An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion

Tyler Durden's picture

Defined Benefit Pension Plans are, in many cases, a ponzi scheme.  Current assets are used to pay current claims in full in spite of insufficient funding to pay future liabilities... classic Ponzi.  But unlike wall street and corporate ponzi schemes no one goes to jail here because the establishment is complicit.  Everyone from government officials to union bosses are incentivized to maintain the status quo...public employees get to sleep better at night thinking they have a "retirement plan," public legislators get to be re-elected by union membership while pretending their states are solvent and union bosses get to keep their jobs while hiding the truth from employees.  

We even published a note several days ago entitled "Establishment Tries To Suppress "Dissident Actuaries" Explosive Report On Public Pensions," which pointed out that the American Academy of Actuaries and the Society of Actuaries killed a report that would have warned about the implications of lowering long-term expected returns on pension assets.  Apparently the truth was just too scary.

Bill Gross has been warning of the unintended consequences of low interest rates for years, and reiterated his concerns to Bloomberg recently:

Fund managers that have been counting on returns of 7 percent to 8 percent may need to adjust that to around 4 percent, Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said during an Aug. 5 interview on Bloomberg TV. Public pensions, including the California Public Employees’ Retirement System, the largest in the U.S., are reporting gains of less than 1 percent for the fiscal year ended June 30.

To our great surprise, certain pension funds are finally taking notice.  Richard Ingram of Illinois's largest pension fund recently announced that he would be taking another look at long-term return expectations noting that "anybody that doesn’t consider revisiting what their assumed rate of return is would be ignoring reality."  Ingram's Illinois Teachers' Retirement System is only 41.5% funded and currently assumes annual returns of 7.5%, down from 8% in 2014.

We decided to take a look at what would happen if all federal, state and local pension plans decided to heed the advice of Mr. Gross. As one might suspect, the results are not pleasant.  We conservatively assume that public pensions are currently $2.0 trillion underfunded ($4.5 trillion of assets for $6.5 trillion of liabilities) even though we've seen estimates that suggest $3.5 trillion or more might be more appropriate.  We then adjusted the return on asset assumption down from the 7.5% used by most pensions to the 4.0% suggested by Mr. Gross and found that true public pension underfunding could be closer to $5.5 trillion, or over 2.5x more than current estimates.  Others have suggested that returns should be closer to risk-free rates which would imply an even more draconian $8.4 trillion underfunding.   

Pension Underfudning

While it should be a substantial overhang for the economy, no one seems to care for now, and thus, we don't expect this issue to be addressed anytime in the near future.  Certainly legislators have no incentive to address this issue now... the country's 15 million union employees may not be so happy about supporting their political candidates if they knew their retirement plans were insolvent... much better to let the system break in 20 years then fix it with a massive tax increase and subsequent taxpayer bailout after convincing the electorate that the problem was somehow created by top earners not paying "their fair share."  After all, it's only $23,000 per man, woman and child.

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Winston Churchill's picture

Just ignore them, maybe they will go away.

Seems to work for beltway insiders.

Sam Clemons's picture

Explained:  A printing press.

ATM's picture

They will print away the shortfall. However the result will be that everyone will have plenty of money, but you won't be able to buy anything with it.

johngaltfla's picture

The solution is easy:

Don't rationalize,


MissCellany's picture

Don't do either. Don't even privatize. (As if banksters can be trusted any more than .gov leeches!)


Unknown User's picture

Total BS!

The reason why both the Democrats and the Republicans insist that the Social Security is broke is because they misappropriated trillions out of the fund to pay for tax cuts to corporations and the wealthy 1% of population.  This is why they insist that the Social Security is a “pay as you go” system instead of insurance that it is.  Paying back trillions with interest is a nonstarter for them so they want to kill the system by convincing the public that the system is insolvent.

Social Security is a social insurance program that is funded through dedicated payroll tax - the Federal Insurance Contributions Act (FICA).  SS is an “insurance” program that belong to the people who paid for it.  However, independence provided by SS safety net did not sit well with those who want people to depend on their “owners” from birth till death.  So the government replaced general obligation T-Bills in the fund with non-negotiable T-bills issues specifically for SS.  Since these T-Bills can only be purchased by the government the GOP claims that the working taxpayers are on the hook for trillions to the elderly which they will not do and therefore SS is broke.  This is obviously false because Congress can solve this problem, at no cost, by replacing the non-negotiable T-bills with general obligations T-bills which then can be sold to investors like any other T-bills.  But this will not happen because both pro-corporate parties are hell bent on impoverishing the American people. 


ZD1's picture

"misappropriated trillions out of the fund to pay for tax cuts to corporations and the wealthy 1% of population"


Congress also misappropriated trillions by providing the FSA with their "free" shit (welfare benefits, Obamaphones, subsidized Section 8 housing, subsidized Obamacare, etc, etc)

PT's picture

Not sure I quite got the message from this article.  Is that a shortfall of $8 Trillion per 15 million employees? i.e. $500 000 per employee when they retire?
Is that $500k per year or $500k for the rest of their lives?  i.e. $25k per year for 20 years (if, say, the employee retires at 65 and lives till 85)?

GunnerySgtHartman's picture

The reason why both the Democrats and the Republicans insist that the Social Security is broke is because they misappropriated trillions out of the fund to pay for tax cuts to corporations and the wealthy 1% of population.

Not exactly.  Any Social Security tax revenues above and beyond what is needed to pay benefits goes into the trust fund, which by law is invested in a special issue of Treasury securities available only to the trust fund.  The special securities are really not much more than IOUs that pay very low interest.  When Social Security needs trust fund money to pay benefits, it cashes in one or more of those Treasury special securities.  There has never been a "pot of Social Security funds" that was raided by Congress, at least not in the way most people think of it.

The trust fund money put into the securities then goes into the Treasury general fund and then Congress can spend it as it likes.

The term "broke" comes when the trust fund is exhausted and Social Security truly becomes a pay-as-you-go system, when 100% of Social Security tax revenues are insufficient to pay the promised level of benefits.

I am not justifying anything Congress has done, only trying to explain how it works.

Omen IV's picture

Referendums to take out the State Constitution as National Policy

The pensions should be declared null, void and of no force or effect - just walk away from the contract by declaring Bankruptcy and move on - the properties are not viable with massive property tax

Tell these people it was all a joke by the politicians and they should hunt the politician and take revenge

neidermeyer's picture

Why should I care about some damned f'ing government workers?

GUS100CORRINA's picture

This kind of stuff is simply unbelievable. UNDERFUNDED PUBLIC PENSION FUNDS are a result of DEMOCRATIC smoke and mirrors game that has been going on for 50 years. This current despot with a reprobate mind currently residing in the WH is big reason this subterfuge has gone on so long.

America is asleep. May America R.I.P.

i hate to say this, but America needs a financial crisis of spic proportions that zeros out all debt and wipes out rich people in the process.

Antifaschistische's picture

exactly....and, did this artlcle actually say it was better to let the system bust in "20 years"  LOL....So, this record stock/bond market is going to last another 20 years?  LOL.....THINK AGAIN!!!

When the dollar collapses, the bond market collapses and that 15 Trillion dollars turns to 30 trillion very fast.

If I were a union member, I'd be spending every other paycheck on gold/silver/aluminum/whatever.  Because inflation WILL be the solution to appease the masses that they WILL get their $xxxx.xx per/month, but when it cost $400 to fill up your car it won't matter.  parasite nation will come crashing down.

AE911Truth's picture

The stolen wealth must be returned.

junction's picture

The Federal Deposit Insurance Corp. currently insures $22 trillion worth of derivative debt that the Bank of America acquired when it took over Merrill Lynch. Where does the FDIC get the money to pay off this insurrance policy if some of the tranches of these derivatives go belly up?

GunnerySgtHartman's picture

Let the derivative holders do a bail-in!

Moronicgenius's picture

I've been lurking for years now and I just had to chime in on the bashing of public employees.  I've been a public employee now for 26 years and before that busted my hump in the private engineering field.  Before that I started work at age 12.(So there)  The disparaging remarks about public employees are disturbing to me because for the last 20 years my municipality has been cutting to the bone, firefighters, police, garbage men,(I refuse to call them sanitation engineers) City engineering, water engineering.  I just wonder what would happen if garbage didn't get collected, streets weren"t paved, water mains weren't replaced, bridges weren't repaired and police and fire decided it was in their best interests to take a couple days or weeks off. Yes, there are public abuses galore, but I live in a state where the public employee pension fund is 95% funded. (YES, 95%) Are my benefits outrageos like illinois? Hell No! Will my benefits give me a cushy living? FUCK NO!! I've already had shoulder surgery, a five(5) level fusion on my lower back and right now I need two new knees.  OK, HERE COMES MY RANT: FUCK ALL YOU LILY-LIVERED, ASS LICKING, BUTT FUCKING, UGLY HATING MOTHERFUCKING FUCKING FUCKERS WHO THINK THE VAST MAJORITY OF PUBLIC EMPLOYEES ACROSS THIS COUNTRY AREN'T WORKING IN YOUR BEST INTERESTS!  YOU WANT MY JOB?  COME AND GET IT, BUT I'M SURE YOU COULDN'T HACK IT, YOU WEAK-TITTED, ADDLED-BRAIN DIP-SHITS.  By the way, this wasn't directed to Winston, I just had to put it somewhere.

P.S. I'm a boomer, you fucks!

Normalcy Bias's picture

I hope the Public 'Servants' out there who have to consider whether or not to go along with doing their countrymen wrong think about this beforehand.

Few of them are going to receive anything near their pensions full, inflation adjusted value...

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Normalcy Bias Aug 9, 2016 7:18 PM

They will be lucky to get .50 on the dollar. More than likely many will get .10 on the dollar. 50% decrease looks great compared to a 90% decrease.

Something is better than nothing.

True Blue's picture

Lol, 'public servants'.

Bill Gross take note; these are not 'public pensions' unless any Tom, Dick or Harriet can simply opt to sign up and start paying in the same 'share' .gov employees have to contribute. Rather; these are looting programs setup to benefit Government Employees so they can continue to blackmail cash out of the public after they are no longer employed by the public over whom they rule like tinpot dictators. Of the Government, By the Government, and For the Government; the only involvement the public has is being bled and screwed to pay for them.

Since other government workers will never let their own fall under the bus, this mismanagement and graft has been backstopped by the taxpayer from its inception, and the managers of these 'funds' damn well know it; which presents moral hazard of unheard of heights and plenty of opportunity for untold looting of John Q. Public's wallet.

Full bailout, 100%; and all funded by further debt -which will be public -in that the public pays for the Government Employees' private wallow in hog heaven.

I am curious though -how many derivatives are clinging like leaches to these funds, representing how much 'money' piggybacking and making side bets on these funds that aren't directly part of the funds themselves?


pitz's picture

I know where I live, the public "servants" earn dramatically more than even the politicians who are nominally their bosses.  Not really sure why this is a situation that is tolerated.  That unelected officials are more important (as determined by the $$$ they're paid) than even elected and fully accountable officials.

Al Huxley's picture

Lucky nobody does math anymore, or this might be a real problem.

nakki's picture

"You fucked up. You trusted us."

Seasmoke's picture

C'mon. It's only $92,000 per family of 4. Be Patriots. Write those checks to your public servants.  They deserve your thanks. They deserve to live a better life than you. Do it for the children. 

Charles Offdensen's picture

Instead of calling them Public Employee Retirement Systems, they should be called Government Employee Extortion Schemes. BECAUSE THATS EXACTLY WHAT THEY ARE!!!

Plus they learned it from the mafia. Just ask Jimmy Hoffa!

For the record I tried.

trueFacts's picture

thats nothing, own pension by itself is short $1.13 trillion, after accounting for yellen's coming hyperinflation.

GeezerGeek's picture

Declare yourself a bank and ask Mr. Yellen for a large loan at zero percent, then deposit the funds with the Fed at 2%. If you get $1 trillion you can make up that $1.13 trillion in about 56 years. 

pitz's picture

What amazes me is that businesses and individuals still give the banks loans at 0%.  Without demanding collateral.  The banks are dead meat when interest rates rise.

Tom Green Swedish's picture

This is not a taxpayer problem. No bailouts for overpaid government employees.

Commodore Decker's picture

Every time the government "fixes" one thing (housing market), the break something else (pensions). By keeping rates at these rediculously low levels, pension liabilities have skyrocketed. Don't worry though, Mr. Yellen will print the problem away.

pitz's picture

Low rates have also inflated assets severely.   Pensions probably benefit more from the low rates than they do the high rates.  If rates are high at some point in the future, the pension execs will probably blame high rates (and severely depressed asset values) for their ills.  Instead of addressing the elephant in the room, and that is, unrealistic return assumptions.

Spungo's picture

8% was not an unrealistic assumption at the time. One could get 8% from government and high quality corporate bonds. I think it was around 2005 when I could get 5% from a regular bank account. 

pitz's picture

5% wasn't sustainable either.  Neither was 8%.  The economy only grows at a real rate of 2-3%, and a nominal rate of 5%.  It is mathematically impossible for long-term interest rates to exceed that, and they have to actually be lower due to the necessity of providing an equity risk premium for those who take more risk in the capital structure.

Normal long-term interest rates in a 2% inflation environment should be, at best, around 3%.  Since we had such a lengthy period of above-sustainable rates, we must have a mean reverting period.

Spungo's picture

But the interest rates are arbitrarily set, and money is printed from nothing. If everyone in the country has their life savings in the bank, where does all of this money come from to pay them 5%? It comes from the fed. This is why higher interest rates are good for average Americans. It's essentially helicopter money. ZIRP is the exact opposite of helicopter money. Nobody gets anything. No pension for you. No college fund for the kids. ZIRP is helicopter money from a select group of people who will use that money for leveraged buyouts of other companies.

pitz's picture

"higher" interest rates usually imply higher inflation.  I guess we could have 10% interest rates if inflation was 10%.  But that would just funnel more $$$ into the hands of government as taxes are based on nominal, not real interest. 

ZIRP, which keeps money relatively scarce, is good for savers.  The last thing savers want is their moeny to be diluted.  Of course ZIRP makes it slightly more difficult for Ponzi schemes to exist.  I don't see a problem with that. 

Restorative_Ally's picture

Unsolvable problem, you say?!?


TPTB love those kind of problems! It's the kind of problem that makes the population angry and easily directable.

Create a problem and offer a scripted solution. Works every time.

1980XLS's picture

The debt, like Moochelle said at the Dems convention. "It's for the Children"

CoCosAB's picture

We were the Children... then!

Budnacho's picture

Fuuuuuck this is an EASY one to fix....


Conquer the Cayman many Divisions do they have?


A fricking MEU could do it on a sunny Wed afternoon...


There's an estimated 21+ Trillion in accounts there from tax dodgers...

LawsofPhysics's picture

Now that's a problem solver right there!!!!

Just give me a second to make a couple transfers...

youngman's picture

They will just print....and for Obamacare too..and a hundred other non funded bailouts...trillions of extra fiat floatng arond

Here2Go's picture
Here2Go (not verified) Aug 9, 2016 6:31 PM

So what happens to all the freshly minted college grad "bartenders & waitresses", when John & Jane Pension can't afford to eat out anymore?

pitz's picture

The economy is likely to have resources to actually employ them properly, perhaps?  How can an economy which invests more in the non-working, than the future of workers possibly move forward?  Social Security payments are more than most students end up living on.  The pensioners with all their free time should be at home cooking their own meals.

indaknow's picture

Default.  Solved.  Next. 

CoCosAB's picture

Default. Bailout. Solved. Next!


It's also a TBTF elephant!

Charles Offdensen's picture

Let them eat dog food!