Rep/Con/Nazis are on their big govt. subsidies & hand outs?
"their" as in Republicans are in charge.
It's all on them if things don't change or get worse.
18   FortWayne   2017 Sep 20, 11:58pm  

I couldn't have said it better if I tried

Strategist says
socal2 says
California has some of the highest combined taxes in the country, but also the highest poverty rate, worst performing schools, and the worst infrastructure.
http://www.politifact.com/california/statements/2017/jul/11/travis-allen/mostly-true-californias-taxes-among-highest-nation/

How does that happen?

Could it be...........wait for it............we have total Democrat political control that pisses too much of our tax dollars away on gold plated government salaries and pensions instead of providing us good schools, services and infrastructure?


Welcome to the Socialist Republic of California. No more need to be said.
19   zzyzzx   2017 Sep 21, 9:06am  

Government employees should get the same shitty 401K's that everyone else gets. Complete with a 50% match on the first 6% of your money that you put in.
20   Blurtman   2017 Sep 21, 9:15am  

A few options: tax payers continue to bend over and vote with their feet but the ultimate receptacle is the bankrupt Pension Benefit Guarantee Corporatiom. (soumd of toilet flushing).
21   HEY YOU   2017 Sep 21, 9:29am  

As long as retired Republicans pensions fall from $2000 to $200/month,I'm happy.
As long as those Republicans that aren't retired realize they may not have a pension in the future,I'm happy.
How many Rep/Con/Nazis are waiting to receive their big govt. pension after working in govt. jobs,all their lives?
If they can't be great free market entrepreneurial successes,they deserve nothing.
SOCIALISTS living on someone else's tax dollar because they are failures.
22   MisdemeanorRebel   2017 Sep 21, 10:17am  

Blurtman says


Walmart Removed the Greeter Position to save money.
23   Heraclitusstudent   2017 Sep 21, 12:19pm  

Blurtman says
Now you have an unfunded liability in the range of $7–8 trillion.

You don't get it. Just add that to the national debt. $20 trillions or 27... who cares.... It's just a meaningless statistic.
24   FortWayne   2017 Sep 21, 12:22pm  

Printing press money debt = inflation
Zimbabwe taught the world that lesson, painfully.

Heraclitusstudent says
Blurtman says
Now you have an unfunded liability in the range of $7–8 trillion.

You don't get it. Just add that to the national debt. $20 trillions or 27... who cares.... It's just a meaningless statistic.
25   Ernie   2017 Sep 21, 12:23pm  

socal2 says
Democrats are willing to let cities burn to the ground with bankruptcy, crime, shitty schools and failing infrastructure to keep their corruption feedback loop going with the unions and public sector bureaucracy.

It is wrong to assume that only D's do that. R's are no different. Ft Worth in TX is R but they have the same problems: http://dfw.cbslocal.com/video/3707215-fort-worth-facing-pension-crisis/
Pensions are used to buy votes from public unions and both parties do that.
26   socal2   2017 Sep 21, 1:26pm  

drBu says
It is wrong to assume that only D's do that. R's are no different. Ft Worth in TX is R but they have the same problems: http://dfw.cbslocal.com/video/3707215-fort-worth-facing-pension-crisis/
Pensions are used to buy votes from public unions and both parties do that.


I believe several of previous Fort Worth mayors and City Councils were Democrats. You can point to a few odd examples, but it is a stretch to believe that Republicans are in the pockets of public sector unions. All the right-to-work states are run by Republicans. Unions declared war against Scott Walker for his union reforms a few years ago. All the states with the worst pension liabilities (Illinois, Connecticut, California, Washington, Oregon) are as blue as the sky.
27   socal2   2017 Sep 21, 2:30pm  

And simply looking at funding percents doesn't paint the whole picture.

A city or state can fully fund their pensions if they are willing to tax the shit out of the people and provide very little quality services like new infrastructure, good schools, business friendly climates, affordability.....
28   anonymous   2017 Sep 21, 2:58pm  

liberals relationship with government:

- give me, give me, give me, tax the rich, tax the rich, tax the rich, give me, give me, give me... strangle the "greedy" private sector, give government golden pensions. Very much like North Korea, where government is the monopoly and those closer to the center have all the money and power, while private sector is dead turned into a local ant colony of slaves that serve the government.

yep, that liberal stupidity knows no end.
29   Strategist   2017 Sep 21, 6:38pm  

anonymous says
- give me, give me, give me, tax the rich, tax the rich, tax the rich, give me, give me, give me... strangle the "greedy" private sector, give government golden pensions. Very much like North Korea, where government is the monopoly and those closer to the center have all the money and power, while private sector is dead turned into a local ant colony of slaves that serve the government.

yep, that liberal stupidity knows no end.


And yet many liberals are communists. All this evidence showing communism has never ever worked and always results in disasters, and yet we have liberals who think communism is the greatest thing since sliced bread.
I met someone a couple of months ago who visited Cuba, and thought it was a wonderful place with happy people. He also said he does not want to live there. LOL. They have no freedoms.no elected governments, no opportunities, cannot travel, and not even access to the internet. Great place to visit just to see how people lived in the 50's, but that's about it.
30   anonymous   2017 Sep 21, 8:08pm  

socal2 says
All the right-to-work states are run by Republicans.


And they all have the lowest standards of living in the nation and have the greatest dependency on Federal aid have the highest rate of unmarried teen pregnancy.
31   marcus   2017 Sep 23, 12:58pm  

http://www.publicsectorinc.org/2014/10/why-pension-plans-are-left-unfunded/

The biggest joke of the costing and funding process is the so-called annual required contribution (ARC) that the actuarial valuation is supposed to determine. In reality, there is nothing “required” about the ARC – most jurisdictions can contribute absolutely nothing and face no legal repercussions, at least in the short run. And when state and local governments don’t make the ARC, they rarely look at, let alone disclose, the long-term cost of postponing the payment and how much more expensive the benefits become as a result. Just look at Illinois, New Jersey and Pennsylvania, which owe some $300 billion in unfunded liabilities between them, or at the sad condition of once glorious cities like Philadelphia, Chicago and Detroit, teetering towards or already in bankruptcy.

Until after the last financial crisis, some public pension plans assumed annual returns as high as 9 percent, thus significantly reducing the money governments had to contribute. Investment fees and other expenses are commonly swept under the rug when projecting and reporting on performance benchmarks. Pay raises and COLAs are routinely underestimated.

Funding schedules mapped out with these flawed assumptions are further rigged to fail. They often promise graduated payments and push the full-funding deadline decades out, thus eroding overall investment returns and inflating costs.

:
:

When all other avenues for postponement are exhausted, states pull a particularly entertaining smoke-and-mirrors trick: they work around the actuaries and legislate their own required contribution.

In Massachusetts, the dollar values of state contributions for years ahead are written directly into the pension law without reference to the ARC. Not surprisingly, those values are well below the actuarial determination or what the law mandates for municipalities and other pension systems in the commonwealth. Illinois has repeatedly declared “pension holidays” for itself and helped bury Chicago deeper into its current fiscal hole by keeping pension-payment requirements for the city way below what they should have been.

I think it's probably true that some republican politicians are more likely to laugh as they postpone funding to pension funds, knowing full well that they can blame the greedy workers for expecting compensation promises to be kept.

Interesting that only when California had had simultaneous governor and legislature controlled by democrats that they started to seriously address pensions fund problems.

32   Strategist   2017 Nov 1, 8:38pm  

oil says


Yes, people need to be fed, medicated, clothed, and sheltered. They need to do it themselves. You can't expect the government to change your diapers.
33   RWSGFY   2017 Nov 2, 10:48am  

Strategist says
That applies to the Russians and the Chinese, but not to the North Koreans as they do not have the capacity to destroy us just now. The idea is to never let them have that capability.
What's your solution?


Clamp down on Russia hard. These are the fucks who're enabling little Kim. All this new nukes and missiles he sudenly unveiled are coming from them. Fucking Russians need to be put into the world of economic pain. Pronto.
34   WineHorror   2017 Nov 2, 11:23am  

anon_c1f03 says
The government is not your daddy. The government is not your mommy.


But the government should pick and choose winners and losers?
35   Ceffer   2017 Nov 2, 11:39am  

Roll back the graft. Pro rate the pensions according to funding, not political promises made by pols to unions and other pols drooling over tax plunder.
36   anonymous   2017 Nov 2, 11:52am  

That government is best which governs least.
37   Strategist   2017 Nov 2, 12:32pm  

oil says
http://nypost.com/2014/01/05/us-is-the-greatest-threat-to-world-peace-poll/


LOL. Means nothing. 100% of Muslims think Islam is a peaceful religion. How right are they?
38   anonymous   2017 Nov 2, 7:08pm  

If Muslims are maniacs who kill people for no reason, why aren't they bombing Chile?
39   Strategist   2017 Nov 2, 7:12pm  

anon_acf85 says
If Muslims are maniacs who kill people for no reason, why aren't they bombing Chile?


Because all Muslims are not maniacs. But all of Islam is violent and dangerous.
40   anonymous   2017 Nov 2, 7:24pm  

Do Muslims give the campaign donations and cushy job promises to the elected officials? Do Muslims call for Middle Eastern wars and run Wall Street, Hollywood, and the media?

Know your real enemy.
41   Strategist   2017 Nov 2, 7:31pm  

anon_acf85 says
Do Muslims give the campaign donations and cushy job promises to the elected officials? Do Muslims call for Middle Eastern wars and run Wall Street, Hollywood, and the media?

Know your real enemy.


"Do Muslims call for Middle Eastern wars"
Duh! Why would they call for wars against their own countries?

"Wall Street, Hollywood, and the media?"
No, they are too stupid to run businesses. They run mosques and terror organizations.

Why don't you tell me Who calls for Jihad?
Who promotes the terrorism we encounter?
Who demand the implications of horrible sharia laws?
42   anonymous   2017 Nov 2, 7:48pm  

The reason they over here is because we are over there.
43   curious2   2017 Nov 2, 7:48pm  

Strategist says
anon_acf85 says
Do Muslims give the campaign donations and cushy job promises to the elected officials? Do Muslims call for Middle Eastern wars and run Wall Street, Hollywood, and the media?

Know your real enemy.


"Do Muslims call for Middle Eastern wars"
Duh! Why would they call for wars against their own countries?


First two questions:

"How Saudi Arabia captured Washington"

"Hillary Clinton, The Podesta Group And The Saudi Regime"

See also Nixon's disastrous deals with KSA, switching the USD from the gold standard to the Petrodollar standard.

Last question:

Because Islam is a word that means literally submission, and a plan designed, fabricated, and optimized to conquer and subjugate as many people as possible. Islam hates people. In Muslim countries, the Muslims-in-Charge use Islam to conquer their enemies and to subjugate everyone, e.g. KSA Petrodollars to crush the Shia heresy based in Iran. In non-Muslim countries, Muslims (e.g. Linda Sarsour) fool useful idiots into spreading Islam. Combining the two, you get MSM mass hypnosis misleading useful idiots to mistake KSA for an ally, and to obsess over Iran as 'the' enemy in the Muslim world (when in fact the real enemy in that part of the world is Islam itself).
44   anonymous   2017 Nov 2, 7:52pm  

Strange how Muslims weren't bombing the USA in 1930.
45   curious2   2017 Nov 2, 7:53pm  

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.
46   Strategist   2017 Nov 2, 7:57pm  

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.
47   anonymous   2017 Nov 2, 8:11pm  

One wonders if US wars lead to terrorism, refugees, debt, and tyranny.
48   Strategist   2017 Nov 2, 8:20pm  

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.
49   Strategist   2017 Nov 2, 8:23pm  

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.

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