There is a “storm cloud” coming in the nation’s state and local pension funds. The storm cloud is estimated to be $1.9 trillion, up by $510 billion since the end of 2013. And it is expected to grow in the years to come, which seems certain in today’s environment.
According to Bloomberg News, the nation’s state and local pension funds face an enormous $1.9 trillion shortfall. But it is expected to grow over the next several years, stemming from record-low bond yields and volatility in the global financial markets. It remains unclear as to how much the shortfall will expand, but there is a lot of pressure for governments to pour more money into the retirement system.
Since a lot of the pensions are posting no more than seven percent gains – some of them are either losing money or recording one percent increases – many of the major pension funds in states like Illinois and Missouri are actually reducing their assumed rate of returns on their investments. Over the last two years, dozens of jurisdictions have adopted the same policy, which helps lessen the blow.
The pain is likely to linger, too. After the Federal Reserve left interest rates unchanged on Wednesday, fixed-income securities will continue to present historically low payouts. Although the United States central bank is possibly raising rates in December, it probably won’t be enough to minimize the growing shortfall.
States and local governments are attempting to address the issue of unfunded public pension liabilities. They’re trying to make room in their budgets to reverse the trend, but then this will limit the government’s spending in areas like education and transportation, two more important issues for cities akin to Chicago and New York.
Speaking of Chicago…it’s facing a pension shortfall of $34 billion. In order to circumvent further bleeding, the Chicago mayor has imposed higher water and sewer taxes, which are then being used to add $2 billion to the public pension. Also, in 2015, the city, which is run by former Obama chief of staff Rahm Emanuel, experienced a credit downgrade by Moody’s. Its credit is now in junk status.
What about that storm cloud? You’re going to see a lot of damage at the municipal level, warns Dan Heckman, a senior fixed-income strategist at U.S. Bank Wealth Management.
“If there’s a real storm cloud on the horizon, then this is it,” Heckman told the news outlet. “The municipal-bond market at some point in time down the road will suffer from concerns over this level of underfunding. This is going to continue to be a source of problems for many municipalities, both at the state and local level.”
And neither President Trump or President Clinton (likely the latter) won’t help them. Both have said that they are not open to any kind of pension reform, even though it is badly needed. At the federal level it is even worse. The U.S. government has a pension shortfall of $3.5 trillion. This represents one-fifth of America’s gross domestic product (GDP).
“The bigger challenge to the US comes from the unfunded liabilities for the Social Security and Medicare programs,” this year’s Moody’s report said. “The Social Security funding gap is estimated at $13.4 trillion, or 75% of GDP, while the shortfall from the Hospital Insurance component of the Medicare program amounts $3.2 trillion, or 18% of GDP.”
Overall, the entire country has to come to grips with more than $120 trillion in unfunded liabilities and expenditures.
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