Unless something changes, government pensions will shred many of the Blue Model states . . .

No Light at End of Tunnel for Public Pensions


. . . the ability to cut spending and increase taxes is limited, and many states are approaching, and some are at the limit.


"The growing pension deficit is putting “enormous” pressure on US cities and states, said Amin Rajan, chief executive of Create Research, a consultancy. It also raises concerns that some public retirement funds might not be able to pay out in future.


According to Wilshire Consulting, an institutional investment advisory company, state-sponsored pension plans in the US had just 73 per cent of the assets they needed in mid-2015, down from 77 per cent in 2014."


So, how does a responsible pension plan address this problem?


"However, Tamara Burden, principal at Milliman Financial Risk Management, an investment adviser to pension funds, said many schemes are relying more than ever on making up the funding gap by assuming “exceptional asset returns”.


“Relying on strong asset returns in today’s market is a scary place to be,” she added."


They lie. Instead of actually doing what they need to do. "Mr Rajan said US public pension schemes are in a difficult place. “Tackling the problem means unpalatable choices: fresh cash injections or reduced retirement benefits or increased retirement age, or some combination of the three.” So, instead of tackling the difficult problems the pension funds simply say they will earn 7% this year. That way when they calculate the pensions position it looks better. The problem is they are not going to have an average return of 7%. So, they must either increase risk dramatically, to obtain near 7%, or, more commonly, lie again next year.


But using this maneuver has resulted in increasing losses not the necessary gains. "According to Wilshire Consulting, an institutional investment advisory company, state-sponsored pension plans in the US had just 73 per cent of the assets they needed in mid-2015, down from 77 per cent in 2014." This is not golf, low score does not win. In this game, 100% is the best number, and 80% is the minimal acceptable number. Below that and the pension fund is flirting with disaster. And there are pension funds with far less than 50% of assets needed. 


This problem is worst in the Blue Model states, and will continue to cause these states, and cities intense difficulty. While it seems insane the vibe from the progressives politicians is, "Damn the torpedoes full steam ahead." I expect we will all have front row seats to the finale of this show.