Retirements for Many Americans Could Be on the Line
There’s a retirement crisis in the U.S. economy, and no one is talking about it. Don’t ignore it if you are saving for retirement.
If you are a longtime reader of Lombardi Letter, this shouldn’t be a big surprise to you. City and state pension funds across the U.S. are severely underfunded; they don’t have enough money to pay their obligations.
How badly are these funds underfunded?
According to the American Legislative Exchange Council (ALEC), which surveyed more than 280 state-administered public pension plans, the unfunded liabilities of state-administered pension funds stand at more than $6.0 trillion. (Source: “Unaccountable and Unaffordable 2017,” American Legislative Exchange Council, last accessed August 8, 2018.)
Keep in mind, this is just looking at the state level. If you include the retirement funds administered by cities, the underfunded liability amount is much higher.
Why call it a retirement crisis?
All of a sudden, retirees could be told, “You may not get the money you were promised.” Why? Because pension funds don’t have enough money. What do you think will happen then? It would have a massive impact across the board.
Solutions to the Problem Create More Problems
Looking at all this, one could ask, “Can’t we resolve this?”
Here’s the worrisome part: the solutions to the current pension problem would create more problems down the road.
For example, look at the City of Chicago’s pension fund. It is underfunded by about $28.0 billion. The city government is coming up with ideas to reduce this behemoth amount.
The solution? The city is thinking about issuing bonds at low interest rates and then using the proceeds of those bonds to invest in assets that could generate higher returns than the interest paid on those bonds.
In very simple words, Chicago is looking to get leverage—borrowing more money to generate higher returns. Don’t forget, leverage is a double-edged sword.
If things don’t go according to plan, all of a sudden Chicago’s pension fund situation could become even more dire.
Where could Chicago invest the proceeds from the sale of their bonds?
If the city invests in the stock market, it will find that stocks are severely overvalued relative to the historical averages.
Would the city buy bonds? Interest rates are going higher. With this, the bond market is setting up to disappoint. Remember, bonds decline in value as interest rates go higher.
Don’t Ignore the Retirement Crisis
Dear reader, you won’t hear about the retirement crisis much in the mainstream media. This could be because everyone is too busy talking about skyrocketing stock values.
If the conditions of retirement funds continue to get worse, I wonder if the U.S. government will come in and bail out the future retirees. It might have to, or else the U.S. economy could face severe headwinds.
But if the U.S. government bails out pension funds, it will have to borrow more money. It already has a massive debt load.
I will reiterate what I said earlier: follow the retirement crisis closely. It’s definitely not a short-term problem; it could create a lot of troubles in the long term.