Larry Edelson and I have talked extensively about enormous underfunded pension liabilities and their possible consequences.
Case in point is the California Public Employees’ Retirement System (CalPERS), which manages retirement funds for 1.8 million public-sector employees and retirees totaling $315 billion.
Their board is meeting to discuss ways to minimize performance fees imposed by private equity firms, which totaled a staggering $3.4 billion since 1990.
Another measure being considered is cutting the capital allocation to these types of investments, currently estimated at 8% versus 14% a couple of years ago.
But the way I see it, these are just Band-Aid-like measures.
The fact is: In California, state worker pensions have only an estimated 65% of the funds needed to pay future benefits.
That’s right: Pensions only have about two-thirds of every dollar needed for their worker benefits!
I don’t know about you, but that stat is absolutely mind-blowing!
And as bad as that seems, it gets worse.
Those estimates are based on a lofty annual return target of 7.5%, significantly higher than the average 2016 public pension return of 1.5%.
In fact, if you do the math, the California pension is banking on returns that are 500% better than the norm.
As a comparison, the average discount rate used by corporations last year stood at 4.3%.
In fact, if public entities adjusted their discount rate down to levels used by corporate pensions, underfunding would increase by $3.5 trillion.
You read that right – a whopping $3.5 trillion shortfall!
And it’s not just CalPERS in a world of hurt …
Recent Fund of Funds data from the Federal Reserve indicated that pensions, both government and private, were underfunded by about 27% at the end of 2016 – or roughly $2.3 trillion.
Worse yet, that figure may be conservative, with some research reports estimating underfunding between $5 trillion to $6 trillion.
By themselves, these shortfalls are horrendous. But even more dumbfounding is that these soaring liabilities have come in the face of favorable market conditions.
After all, multiple rounds of quantitative easing and financial engineering propelled the S&P 500 up 260% from its 2009 low to last month’s record high.
And don’t forget a host of other pressures bearing down on pensions right now …
- Artificially low interest rates engineered by the Fed.
- Conservative investment allocations – tilted toward fixed income.
- Rising public-sector pension entitlements.
As more baby boomers retire and collect what’s owed to them, insufficient funding poses a real threat to global capital markets.
In fact, consider what might happen to pension liabilities if global equity markets made an even normal correction: Even more terrible returns.
Here’s what this means to you …
Expect to pay higher state and local taxes for fewer services in the years to come. And don’t be surprised if authorities of all shapes and sizes – from local governments to national agencies – up the ante to get ahold of your assets any way they can.
So, please, make sure you make the necessary adjustments now to preserve and grow your wealth. This includes staying away from U.S. Treasuries, buying blue-chip companies on dips and adding to physical gold and silver holdings when the time’s right.