Soaring Underfunded Pension Liabilities Spell Trouble Ahead

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.

Many government workers, including police officers and firefighters, may lose pension benefits.

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.

Good investing,

Mike Burnick

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Comments 8

  1. Glenn A.Melcher April 21, 2017

    Your Group is still amazing. Mr. Edelson would be proud..

    Thank You for telling us what we need to know.

    A long time Fan in Minnesota.


  2. richard ellenbogen April 21, 2017

    Your reports don’t say anything new, all of them are old ideas and information. How about some new ORIGINAL ideas in your reports.


  3. f151 April 21, 2017

    In California (as in Illinois and other states), the corruption of the Democrats that run the state is well exemplified by this report. For decades, they have given out benefits to government employees far beyond the ability of the taxpayers to pay….and the investments to perform. In return, they asked the unions to get these employees to VOTE for them….to give them THE POWER. And year after year…..on and on it went. The scam worked well……until now. Soon, the piper will demand payment……and there will be no way to pay.


  4. N. Thales April 21, 2017

    Excellent piece.


  5. Tom Fratello April 21, 2017

    The state of the California Employee Pension Fund is one of the reasons I cashed in all my California Muni Bonds. Between ridiculous growth projections for the pension funds and giving away millions to illegal alien students for tuition and millions for Eric Holder’s law firm to protect illegal aliens, not to mention hundreds of millions for High speed Rail to Nowhere I expect California to take aim at my money. But its not there any more. Sorry! You might want to mention the Cal Munit situation to your readers.


  6. Jim Benning April 21, 2017

    Hi Mike,

    Since you took over the task for Larry, we have been told of the world current events and history. Can you please get back to the real business of investing and what companies we can start following for upside investing in the short and long term. Please start naming companies with the balance sheet for success.


  7. Nels April 25, 2017

    The low rates that have propped up over-leveraged companies have also caused the returns on pension funds’ bond holdings to approach zero. The pension funds have to either go mostly to stocks, and bet the retirees’ farm on the Fed keeping stock prices high forever, or they have to hold cash or bonds and get near-zero returns.


  8. William hirshberg March 6, 2018

    how about this for a solution:

    allow states to raise a 25 cent per gallon fuel tax to be devoted to pension funding if the unions area to move to a defined contribution (or the model hybrid plan) plan for all new employees.

    unions can get a more stable pension plan states get the benefit of capping their pension liabilities going forward.