Defined Benefit Pension Plans are, in many cases, a ponzi scheme. Current assets are used to pay current claims in full in spite of insufficient funding to pay future liabilities… classic Ponzi. But unlike wall street and corporate ponzi schemes no one goes to jail here because the establishment is complicit. Everyone from government officials to union bosses are incentivized to maintain the status quo…public employees get to sleep better at night thinking they have a “retirement plan,” public legislators get to be re-elected by union membership while pretending their states are solvent and union bosses get to keep their jobs while hiding the truth from employees.
We even published a note several days ago entitled “Establishment Tries To Suppress “Dissident Actuaries” Explosive Report On Public Pensions,” which pointed out that the American Academy of Actuaries and the Society of Actuaries killed a report that would have warned about the implications of lowering long-term expected returns on pension assets. Apparently the truth was just too scary.
Bill Gross has been warning of the unintended consequences of low interest rates for years, and reiterated his concerns to Bloomberg recently:
Fund managers that have been counting on returns of 7 percent to 8 percent may need to adjust that to around 4 percent, Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said during an Aug. 5 interview on Bloomberg TV. Public pensions, including the California Public Employees’ Retirement System, the largest in the U.S., are reporting gains of less than 1 percent for the fiscal year ended June 30.
To our great surprise, certain pension funds are finally taking notice. Richard Ingram of Illinois’s largest pension fund recently announced that he would be taking another look at long-term return expectations noting that “anybody that doesn’t consider revisiting what their assumed rate of return is would be ignoring reality.” Ingram’s Illinois Teachers’ Retirement System is only 41.5% funded and currently assumes annual returns of 7.5%, down from 8% in 2014.
We decided to take a look at what would happen if all federal, state and local pension plans decided to heed the advice of Mr. Gross. As one might suspect, the results are not pleasant. We conservatively assume that public pensions are currently $2.0 trillion underfunded ($4.5 trillion of assets for $6.5 trillion of liabilities) even though we’ve seen estimates that suggest $3.5 trillion or more might be more appropriate. We then adjusted the return on asset assumption down from the 7.5% used by most pensions to the 4.0% suggested by Mr. Gross and found that true public pension underfunding could be closer to $5.5 trillion, or over 2.5x more than current estimates. Others have suggested that returns should be closer to risk-free rates which would imply an even more draconian $8.4 trillion underfunding.
While it should be a substantial overhang for the economy, no one seems to care for now, and thus, we don’t expect this issue to be addressed anytime in the near future. Certainly legislators have no incentive to address this issue now… the country’s 15 million union employees may not be so happy about supporting their political candidates if they knew their retirement plans were insolvent… much better to let the system break in 20 years then fix it with a massive tax increase and subsequent taxpayer bailout after convincing the electorate that the problem was somehow created by top earners not paying “their fair share.” After all, it’s only $23,000 per man, woman and child.
There’s a gung-ho guy at my local post office who thinks that working at the post office is just the bestest job ever with excellent benefits and blah, blah, blah. He even wears his Postal Inspector badge on his belt for everyone to see. I never even knew they had badges. Nearly every time you go in he’s talking about his retirement plans which are still a few years off. I mentioned to him once a few years back that he might want to look into the true status of pensions in the postal system. He either ignored me or it went right over his head.
The pensions, both public and private, cannot be paid with money of equal value to today’s money.
The only way to keep them looking legitimate is massive inflation that returns payments worth a fraction of what they would be worth now.
The idea of an increase in the money supply to pay our pensions and other obligations by real productive activity seems ridiculous in today’s America, certainly not something President Hillary will be pursuing or even understand that needs to be pursued.
Same with the rest of the national and public debt, the solution will end up being either outright default (less likely) or the Wiemar approach of just issuing money (more likely).
Hard times are coming, not like previous depression/recession style ones but something new that may last for decades and decades, be ready for them. I don’t see us surviving as an independent and sovereign nation as they unfold.
It’s not a math problem; it’s a crooked liberal problem. There are many variables but the solution(s) will come from TPTB crooks and will not be good to the workers or taxpayers and whatever they propose will have a treble hook attached.
Funny how the Democrats and leftists created all these lavish pension plans, without funding them, expecting almost unlimited growth to cover the cost then did everything they possibly could to prevent the growth they were counting on.
Yet every time the conversation is broached, the other guy is fucked. Long before they give those fed/state/municipal teet suckers the bad news, they’ll have squeezed the citizenry like a grape for the sixth time. I tell them, that I do talk to, due to the credit available to the general public et al that for that reason alone when it evaporates, it’ll be the reason it was all good until it wasn’t because that’s the only difference between what’s coming and what’s happened. That’s what you say when you want to have someone give you a blank look.
The biggest problem with pensions, is you need to have more working people than retirees. Right now, this is not happening. Corporations and governments are not replacing retiring workers with another person. Many departments are being told to downsize the workforce to bare minimums. As a result there are less workers contributing to the pension plan, and a good chunk of work gets let to contractors who do not pay into the system. Couple that with ZIRP, and you have a disaster in the making.
Retired? Best get prepared!!
The question never asked in this type of article is, what is a return? Talk about brainwashing. Every investment i make, i’m looking for returns in the hundreds of per cents. I’m not looking for my money to “grow”. Money doesn’t “grow”. It has to be put to use. I may have to do lots of complicated things to get a return on money, lease buildings, hire people, buy equiptment, whatever. But i need to add value, to get paid. But that’s how i get a return on investment. The idea that unlimited numbers of people can park unlimited amounts of money with managers and they can magically conjure up a return is batshit crazy. Where are the guys who add value, and are willing to pay the vig to service all that money? The financial system is a fraud. It can’t be as big as it is, and not be. It needs to be downsized, and the real economy needs to be grown. It’s not hard. It will be hard for certain people, no question. But that’s what the future holds, so better to adapt now.
And to reference the title, an unsolvable math problem, i disagree. It’s easily solvable, by using the same logic used in bankruptcy. Figure out the value of the asset, and divide it among the stakeholders. So sorry. Chumps
The term “unfunded liabilities” is code for “we took the pension contributions we were supposed to make, and used them to buy crap from companies that give us kickbacks, hope you like eating pet food.”
What do you think the reaction is going to be when the pension-grifting cops-fireman-teacher cartel suddenly comes to the Reality that they are going to get stiffed ?
THINK about it.
The math isn’t hard…it is basic = no money available for pensions
when everything is downsizing/shrinking/going bust. People do not want to face it.
Too many lies by too many liars. It’s a wonder that people cannot understand it; you would think that it’s obvious.
(1) Insurance companies invest premiums to get returns to pay claims. ZIRP = no interest returns to insurance companies = bankrupt insurance companies, no money to pay claims, no value in insurance
(2) Retirees invest savings to earn interest to pay expenses in old age. ZIRP = no interest returns to retirees = not enough income to buy luxuries / frivolities / basic living expenses, no value in consumer goods beyond food / shelter / limited clothing
(3) Pension plans invest contributions to get returns to pay pensions. ZIRP = no returns to pension funds = not enough cash flow to pay pensions and stay solvent, no value in pensions as reserves are drawn down and not replaced
ZIRP has destroyed the economy in terms of insurance policies, savings accounts, and pensions. And the banks have the nerve to install “bail-in” laws (through compliant / bought-off legislators) to keep them from recognizing the losses the financial industry and FED have made inevitable!
Damn there are some seriously stupid legislators, bankers and “regulators” out there! I wonder if all their families are immune to reality?
Anonymous, you are correct. We are entering an era in which inflation is the imperative. Quantitative Easing is the current term for the massive efforts underway to reflate the economy. The first phase, what can be called the ‘replacement’ phase, was a massive distribution of cash, attempting to cover some or most of what was vaporized in the ‘Great Recession’. Much to my surprise, it has worked well enough to keep the economy from falling into a deep, black hole-like depression.
The list and totals of all the various debts that must eventually be defaulted/bankrupted/repudiated/settled/walked away from/fought over is truly astounding. The idea that most of it, or even the majority of it could be inflated away might seem absurd — at first. However, I believe many of us might prefer that as much of the wrenching excesses as possible be paid for in loss of purchasing power rather than in blood.
It appears that the inflation phase has only begun, and will take a very long time to play out. Also, right now, a little inflation will be perceived by most as a very good thing, and as a result, there will be some good times to be had over the next extended period of years — sorry about that, doomsters everywhere! It turns out that the can is being kicked down the road much further and for much longer than most of us ever thought was possible.
I will be looking for signs that limits are being approached, things are starting to fall apart, the center not being able to hold, etc. I have been doing that for 10 years now, and have concluded that all the sound and fury we have brought to bear so far over the past ten years or so has turned out to have been focused mostly on the fraying of the edges.
Perhaps if Texas secedes from the union (as it has a right by treaty to do), that might be a strong signal that things have turned. Perhaps we will see a cataclysmic stock market crash at some point in the future. Perhaps…
In the meantime, life as we know it goes on…