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Retirements in Trouble: 2 Ways to Solve Pension Crisis, But Americans Lose Both Ways Lombardi Letter 2018-05-15 13:01:07 Retirement retirements pension crisis There’s a massive pension crisis in the United States, and it's not getting a lot of attention. It could put the retirements of many Americans on the line. Here’s the full story, including two possible ways to avert this crisis. Both of them are bad for Americans. Analysis and Predictions 2018,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2018/05/iStock-644935518-150x150.jpg

Retirements in Trouble: 2 Ways to Solve Pension Crisis, But Americans Lose Both Ways

U.S. Economy - By |
Retirements In Trouble

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Many Americans’ Retirements Could Be at Risk

There’s a pension crisis in the U.S. economy. The retirements of many Americans could be on the line. Beware.

You see, as it stands, pension funds run by states and cities across the U.S. are severely underfunded.

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This is a problem because those who are close to retiring or have reached retirement age already may not get the payments they were promised; something they contributed toward all along.

Now, the big question is: “How are we going to solve this problem?”

Option #1 to Avert the Pension Crisis

One solution could be that the U.S. government steps in, bails out these pension funds, and saves the retirements of many Americans.

Mind you, the underfunded amount is immense: $6.0 trillion for the state-administered pension funds alone.

If the U.S. government steps in, it would have to borrow a lot of money to solve this pension crisis. The U.S. national debt already stands at $21.0 trillion and it is expected to go severely higher in the next decade.

This could really put a dent in the federal government’s finances. And obviously, since American taxpayers are on the hook for this debt, they could end up paying a lot more taxes.

Option #2 to Avert the Pension Crisis

There’s another solution.

The Federal Reserve Bank of Chicago came up with another solution. It’s rather scary, though.

Before going into any details, know this: Illinois pension funds are a few of the most underfunded pension funds. According to the Illinois Commission on Government Forecasting and Accountability, the state’s unfunded pension liability stood at $129.1 billion in mid-2017.

Here’s the solution: the Chicago Fed says the best option would be to impose a statewide residential property tax, which expires when the underfunded liabilities are paid off.

This is word-for-word from the Chicago Fed’s blog:

In our baseline scenario, we estimate that the tax rate required to pay off the pension debt over 30 years would be about 1%. This means that homeowners with homes worth $250,000 would pay an additional $2,500 per year in property taxes, those with homes worth $500,000 would pay an additional $5,000, and those with homes worth $1 million would pay an additional $10,000.

(Source: “How Should the State of Illinois Pay for its Unfunded Pension Liability? The Case for a Statewide Residential Property Tax,” Federal Reserve Bank of Chicago, May 7, 2018.)

Let me be very clear: it’s not just a one-time tax. They are expecting it to continue for 30 years.

Who Loses?

Dear reader, no matter how you see it, Americans are losing in this pension crisis that’s not getting much mainstream media attention. As I said earlier, many retirements could be on the line.

If the U.S. government bails out the pension funds, American taxpayers will have to pay higher taxes down the road.

If we assume what the Federal Reserve Bank of Chicago says is the right way to go, Americans lose again.

Remember, a lot of individuals rely on their homes as an asset that could be used during their retirement years. Putting extra taxes on those homes could make them unaffordable.

A $2,500 hike in property taxes (for homes valued at $250,000), could be a major outlay for many. It turns out to be $208.00 a month. For homes worth $1.0 million or more, the tax increase turns out to be over $833.00 a month.

Mark my words, the pension crisis is far from over. After the financial crisis, asset prices increased, so pension funds were able to generate some returns. If we see a crash of some sort in asset classes (it’s possible), this situation with pension funds could get much worse.

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