04/24/2017 - John Mauldin On The Pension Fund Crisis
“Many, perhaps most, current city and state workers simply aren’t going to get anything like the pension
benefits they have been led to expect” .. Fred Sheehan: ‘We are promised… is the haphazard refrain often encountered when the reduction of pension claims is mentioned. Promised or not, one distinguishing feature of non-federal government spending commitments stands out: only the United States has a printing press. States cannot print money. They can earn returns on their pensions’ invested assets, they can sell city hall, lay off the public works department, and tax, but an underfunded pension plan can only pay claims with dollars that exist.’ .. This list of options is actually too generous. Sell city hall? That presumes someone will buy it. Lay off the public works department? Not good for property values. Raise taxes? Right, on all the people in those houses without sewage service .. Repeat Sheehan’s last line and burn it into your brain: ‘An underfunded pension plan can only pay claims with dollars that exist.’ No one gets anything if the money isn’t there, and in a disturbing number of places it isn’t.
We know that pension plans typically have only 40–50% of their assets in equities, something like 40% in bonds, and the rest in real estate and alternative asset classes. How do you get 8% from that mix? Keeping 40% in bonds at 3% (if you’re lucky) means everything else has to make 15%. Marc Faber, who is even better at scaring people than I am, points out something that should be obvious but apparently is not: Pension plan funding ratios have been declining even as financial markets have posted impressive gains: ‘I find the deteriorating funding levels of pension funds remarkable because post-March 2009 (S&P 500 at 666) stocks around the world rebounded strongly and many markets (including the US stock market) made new highs. Furthermore, government bonds were rallying strongly after 2006 as interest rates continued to decline sharply.’
Like state and local pension obligations, US federal government pension obligations are also basically unfunded. They are expected to come from future tax revenues. Those obligations are the bulk of the over $100 trillion in unfunded liabilities that show up in the estimates of how much the United States is really in debt. That money is going to have to come from somewhere. But just as the United States will never default on its actual debt, I truly don’t believe we will default on US government pension obligations.”
