Forget Puerto Rico, What About U.S. States’ Soaring Pension Debts?


Investors Business Daily Op-Ed: Debt: Yes, Puerto Rico is broke, and has declared the equivalent of bankruptcy in a federal court. But U.S. states, cities and counties have no reason to feel superior. They, too, are nearly insolvent, running deficits as soaring pension costs threaten the nation’s fiscal health, a new report says.

The Hoover study looked at 649 pension systems as of 2015. What it found was alarming. The average investment return for pensions was 2.87% for the year, while the discount rate — essentially, the expected investment return — was 7.36%. That means returns are 61% below expectations, a dismal performance to say the least.

This means that pension systems across the U.S. will have to do one of two things: Find more money to fund the expected payouts, or slash pension spending on future retirees — or some combination of the two. None of the choices is appealing.  more …

Opinion: I saw this headline while watching the made for TV movie: “Madoff”, how ironic.

I didn’t intend to watch the movie but came across it by accident. There is little difference between millions of government workers that were told their pensions were guaranteed and would provide for their retirement, and the Ponzi scheme that Bernie Madoff used to keep his phony investment company going for 40 years.

For reasons only known to the designers of these pension plans, the payout to the participants of the plans is based on them earning 7-8% – every year.

From Investopedia (here), ‘Where do Pension Funds Typically invest?’

The value of U.S. pension funds at the end of 2015 was $21.7 trillion. The funds’ managers prudently manage assets in a method meant to ensure that retirees receive promised benefits. For many years this meant that funds were limited to investing primarily in government securities, investment-grade bonds, and a small amount placed in blue-chip stocks.

Changing market conditions and the need to maintain a high rate of return have resulted in pension plan rules that allow investments in most asset classes.

It is quite simple really, the Federal Reserve experimented with $4 trillion in printed money, gave it an innocuous name (quantitative easing) and literally forced interest rates down to zero by buying yuuge amounts of bonds.

With interest rates at zero, and pension plans loaded with government bonds, the returns of most plans are nowhere near 7-8%. In some cases they were negative and many plans squeaked by with 2-3%.

After reviewing the investment results for 230 public pension plans for the last two years, Pew reported in April 2017, that despite strong recent stock market performance, the gap between liabilities (promises) and assets for those plans widened by 17 percent, to $1.4 trillion.

The plans have been heading for disaster since 2008-9:

  • Foolish plan managers with academic backgrounds
  • A new president whose Cabinet had the lowest percent of business experience – ever
  • A Federal Reserve that was willing to experiment with a money printing scheme
  • A Congress who was negligent or ignorant or both
  • A nation who forgot Godly principals (Deuteronomy 15:6).

Solution: Cut back on lavish pension promises.