Real Investment Advice
APR 26, 2018
Math is math. It does not play politics. It does not care who has enough to eat or a place to live. It barrels ahead, executing equations, no matter what. To lament math is to lament the truth.
The math locomotive that is barreling down the railroad tracks to which criminally underfunded pensions are bound is inevitably going to make things extremely messy. There are going to be a whole lot of impassioned speeches, political posturing, and chest-thumping about this over the coming years.
None of which will slow the train one bit.
It is no surprise that public pension funds are completely overwhelmed, but they still have not come to the realization that markets do not compound at an annual return of 8% annually. This has led to a continued degradation of funding levels as liabilities continue to pile up.
If the numbers above are right, the unfunded obligations of approximately $4-$5.6 trillion, depending on the estimates, would have to be set aside today such that the principal and interest would cover the program’s shortfall between tax revenues and payouts over the next 75 years.
With pension funds already wrestling with largely underfunded liabilities, the shifting demographics are further complicating funding problems.
One of the primary problems continues to be the decline in the ratio of workers per retiree as retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers.)
However, this “support ratio” is not only declining in the U.S. but also in much of the developed world. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate.
With rates pushing higher, economic growth slowing and Central Banks extracting liquidity, we are already closer to the next major bear market than not.
The next crisis won’t be secluded to just sub-prime auto loans, student loans, and commercial real estate. It will be fueled by the “run on pensions” when “fear” prevails benefits will be lost entirely.
It’s an unsolvable problem. It will happen. And it will devastate many Americans.
It is just a function of time.