Public Pension Plans: Boom And Bubble Forever Or Bust
WEDNESDAY, JUNE 11, 2014 AT 1:28AM
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Public pension plans of states and cities have been in a heap of trouble for years. Promises of juicy pensions after a relatively short time on the job, with many decades of life expectancy remaining, are easy for politicians to make and buy votes with, and for unions to demand to please their membership. But they’re a tad expensive to live up to. Some have been involved in bankruptcies of their municipalities, including those of Detroit. Others are headed that way.
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The best-case scenario, which is also the base scenario, assumes return on investment is 7.7% for all plan assets combined, for all years to come.
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Assuming the unlikely scenario of an eternal return of 7.7% annually, some of these pension funds are in worse trouble than others. A small coterie, like the Louisiana State Parochial Employees fund, is funded over 100%. But most plans are in trouble. Some of the worst sinners: Alaska Teachers with a funded ratio of 47.9%, Connecticut SERS (41.2%), Illinois Teachers (40.6%), Chicago Municipal employees (37.0%), Illinois SERS (34.2%), Chicago Police (30.9%), or Kentucky ERS (25.8%). Some of the sinners are relatively small plans, but several are large, such as the Illinois SERS, Illinois Teachers, and Connecticut SERS. If markets were allowed to swoon, these babies would be wiped out.
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And even that miracle, combined with the other miracle, a 7.7% return for all years to come, won’t be enough: it would still leave plans $1.1 trillion underfunded. Alas, if the rate of return drops to 5%, the hole will increase to $3.0 trillion, and plans would only be 50% funded. And at a rate of return of 4.0%, unfunded liabilities would jump to $3.8 trillion, and numerous plans would simply….
Reality is too ugly to contemplate. So now the hope is that the new rules – accounting for stock market surges in the year in which they occur – will trigger big gains immediately and drive up the funded ratios. Better not even think about the possibility that the stock market might stumble from current bubble highs or that a soupçon of chaos in the bond market would slam junk bonds and trigger a wave of defaults.
What these pension plans need in order to be there in the future, the report suggests, is a booming economy year after year and endlessly inflating asset bubbles. Otherwise, forget it.
Wiping out in one fell swoop six years of carefully orchestrated propaganda, St. Louis Fed President James Bullard admitted that the Fed had dropped the ball during the prior bubble that blew up the financial system, and that it’s dropping the ball again during the current bubble.
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So what does the average schmoe do?
Plan for pension defaults. Save in commodities.
Does anyone really believe in 7+% returns forever?
In war movies, you always hear “get small in your hole”. I think that advice is good for fiscal crisis.
Always live modestly. Save in commodities. No “bad” debt; very little “good” debt.
I’m not sure that IRA / 401k is a panacea. I’m in it big time, but the politicians and bureaucrats must be looking at that pot of wealth longingly.
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