Pension Ponzi Exposed: Minnesota Underfunding Triples After Tweaking This One Small Assumption...

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 despite 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.  

So what allows this ponzi to persist?  It all comes down to one simple assumption: Discount Rates.  You see, if you simply discount future liabilities at a high enough discount rate then you can make any massively underfunded pension ponzi look like a stable, healthy retirement gold mine. 

In fact, just over a year ago we took a look at what would happen if we calculated the true underfunded level of America's public pensions at more reasonable discount rates.  The result showed that the media's highly referenced underfunding of $2 trillion soared to something closer to $5-$8 trillion when more reasonable discount rates were employed.

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


Now, the state of Minnesota has gracefully stepped forward to beautifully illustrate our point.  Upon making a few minor "tweaks" to their various funds' discount rates, the state found that their aggregate pension underfunding more than tripled from roughly $16 billion to over $50 billion.  Here's more from Bloomberg:

Minnesota’s debt to its workers’ retirement system has soared by $33.4 billion, or $6,000 for every resident, courtesy of accounting rules.


The jump caused the finances of Minnesota’s pensions to erode more than any other state’s last year as accounting standards seek to prevent governments from using overly optimistic assumptions to minimize what they owe public employees decades from now. Because of changes in actuarial math, Minnesota in 2016 reported having just 53 percent of what it needed to cover promised benefits, down from 80 percent a year earlier, transforming it from one of the best funded state systems to the seventh worst, according to data compiled by Bloomberg.


The Minnesota’s teachers’ pension fund, which had $19.4 billion in assets as of June 30, 2016, is expected to go broke in 2052. As a result of the latest rules the pension has started using a rate of 4.7 percent to discount its liabilities, down from the 8 percent used previously. As a result, its liabilities increased by $16.7 billion.


But other factors also helped boost Minnesota’s liabilities: Eight of Minnesota’s nine pensions reduced their assumed rate of return on their investments to 7.5 percent from 7.9 percent, while three began factoring in longer life expectancy.

All of which resulted in this:



Of course, Minnesota's underfunding didn't just magically "soar by $33.4 billion" as Bloomberg puts reality, the state's pensions were always underfunded by ~$50 billion...the only difference is that that some pension administrators finally decided to stop lying to their retirees and report reality.

All of which rendered this Bloomberg map from just two months ago showing an 80% funding ratio for Minnesota completely obsolete...


...Sorry, Minnesota teachers but you're almost as screwed as your counterparts in just didn't know it until your bosses finally decided to stop lying to you.

Pension map

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Five Star's picture

When you start applying realistic markets values and discount rates etc... to the various state pension funds and then look at how underfunded they really are relative to their tax revenue, it's insane. Nevada would need to spend 40% of all tax revenue just to keep their very underfunded pension from becoming even more underfunded. Minnesota is actually in better shape than most states...

MisterMousePotato's picture

Back when we lived in California, I showed my wife some simple arithmatic regarding California's public pensions and realistic assumptions on returns.

In a nutshell, $30,000 was needed from every man, woman, and child.

I asked her, "Do you see them getting $90,000 from us?"

How 'bout Howard and Sandy?

Or all those 'recent arrivals in the United States'?

Welfare recipients?

Criminals, children, and the elderly?


When you think about it, you can see that it's utterly unrealistic to expect to get a dime from more than about - what? - ten percent of California's residents ($300,000 each).

And then ... other than government employees (in all their various guises), what group of any significant numbers has that kinda dough? (It being a fact that government employees do not pay taxes.)

Minnesota's $6,000 per capita is really something more like $60-120,000 per working stiff.

Edit: Brian, infra, reminded me that, in discussing this issue with my wife, I also pointed out that the actual present values of the pensions' assets were, well, in my small way thinking, about as realistic as assumed discount rates.

Tesla worth more than all the others combined? Yeah. Right.

Oh, or how about that investment in Stuyvesant Villages? One year, two billion; next year, oops ... zero.

What's gonna happen when Chicongo's pension funds no longer have the liquidity to buy CalSTRS Facebook stock for $1000 per? (Or vice versa.)

Don't look at me. I ain't buyin' it.


NoDebt's picture

Since retirement plans of various stripes are my wheelhouse I could post up almost endlessly on this subject.  Nobody wants to hear the details (and there are a LOT of details).  So let me short cut this for you:

1.  1/4 of the pension funds in America (most of which are government entities) are fucked.  Only the government entites matter because they are not covered by the PBGC (direct access to the Federal Government's printing press to save a failed pension) .  Merely the guarantee that they are a government entity and will always pay their obligations because, in theory, that entity can always just raise taxes.  They have no possibility of paying full benefits to everyone unless you think those who live in the community are willing to live without trash collection, police protection and a functioning fire department while taxes rise by a full order of magnitude.  And remember, when you start jacking taxes to the moon your tax base quickly evaporates (moves elsewhere).  They're dead man walking.

2.  The next quarter of them are technically savable, but politically they would have to do such unpalateable things their survival is unlikely without significant cuts to pension benefits.

3.  The thrid quarter are in so-so shape.  Some workable solution can be hammered out but nobody is getting everything they want.  Benefits go down, taxes go up, but it survives.

4.  The last quarter is OK, assuming we don't have a massive market disruptions like 2008 or 25 years of Japan-like conditions ahead of us.  I'm sure it will be fine.  No crashes for 20 years on top of the 8 we've go under our belt since the last one?  Sure.  It'll be fine.  Absolutely.  No doubt about it.


Stuck on Zero's picture

What happens when the rate of return on pension investments drops to -40% in the next crash?

Arnold's picture

NIRP will Kill everything.
The Fed's Roundup.

BuddyEffed's picture

Someday the pension herd will turn and in a big way and then this Zepellin applies

max2205's picture

Bittulips is th answer 

MANvsMACHINE's picture

I've created a new crypto and I'm calling it PensionExtensionToken and I'm going to offer the ICO exclusively to pensioners who have doubts about the health of their pension. Their pension benefits will be put on the blockchain (cool, huh?) and I expect huge demand and ever higher prices of PET. I'm going to limit the number of coins to 30 trillion and plan on selling them for an insider price of only $0.10 per coin. Other coins have experienced gains of over 100,000% in a short period of time so this will provide a huge opportunity to those who feel a little queasy about their pensions and risk of never seeing the benefits they are relying upon for a comfortable retirement.

We've all heard about Fuck Token. After all is said and done, my PET coin will be remembered as an even bigger and better Fuck Token.

*** Disclaimer : This communication shall not constitute an offer to sell or the solicitation of an offer to buy securities nor shall there be any sale of these securities in any state in which such solicitation or sale would be unlawful prior to registration or qualification of these securities under the laws of any such state.

New_Meat's picture

Can I get in at the ground floor and then get off just before the penthouse?

JRobby's picture

The minor tweak: actually using the correct numbers of eligible pension benefits recipients, benefit amounts and their life expectancies

I Art Laughing's picture

Good luck getting police, fire, EMS and trash pick-up with stagnant wages and a work until you're dead retirement package 

warsev's picture

For nearly all of human existance that's been the reality. FDR tried otherwise and it caught on and was widely adopted. He and his cronies knew from the beginning it was a Ponzi scheme that was unsustainable. Here we are.

Ace006's picture

The sentiment is widespread among the elderly that they earned their Social Security benefits. Medicare is also a right. There's some steam behind those opinions too. One won't get anywhere with talk of Ponzi schemes and unfunded liabilities (and unanticipated increases in longevity). You can't convince a man of something if his economic fortunes require him to believe the opposite. 

That Nazis were right wing is another widespread belief among the whole population, though you see every day someone in the comments section of wherever who doesn't let that pass. That WWII was only about the holocaust is another sacred article. Ditto socialism is terrific, Israel is our ally,  immigrants contribute more than they take or destroy (and will willingly become ardent "Amerucans" just like the BLM and AntiFa clowns), Hillary was not of the lizard persuasion ,  and we can all get along if we just act like "Americans." (Or "Murcans" as McMasters likes to say.)

Bottom line is that humans accept complete nonsense even though they are grounded by the immediate realities of their own lives. Anything beyond that and you're quickly into Nancy Pelosi, chem trails and 9/11 was an inside job territory.

BandGap's picture

Woah there. "humans accept complete nonsense"? How about we are born into a system that requires us to apy this crap while accepting the underlying lies?  It's more like humans place their trust in other himans to do the right thing.

I am 5 years out from collecting social security and I have exceeded the maximum contribution 80% of my working years. It's about 300K, not counting Medicare. I will probably never see that money.

Winston Churchill's picture

You'll be paid, but will it buy more than one can of Alpo per month ?

BandGap's picture

As long as my fur is soft and shiny, and I can shit every day. Ken L Ration looks like it might be good on saltines, BTW.

BetweenThe Coasts's picture

We are fucked and the government is bankrupt, unable to do anything useful for regular people. The fact that a sum almost equal to the National Debt has been looted from same government is a taboo subject.

Things would be quite different if we got that money back, instead of being left with all the liabilities and none of the assets.

DOD and HUD Missing Money: Supporting Documentation
glenlloyd's picture

I've found in my conversations with people that

1) hope is a common (though ridiculous) theme.

2) by looking the other way nothing bad will ever happen (very common!)

3) few are prepared for the magnitude of the dislocation I expect in the future

4) people are generally just so detached from reality in so many respects.

5) people don't want to hear about what's coming, i.e. admitting we have a shit storm coming means we would have to acknowledge that something bad is going to happen.

JRobby's picture

Funded by a mandetory tax on wages and net self employment business income. It must pay out or pitchforks come out.

Listening to idiotic politicians argue this in circles to make themselves feel better and get re-elected is noise

RichardParker's picture

Good point. However, over 80% of the private sector is having that shoved down their throats.

Freddie's picture

Minnesota and the rest pretending that 7.5% is attainable is a joke.   It died with ZIRP.

In the past, maybe 6% to 6.5% was possible with a 50/50 mix of stocks and bonds when bond yeilds on corporates of good quality were 6%.  In addition, the stock market with dividends might return long term 6 to 7% because inflation or dollar debasement helps stocks.

The ones that make out or survive are many cop, firemen and other govt pensionss including Federal because they control their guns, court and they make the laws.   Miltary ones too.  Just like third world countries.

Macavity's picture


  • 1st/3rd world wealth flows (from 3rd to 1st)
  • 1st/3rd world production capacity flows (from 1st to 3rd)
  • zero sum game...when you include kicking the can (i.e. monetisation of the future in all its glorious machinations)
  • Ageing population
  • QE, aggregate invisible inflation, currency debasement, etc
  • Wealth transfer to execs of large conglomerates
  • Concentrated ownership of bloody everything, meaning monopoly, artficially inflated prices, nil real competition

Is there really a question why we're headed for ZIRP or why "returns" in the market are so bloody low.  Seriously.  Why do markets, economists, asset managers, et al ignore this?

Put another way, businesses are relatively healthy (except all of the cost-saving, future-crushing shite), but all value is siphoned off at every point along the way.  Anywhere you can insert a middle-man, there's free money to be made.  Let the markets (& muppets) have the leftovers.

Sanity Bear's picture

It's not anywhere near that complicated.

We're at ZIRP because we're in the endgame for debt-backed currency, where it's impossible to issue enough good new debt to cover the interest on existing debt.

While those other factors are significant in other ways, they aren't at the core of what is happening here.

Macavity's picture

You're probably right. Perhaps my components are just symptoms. Do you have any good links, sources or reading material?

Sanity Bear's picture

I'm sure there's something good out there but I can't think of it offhand.

Here's how it works:

A dollar is created/enters the system (added to the monetary base) by the act of a fractional reserve bank making a loan using only a fraction of the loan amount. Physical currency printing - which is how most people will surmise it is done, if asked) is both insignificant in scope and offset by currency destruction.

The rest of the money that is lent to the borrower is created out of thin air at that moment by this act of fiat. Fractional reserve magic.

When money is lent, it is lent at interest. The money to pay back the interest has to come from somewhere. But the only way money enters the system is by the act of making a loan.

Which gives us a bottom line is that the only way loans are actually good is if they can be paid back with interest from additional loans which need to be paid back with interest from additional loans and so on.

The movement of money in this system not circular, it's geometric - overall in order for loans not to fail en masse by the simple function of not enough money available, a certain percentage of the existing monetary base MUST be added by more loans.

It gets worse when loans go bad, because a bad loan eliminates the money that other loans need to pay interest, which in turn can cause a chain reaction of loan losses - deflationary depression.

So they have to, they absolutely must keep adding more and more money every year to keep the party going. This is why we see bubbles in sector after sector after sector, because anything goes when it comes to making sure the debt party keeps on rocking - normal human economic activity simply doesn't demand that much debt, and at a certain point people physically cannot both eat and pay down debt.

Tapeworm's picture

 In a few paragrphs you have done a good summation.+++

Macavity's picture

Thank you. That was very cogent. I'd never thought of bad loans that way--in aggregate across an economy, the destruction of value by a bad loan hits its would-be-suppliers. I had only ever appreciated the very artificial balance sheet risk of the lending bank.

Macavity's picture

Feck. Arse.

It just hit me--apologies for the slow epiphany: with a debt-based money system (either fully debt or with a more-or-less fixed proportion to cash, say 3%), debt money can only be repaid by debt money, changes in the underlying level of real wealth and increases in production, etc don't matter AT ALL. Genius.

man from glad's picture

The county is getting greedy (again). At public property tax hearings I am seeing more people show up and voice concerns. When .gov goes full retard and raises taxes massively to cover these pension gaps the pitch forks are gonna come out.

Winston Churchill's picture

So you found accounting too exciting ?

new game's picture

guess where my wifes pension comes from; yup- pera of MN. and then SS. aty 61 we thank the spirits we have a garden and tulips(hehe), lol, or was that bitcoin, anoth lol...

Dogman57's picture

These pensions are for lazy public employees.  Ever go to the DMV?  Who cares?

Retired Guy's picture

Why get all worked up about this? When the market corrects and the annual return becomes something south of 50% the true futility of saving for the future in this house of cards world will be revealed. I have been learning how to grow a garden and fix my own stuff. It isn't much but at least it is real.

Shinebama's picture

Shitcago is already selling assets to make pension payments, which is the reason I sold my condo and moved last month. It's unsustainable (everywhere, not just Shit Congo/IL), but the only people with the power to change it are plan members so they have no incentive to fix it.

Bastiat's picture

"It being a fact that government employees do not pay taxes"

What are  you talking about?

NoPension's picture

If your salary comes FROM taxes, your paying taxes really helps, eh?

Or this,
" the government can give everyone a job, with good pay and benefits. Tax them a little higher for the privilege. Problems solved. Gov jobs pay well and have much better benefits than the private sector."

If you think that sounds like a good plan...well sure, gov employees' taxes count.

Bwana's picture

Everybody who jumps on the pension shortfall bandwagon never mentions where the supposed funding that exists actually is. It is invested in mutual funds, stocks, bank deposits and in the case of my pension some of it is loaned to large construction firms for construction financing.

Most of the pensions are underfunded. If the stck market, mutual funds and dollar took a big dump and took out the banks where would all the pensioners be as far as income security. There is a day sometime in the future where the entire Ponzi scheme collapses and to people like me who are too damaged from 50 years of hard work to work anymore,have no where to turn. The Social Security trust has been raided and all the money taken so all benefits are comiing from the general fund. We paid into this fund(not by choice) and now every crook in Washington DC call this an entitlement like the handouts they give to illegal aliens who just entered the US. I personally believe when people are paid to collect, invest and establish a pension based upon that authority they should be civilly and criminally responsible for the success of what they are doing. The State of California has passed laws making workers responsible for the outcome of those workers actions. I put in 28 years as a licensed blaster and California passed laws that put the entire liability on the licensed blaster, not the superintendent nor the company nor the engineers but on the blaster who is told what to do by the supervisors. I gave it up because I was not going to be responsible for what happens when taking the orders of a supervisor. If anybody wants the pension problems cured make everyone involved responsible.

Arnold's picture

Minnesota elected Al Frankin.
They don't do maff.

Ace006's picture

If Al Franken was the answer, what was the question?

shovelhead's picture

What is a bad comedy writers best retirement plan?

Buckaroo Banzai's picture

"What is, a smarmy lying jewish sack of shit, Alex?"

Dogman57's picture

Theys knant spel gud ither.

steve2241's picture

Is that Minnesota Swedish?

Brian's picture

None of this takes into account that when these pension funds actually have to start paying out materially more than they are taking in, they will need to liquidate assets to fund the payouts.  Since the assets now are almost entirely equities, that means massive concurrent forced liquidation of equities.  So the true unfunded liabilities should, in reality, be based on the true underlying value of the stocks, not the paper value when everyone (quants and CBs) are buying.

When the time comes to pay, the markets will crash and no one will get a red cent.

GooseShtepping Moron's picture

That's what I've been saying. These pension plans are going to destroy the economy one way or another, either by tanking the markets, spiking consumer inflation, taxing productive workers to death, refusing to pay the promised benefits, or some combination of the above. There is no way to avoid the fiscal trainwreck ahead. The only prudent move is to slowly start sunsetting the plans on a prorated basis.

Macavity's picture

There's an episode of Mike Maloney's "Secrets of Money" on YouTube (i think episode 7--the last one of the series) where he chats with the chap who wrote The Demographic Cliff.  They explain the concept and potential effect of net asset sell offs due to ageing population pretty well.  Good graphics, makes it easy to understand.  I don't know if it's true, but it's a good argument.