Moody's: Modest Downside Could Spark $3 Trillion Surge In Pension Liabilities

Tyler Durden's picture

Some very simplistic math from Moody's helps to shed some light on just how inevitable a public pension crisis is in the United States.  Analyzing a basket of 56 public plans with net liabilities of $778 billion, Moody's found that just a modest downside return scenario over the next three years (2017: +7.2%, 2018: -5.0%, 2019: 0%) would result in a 59% surge in new unfunded liabilities.  Moreover, given that total unfunded public pension liabilities are roughly $5 trillion in aggregate, this implies that a simple 5% drop in assets in 2018 could trigger a devastating ~$3 trillion increase in net liabilities.

Meanwhile, Moody's found that even if the funds return 19% over the next three years then net liabilities would still increase by 15%.  Per Pensions & Investments:

In its report, Moody's ran a sample of 56 plans with $778 billion in aggregate reported net pension liabilities through three different investment return scenarios. Due to reporting lags, most 2019 pension results appear in governments' 2020 financial reporting, Moody's noted. The plans had $1.977 trillion in trillion assets.


Under the first scenario with a cumulative investment return of 25% for 2017-'19, aggregate net pension liabilities for the 56 plans fell by just 1%. Under the second scenario with a cumulative investment return of 19% for 2017-2019, net pension liabilities rose by 15%. Under the third scenario with a 7.2% return in 2017, -5% return in 2018 and zero return in 2019, net pension liabilities rose by 59%.


In 2016, the 56 plans returned roughly 1% on average and would have needed collective returns of 10.7% to prevent reported net pension liabilities from growing.

Of course, as we pointed out before, the problem is that the pending doom surrounding these massive public pension obligations often get clouded over by complicated actuarial math with a plan's funded status heavily influenced by discount rates applied to future liability streams.  Translation, they can "kick the can down the road" for a very long time before having to actually admit there's a problem.

Take Chicago's largest pension fund, the Municipal Employees Annuity and Benefit Fund of Chicago (MEABF), as an example.  Most people focus on a funds 'net funded status', which for the MEABF is a paltry 20.3%.  But the problem with focusing on 'funded status' is that it can be easily manipulated by pension administrators who get to simply pick the rate at which they discount future liabilities out of thin air.


So, rather than lend any credence to some made up pension math, we prefer to focus on actual pension cash flows which can't be manipulated quite so easily. 

And a quick look at MEABF's cash flows quickly reveals the ponzi-ish nature of the fund.  In both 2015 and 2014, the fund didn't even come close to generating enough cash flow from investment returns and contributions to cover it's $800mm in annual benefit payments...which basically means they're slowing liquidating assets to pay out liabilities.


Of course, like all ponzi schemes, liquidating assets to pay current claims can only go on for so long before you simply run out of assets. 

So we decided, as Moody's did above, to take a look at the impact of a couple of return scenarios.  But, rather than looking at "funding status" which can be maniupulated to say pretty much whatever pension administrators want, we focused on calculating when Chicago's largest pension fund would actually run out of money.

On the expense side, annual benefit payments are currently just over $800 million and are growing at a fairly consistent pace due to an increasing number of retirees and inflation adjustments guaranteed to workers.  Assuming payouts continue to grow at the same pace observed over the past 15 years, the fund will be making annual cash payments to retirees of around $1.3 billion by 2023.


Investment returns, on the other hand, are much more volatile but have averaged 5.5% over the past 15 years.  That said, the fund took big hits in 2002 (-9.3%) and 2008 (-27.1%) following the dotcom and housing bubble crashes. 

And while we hate to be pessimistic, lets just take a look at what happens if, by some small chance, today's market gets exposed as a massive bubble and we have another big correction in 2018.

Such a correction would force the fund to liquidate over $1.5 billion in assets in 2018 alone....


....and the system would run out of cash completely within 4 years.


The risk associated with America's pension ponzi schemes have largely been overlooked by investors to date because so long as they can meet annual benefit payments then plan administrators can just continue to 'kick the can down the road' and pretend that nothing is wrong.   

Of course, that strategy ceases to work when the pensions actually run out of cash...which could happen sooner than you think...and when it does, America's retirees will suddenly find themselves about $5-8 trillion poorer than they thought they were.

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Juggernaut x2's picture

Behold- The Ponzi Scheme in its final act

Creepy_Azz_Crackaah's picture

And guess who will be paying for it through devalued money and skyrocketing taxes?


My primary residence county just raised property taxes 9 (NINE!!!) percent to pay for the wealthy, multi-million dollar equivalent, gubmint pensions.

Creepy_Azz_Crackaah's picture

And that trend will continue year after year.  Maybe skip a year now and then.  Must pay for gubmint union votes.

Insurrexion's picture

I AirBnB.

All cash.

Fuck the marxist government's welfare and pension problems.

When the "markets" crash and the the ponzi scheme goes with it...

deals galore.

Nage42's picture

You say "cash," but what does that mean?!?


You think the USD will survive the unfunded liabilities mega-swirly?


"Everyone's got a plan until they get kicked in the knutz"  (what M.Tyson wanted to say).

fattail's picture

The USD will surge when all other assets are deflating.  I am suprised the dollar has held on as well as it has.  no doubt low fuel prices and american's willingness to eat cheap nutritionless food cover up for the dollar's complete lack of fundamental strength.

The author also fails to account for the second derivative of falling asset values and negative pension returns.  Retiree's will put a massive run on the pension, Dallas style, which makes their 4 year time frame optimistic.  

These ZeroHedge authors need to take their rose colored glasses off.

man from glad's picture

And on top of the skyrocketing taxes and fees the private sector gets to bail out the public sector via the "Bail-In".  It's coming.

man from glad's picture

"My primary residence county just raised property taxes 9 (NINE!!!) percent.."

No homestead exemption?

Stormtrooper's picture

Do you and your neigbors vote?  Vote to un-incorporate and send your politicians packing (make sure that they understand that staying is not a safe option).

Farmer Joe in Brooklyn's picture

If the MSM doesn't get their civil war between the left and the right, it will be government pensioners vs non-pensioners...

3rdWorldTrillionaire's picture

Simple, transfer all muni assets to the pension fund... problem solved! Problem solved... 


for the next 30 years.

peopledontwanttruth's picture

Millions of government breast feeders screaming where's my money shortly

JackT's picture

Billions are the old millions and trillions the billions.

Lumberjack's picture

Re-hypothecation is a bitch....


Stuck on Zero's picture

"All quotes attributed to me were not made by me." -Einstein

Tyrone Shoelaces's picture

Just gotta move the decimal point, like Mexico did years ago.  Problem solved!


yogibear's picture

Let's see Yellen and her the Federal Express money-printing machine double it's $4.5 trillion balance sheet to $9 trillion.

With QE 4 , a given, taking the national debt close to $30 trillion before long.  

xrxs's picture

Going to get control p'd back to awesome.

DrZipp's picture

To infinity and beyond.

GotAFriendInBen's picture



This is just code for "Keep Printing"

jmack's picture

How many retirees will start starving if that one pension fund stops paying out?

crazybob369's picture

Didn't Madoff go to jail for doing this? Wonder how many plan administrators will see any jail time over this. I'm guessing somewhere between zero and one. Maybe one, because they always find someone to throw under the bus to placate the peasants.

Creative_Destruct's picture

Yep, Madoff went to jail. And his scumball scheme PALES in comparison to what government entites and their sychophant advisors/administrators have been doing in the open. 

The actuarial delusions of these pension plans have been obvious for decades.

Blankfuck's picture

Now Now Now, calm please. Look THE FED RESERVE FUCKERS made a GREAT life to our BANKSTER FUCKERS. Surely they will PRINT SOME FREE PONZI MONEY to the people who are ELITE TO THE PENSIONS as well. NO NO NO WORRY HERE. 




I am a guru and if you keep repeating these words it will most certainly happen! look the bankster fuckers sleep well-very well



Creative_Destruct's picture

Printing has "worked" up till now, but eventually..... welcome to the currency crisis... and a hyperinflationary depression.

Stormtrooper's picture

So, what is the better option?  Should we kick Illinois, California, New York out of the Union and let Peurto Rico take their place?  Several hundred billion unfunded liabilities in Illinois, Cali, NY vs. 70 billion debt for Peurto Rico.  Peurto Rico might be cheaper for the taxpayers.

Shall we flip a coin?

Five Star's picture

The crazy things is when you assume realistic market returns like above for pension fund investments and then look at state and city budgets and realize that places like Nevada are going to have to throw like 40% of tax revenues at their pensions to keep them solvent.

Thethingreenline's picture

Nevada like other states will do what they gotta do to keep pensions solvent. Period.

gregga777's picture

Don't worry folks. The retirement plans for all of the Crony Capitalist CONporate executives responsible for underfunded pension for American Workers don't get paid out of those plans. Their pensions are always fully funded. I knew that y'all were all terribly worried about the criminals in the C-suites. You can stop worrying about them now. /sarc

uhland62's picture

There was a French movie my mother told me about.

It was a bit cold living under the bridge in Paris and hungry they were, too. So they concocted a plan to get a roof over their heads and 3 meals, 3 meals a day!. Nowadays people even get a colourful suit, orange.  

gregga777's picture

It's all the fault of the Goldman Sachs Feral Reserve System. That's all that you need to know.

silverer's picture

Hello working dupes. Your pensions went to welfare.

silverer's picture

Funny how pensions are tied to basic valuation, while stocks aren't.

Thethingreenline's picture

TTGL has commented in detail on this. Bottom line: the pensions should be paid, the pensions must be paid and the pensions will be payed. TTGL slung sh** for 25 years and now they gonna take away his pension? TTGL ha soutlined multiple ways this could be dealt with. Read the Illinois thread. Sick of this bashing the pensions, bashing the pensions, bashing the pensions, every day, steady drumbeat of lies and obfuscations of a 'problem' that can be repaired with little difficulty. Mostly jealousy and such. Stop bashing the pensioners and look at those who stole from the trust fund!

Cordeezy's picture

The baby boomers and the generation before theirs were able to get pensions and actual retirement, that will be the last generation to see these things.  Now they are kicking the can down the road till someone has to deal with the system that is obviously fraudulent and laden with money that doesn't even exist.  Can anyone fix this will be the ultimate question?

uhland62's picture

Can't say, that would be a complicated calculation.

The only thing I can say is that nobody should have expected that you can spend trillions on wars and not have a shortfall somewhere. Even now, they talk of 8,000 more Marines to Afghanistan. If that's what your priority is, of course there will be problems. What I am wondering is, how will people of age pension age feed themselves in 20 years time after the card house from credit cards has collapsed? It's going to be ugly. The start of 60/70 year olds being homeless is already made. When all money goes into military adventures, there's not much for people left.


People need to be paid wages that they can afford health insurance that's not subsized and capital building for the approximately 20 years in retirement.    

Charvo's picture

Meredith Whitney was a few years early in her prediction of municipal bankruptcies, but they are coming.  These bankruptcies will happen when the bubble bursts and all these assets held in the pensions get marked down.  They will be forced to do restructuring of pension obligations while also at the same time raising taxes on its residents.  It'll be pain bigtime.

Charvo's picture

Think of the social security system in America.  Baby boomers had good jobs with good incomes, so they are retiring and getting social security benefits that are most likely to be pretty high per monthly check.  The folks paying into the system now are getting shafted with lower paying jobs which means lower FICA contributions.  With this trend increasing every year, the social security system in America will soon have to get contributions from the general fund.  Think about how much that will pressure the fiscal budget.  Add on top of the massive medicare expense bill.  I don't see how the US dollar survives this mess in a few years.

Expat's picture

Simple math or simplistic math?  I can't tell if the author knows the difference which would change the article entirely.

whatisthat's picture

I would observe there is perceived benefit to prosecute and imprison the corrupt politicians and bankers who established and supported the public pensions Ponzi schemes...

CurrencyCrash's picture

Just forbid fractional reserve banking and all will be good.