December has not been encouraging for pensions funds’ financial stability and solvency. Within the last few weeks it became evident that the pension system in the United States has become so precarious that Congress is literally preparing for its complete failure.
While Congress busily worked out its latest budget deal and boost to spending, they slipped in a provision to start up a new committee to deploy federal government funds to financially save up to 200 multi-employer pension plans. In these pension plans, labor unions alongside employers together fund retirement benefits for benefiting employees. The enormous funds then take on the responsibility to pay out retirement funds and benefits to the workers when they retire.
Now the word is out from Boston College that a total of 1,400 corporate pension plans will face a combined $553 billion in shortfall. The Boston College survey makes for grim reading as it reveals that approximately 25 percent of these corporate pension plans will probably fail over the coming decade.
This is a scary figure to contemplate. It means that an entire one out of four employees (non government) who anticipate having a pension to pay for their retirement could and probably will receive nothing.
Yet government pensions funds are even worse off. Moody’s the credit rating household name reveals a combined $7 trillion shortage of funding in combined federal, state, and local governments’ pension plans. This chart shows how badly the state and local pension funds are severely underfunded:
How could things be so bad across the board?
The problem stems from investment returns that have been consistently below the required minimum set by the pension plans. These pensions have an average goal of eight percent returns in order to make their payout commitments to beneficiaries.
In order to attain these returns (that must also be safe), the pension funds will plow their money into bonds, real estate, private equity, stocks, and various other tangible assets in an attempt to diversify away from one or a few asset classes. The problem has come from near all-time lowest (in human history) interest rates. This has made it nigh on impossible for the pension funds to hit the needed returns without endangering their stakeholders through higher and greater risk levels.
Completely unrealistic investment return goals are a major problem for the pension funds today. They have not been capable of generating eight percent returns for most of the last decade. This leaves them unable to cover their promised liabilities in the future.
This has been especially aggravated by their commitment to purchasing bonds, the biggest single asset for the majority of pension funds. It has forced most of them into the difficult and dangerous position of purchasing higher risk assets, such as private equity and stocks, with a greater amount of their capital.
Doing this has helped them to a point. For the now second consecutive year, the two biggest public pensions within the United States have met their goals. CasSTRS the California State Teachers’ Retirement System and CalPERS the California Public Employees’ Retirement System each attained that coveted and desperately important eight percent this year and last. Between the two of these enormous pension funds, they manage a combined $575 billion on the behalf of 2.8 million retirees and currently working public employees.
This is not their typical performance though. They achieved an average 6.3 percent per year for the last ten years through June 30th at CalSTRS. CalPERS fared considerably worse with a mere 5.1 percent in the same ten year time frame. Consider that in this past decade, you have witnessed among the longest-lasting both stock and bond bull markets in American history too.
Is Your Retirement Portfolio Prepared for the Pension Fund Bailout Financial Catastrophe?
Even the two California pension behemoths have come to terms with the impossibility of reaching their necessary goals. They have both now moved to drop their future targets to seven percent. This will still not be possible for them though as the statistics have already revealed that they could not do it consistently in even the best moving of markets. Wilshire Trust Universal Comparison Services measures the past ten year annualized average return through June of 2017 at 5.57 percent for all public pensions.
Now harder times lie ahead for the markets, threatening their abilities to do this even more. As far as the Congressional rescue plan goes, the American pension system is already hopelessly past fixing. The government is late in recognizing the need to do something about the building crisis. You do not have to make the same mistake in waiting too late to protect your retirement portfolio though. Gold boasts over three thousand years in proven track record for safeguarding the valuables and assets of individuals across the globe.
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