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Pension Meltdown
Crunch Time for Pensions

The recent stock market declines have made the challenges facing state and local pension funds even more acute. Reuters reports:

The erosion of assets at U.S. public pension funds since last summer is raising concerns state and local governments will have to increase their contributions to the funds to make up for shortfalls, leaving less for public services.

U.S. public pension funds count on returns of 7 percent to 8 percent a year to meet their liabilities, an ambitious target in a low interest rate environment.

“The contributions have gone up very substantially and we are headed toward them going up more again, creating really politically difficult choices,” said Donald Boyd, a state and local government expert at the Nelson A. Rockefeller Institute in Albany.

Though this year has, so far, had a bad start, prices have generally trended upward since the financial crisis. But that hasn’t been enough to shore up the nation’s over-promised and under-funded pension funds. Sooner or later, we are going to see another recession—where stock prices fall and cities and states lose revenue as their tax income falls. When that comes, expect a severe crunch: There won’t be enough money to maintain vital services and keep the pension funds going. Many cities and states will become increasingly difficult to govern as various interests compete for a declining share of public resources.

The deterioration in the financial health of so many American cities represents just one of the many ways in which an irresponsible political class is burning through the nation’s assets. The reckoning will come, and it will be ugly.

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  • Jim__L

    One again xkcd cleverly demonstrates the limitations of a technical concept like compound interest…

    (By the way, if you hover over the comic you usually get an extra joke — in this case it’s “But Einstein said it was the most powerful force in the universe, and I take all my investment advice from flippant remarks made by theoretical physicists making small talk at parties.”)

    All this argues for more conservatism in finance. TEA Party 2016!

  • FriendlyGoat

    Net, net, traders and trading have blown up the world in many (almost all) places to the point where conservative returns on conservative lending are impossible——soooo, let’s repudiate pensions and the entire pension philosophy. No, you can’t have 7%. No, you can’t even have a relatively-safe 4%.
    You can have 100% or more if you trade equities and derivatives “right”. You can lend to credit-card borrowers at 20% if you’re a bank. You can lend at several hundred percent if you’re a payday/car title lender. But if you’re an individual or a pension fund, your bond market and central banks are going to be too busy mitigating the perpetual damage of tax cuts and excessive trading to allow what used to be “conservative” to exist at all. Lots-a-luck, y’all.

    • Suzyqpie

      ….irresponsible political class is burning through the nation’s assets….Additionally, when the Democrats are at the negotiating table with the public sector unions, no one is representing the taxpayers.

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