Swelling State Debt and “Pension Tidal Wave” May Engulf Economy
The housing market and the student loan bubble are not the only financial bombs set to go off.
Pension liabilities swelled drastically over the decades since they were set up, as politicians conceded greater and greater benefits to workers, and passed off the burden on taxpayers.
Investing in risky stocks, and now derivatives, these pensions have become a millstone around the necks of dozens of socialized cities and states across the country – with locales like Detroit, New Jersey and California as the worst offenders.
Irresponsible funding by local authorities was compounded by pressure from unions for state and municipality workers, and now, according to the Washington Examiner, it is threatening to create a “tidal wave” that is not only creating bankruptcies and threatening to leave pensioners stranded, but could engulf the larger economic picture as well:
Over time, elected officials came to promise workers politically popular new benefits without setting aside the money to pay for them, declared “holidays” from contributions into pension systems and changed their own accounting systems midstream to make the systems seem better funded — all just ways of passing obligations on to future taxpayers. In the process, government pension systems became one of the chief vehicles that state and local politicians used to massage their budgets.
Years of gimmicks and politically motivated benefit increases for government workers have left America’s states and municipalities with pension funds that are short at least $1.5 trillion — and possibly as much as $4 trillion if the investment returns of these funds don’t live up to expectations in coming years.
Retirement debt has even played a crucial role in high-profile government bankruptcies — including in Detroit; Stockton, California; and Central Falls, Rhode Island. Fixing the problem is proving expensive, and it won’t happen quickly in places with the worst debt.
Now we face the consequences. Our elected representatives played a deceptive game of chicken with pension funds. And now the chickens have come home to roost.
Accounting games met with political theatrics has transformed the pension situation into an all out crisis, just waiting to collapse.
The ripples of those problems could easily send shockwaves through the economy, given the enormity of pension funds like Calpers – which shockingly has at least $198 billion in unfunded liabilities – and the high risk way in which funds have been leveraged and invested.
Nationwide, the pension shortages top a minimum of $1.5 trillion, but as the Washington Examiner explain, the real number could be an unfathomable $4 trillion in unfunded liabilities given the current direction of financial markets.
A recent New York Times article highlighted the complications for major pension funds who are managed on Wall Street by major equity firms including Blackstone, KKR and the Carlyle Group – and shell out huge amounts of money in management fees, and increasingly see little in return in the Federal Reserve’s zero percent interest rate climate:
“The biggest problems facing pension funds are twofold,” said David Crane, a lecturer in public policy at Stanford University and a former special adviser to Gov. Arnold Schwarzenegger. “One is earning enough to make up for their failure to earn what they said they would earn in the past, and two is making enough in this environment to pay for new promises.”
For pension plans across the country, the issue has become political as well as financial as taxpayers are increasingly being asked to pay for public pension shortfalls. “The more that is being paid to the asset managers, the less is available for public services,” Mr. Crane said.
New Jersey may be in the news for its stunning and corrupt mismanagement of the pension problem, but these bureaucrats are hardly alone.
A pension fund for Texas teachers, the fifth largest in the nation, lost big on leveraged investments managed by KKR – showing how Wall Street managers can literally gamble with the futures of millions of Americans:
The Teacher Retirement System of Texas wanted a big win, so it put $100 million into the buyout of a Las Vegas gaming company called Station Casinos.
The company went bankrupt, and like many an unlucky jackpot-chaser, the state’s largest pension fund walked away a loser. More than $99 million of Texas teachers’ retirement money had vanished.
The fact that the current market is not performing, and hence not providing returns has made all of this so much worse.
There is no getting around the fact that socialism has fueled this problem, while bad government habits and dangerous Wall Street investments have made this into a monstrosity that won’t soon be resolved.
Best to head for high ground.
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Date: June 18th, 2015
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