Pension Fund Crisis
It is my prediction that many entities will have even more difficulty than what they currently are experiencing funding their pension plans when USAPonzi implodes and the Government takes the necessary steps to get to a sustainable fiscal model. This is due to the fact that the USAPonzi asset price inflator will have to go away. It has long been the contention of financial advisors that one needs to be in the equity markets rather than fixed income because the historical returns in the stock market are higher than the more conservative and stable bond market. I hope that this website demonstrates that this has been true for the last half century at least in part because of the systemic asset price inflation (see Inflation-A Byproduct of USAPonzi) induced by USAPonzi.
Why is this a problem for Pension funds?
Pension funds must make assumptions as to the returns that they can earn on the investments that they hold to grow the value of their assets and therefore to be able to pay their pensioners. Many pension plans are assuming they can achieve 7-8% returns on their invested capital and to achieve this are investing more in stocks than in bonds since bond yields have been reduced. However I contend that some (maybe even a lot) of the returns in the stock market over the last several decades has been created by the USAPonzi asset price inflator of 5%. When this goes away the returns for the stock market will more closely track the fixed income returns of the bond market.
As a result the state and local governments and other entities with pension funds will be forced to reduce the discount rates on their pension funds and therefore will have to increase their contributions into the funds. If these pension plans use a 60/40 stock to bond mix to achieve their returns then a 5% lower return on their stock holdings would mean about a 3% reduction on their total return. So their expected return might be on the order of 4-5% rather than the current expected return of 7-8%. Of course if they have more than 60% equity assets then their expected returns would drop even more.
As we know, many state and local governments currently have significant underfunding of their pension funds but this will be exaggerated when USAPonzi implodes since its implicit asset price inflator will vanish. But this may not be the biggest problem! The equity holdings in their current assets will likely drop by 1/3 or 1/2 or more if GDP contracts as much as my analysis (U.S. "Real" GDP) suggests. On the other side of the holdings in these trust funds, the bond values could take a hit as well since interest rates are likely to increase with the implosion of USAPonzi.
The Federal Government has no Trust funds
Most state and local governments and other entities at least have trust funds. The Federal Government does not have any trust funds, we just see the reflection of our entitlement trust funds on the IOU/IOME (Intragovernmental Holdings) postings to our Federal Debt ledger and the virtual debt posted to our Federal Obligation ledger as the present value of our Unfunded Liabilities.
State and Local Government Budgets
As is well known, many state and local governments are already in budget, deficit, and debt crises but the implosion of USAPonzi will only make that problem more severe. Several cities (most notably Detroit) have already come to the end of their rope but this will likely push several more over the edge when USAPonzi implodes.
Next Page: Endowment Fund Crisis