The Entire Pension System Is A Ticking Time Bomb

Forewarned is forearmed: If you have the ability to cash out of your 401-K plan, you should do so now or be prepared to suffer the consequences of the most corrupted Ponzi scheme in financial market history (notwithstanding the U.S. Treasury debt scheme)

It’s been my belief that one of the primary reasons the Fed is propping up the stock market is to prevent a complete catastrophe in the nation’s pension system – both public and private. The culprit is underfunding. The underfunded of status of every single State pension fund is highly visible. However, through the magic of GAAP accounting and widespread upper management corporate fraud, most private pension funds may be even more underfunded than State funds. Pensions are crucial for those in retirement, hopefully by that point people will own their homes but their pensions pay for all of their living costs and are especially important if they haven’t managed to save much for their retirement. It’s important to consider your retirement options in conjunction with the income you will have, but the state pension system needs to be a reliable source. Planning for the future is never easy, but there are certain streams of income that should be guaranteed. This is especially true for people hoping to live out their twilight years in retirement homes or other assisted living facilities.

The pension fund “time bombs” are beginning to detonate. There are a lot of people who are worried when thinking about their possible pension troubles as there have been a lot of reports about the pension funds being at risk. While the troubles with the Chicago and Illinois public retirement funds have been widely reported, last week a $17 billion private sector “multi-employer pension pension fund” announced that many of its beneficiaries will soon incur payout cuts as high as 60%. This was not mentioned in the mainstream financial media: Central States Pension Fund payout cuts

This is what happens when payout liabilities “catch up” to an underfunded asset base.

The total size of the retirement asset market is around $18 trillion. Media attention gets focused on State pension funds, nearly all of which are significantly underfunded, this then means those that enter retirement may never actually get their state pension, but instead have to look into a company that offers low-interest loans to enjoy (or sometimes just keep afloat) when in retirement, companies similar to that of Key Equity Release, for example, are able to release some of the homes’ value to the homeowner, allowing them to have money to spend as well as being able to keep a roof over their head. Underfunded pensions are in fact becoming so dried up, one study showed that as of last year every State fund was underfunded and the cumulative amount of underfunding was $4.7 trillion: LINK. It’s probably safe to assume that corporate/private pensions are underfunded as well by at least that much.

Here’s a recent article from the Denver Post which offers a surprisingly candid assessment of the Colorado Public Employees retirement fund (PERA):

PERA’s unfunded liability rose last year (to $24.6 billion) and its state and school divisions – its largest – each finished at a funding level lower than the year before: 59.8 percent and 62.8 percent, respectively. These figures fluctuate, of course, but the funding levels for both are lower now than they were in 2010 when the system’s reforms kicked in. LINK

For the sake of argument, let’s assume that on a “macro” basis, the amount of “base case” underfunding is around 30%. This level assumes that all assets in every fund – public and private – are accurately marked to market. But this is highly unlikely. I know from an inside source at one public pension fund that the fund he helps manage has about 20% of its assets allocated to private equity funds. A significant stock market sell-off would annihilate the value of p/e investments. Then there’s illiquid real estate and derivatives holdings. In general those are “mark to model” assets which are more likely “marked to fantasy.”

If a bona fide, independently audited “mark to market” exercise were performed on all pension funds – public and private – it is likely that the “base case” true level of underfunding is more like 50% rather than the 30% I suggested above.

Again, a serious stock market sell-off would incinerate the carrying value of those asset sectors. This problem is compounded by the fact that the pension fund “hurdle rate” ROR is 7.5% – in some cases it’s still 8%. These were realistic “bogeys” when Treasury bonds were yielding a “normal” interest rate. The ZIRP policy of the Fed has destroyed the ability of pension funds to generate anywhere close to 7.5% on the fixed income portion of their assets, forcing most to overweight high risk equity bets and below investment grade fixed income assets (junk bonds, CLO’s, risky mortgage structures, etc).

“Underfunding” of a pension fund is the same dynamic as debt. To the extent that a pension fund is underfunded, it “owes” that amount of money to fund. But underfunding is worse than plain debt. It’s a Ponzi scheme. As cash payouts increase at a faster rate than cash contributions, eventually the fund hits the wall. Just ask the beneficiaries of the Central States Pension Fund mentioned above.

When the Fed loses control of its ability to keep the stock market propped up – which will happen sooner or later – the pension fund collapse in this country will be the financial equivalent of a nuclear apocalypse.

5 thoughts on “The Entire Pension System Is A Ticking Time Bomb

  1. You are dead-on right Dave and really hits home for me. I am an IT guy who quit his job working for the state of Ohio last year. One of the reasons I left was to be able to ‘cash-out’ a lump some payout from the Ohio PERS pension plan. I explained to the guys at work how once the stock market craters they will close the window on cash-outs and be forced to cut or eliminate the plan. Being engineers they understood exactly what I was saying, but sadly kind of just shrugged their shoulders.

    Just think how negative rates will impact these pension funds. People are so screwed and most have no idea the trouble which lies ahead. And the media keeps discussing inane crap like inflate-gate while ignoring stuff like this or the fact their is a potential shit storm brewing in the SPratley’s and the Middle East.

  2. This is a pretty silly article, the Pensions have been deducted and placed in investment portfolios for years. The actuaries have been carefully calculating and recalculating the requirements for years. The funds were “topped up” according to the actuarial figures.
    The problem is that it is impossible to fund for the future!
    No investment on any large scale can keep up with inflation. It is impossible.
    The whole concept of wholesale investment is ridiculous.
    An individual can by “playing” the market, perform better than inflation, but only at the expense of other investors.
    Insiders can perform better than inflation, but only at the expense of other investors.
    Had the pension funds moved their investments to be ahead of “productive industry” (i.e. to Japan, then Korea, then China etc.) they may have stayed in the rough “ball-park” of inflation, but as long as a government can create “money” (not wealth or value) out of thin air, you are screwed.
    There are only 3 ways to acquire value. Create it, Exchange “value for value” with another person, or Steal it.
    The governments neither create or exchange, but by force and fraud they steal it from the producers.
    Everything that the government has spent came from your pensions, savings and future debt.

    “Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.” — Dwight D. Eisenhower
    (He failed to mention ‘The savings of pensioners’)

    1. Value is actually harvested — from the natural world (complex carbon molecules, which comprise 97% of economic activity). Value and wealth are not created. Once harvested, we can then use our hands and technology to transform that harvested wealth somewhat, although only within the realm of possibilities offered by thermodynamic efficiency.

      Government does not “steal” wealth, and producers do not “produce” it. It is all about wealth redistribution, no matter what any Austrian economist will tell you (for example, in Peter Schiff’s book, when he argues that Able actually PRODUCED fish by catching them with a net — that must be quite a net! Hey Able, the ocean called, they’re running out of fish!!!). The private sector working in the primary industries harvests, transforms and distributes wealth from the natural world, which is then further distributed by secondary private sectors and governments.

  3. Just make sure that you as an investor keep 100% of your assets in the profitless ponzi scheme Amazon you can never go wrong.
    The sky is the limit don´t care about Walmart numbers or falling retail sales up up up here we go !!

  4. Thanks for posting that CNN article.
    Except for your site, I didn’t really see that story anywhere in the alternative financial media either.
    Scary stuff though. When pending retirees realize the scenario, I can’t imagine its going to do much to boost consumer spending.
    And if I remember the hype, these are the folks that would be driving a consumption boomlet, as they liquidated retirement assets in their golden years.
    Maybe they change that to “Tungsten years”

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