Mauldin: Americans Don't Grasp The Magnitude Of The Looming Pension Tsunami

Tyler Durden's picture

Authored by John Mauldin via,

Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade.

You read that right—not doubled, tripled, or quadrupled—quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe.

You will also notice in the chart that much of that change happened in 2008.

Why was that?

That's when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments.

According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”).

Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50–60% next year.

That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25%—a step in the right direction but not nearly enough.

Think About This as an Investor: How Can You Guarantee 6–7% Returns These Days?

Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of course you don’t. Yes, some strategies have a good shot at doing it, but there’s no guarantee.

And if you believe Jeremy Grantham’s seven-year forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years.

Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return—about the average for most pension funds—then that means in 30 years that $1 million will have grown to $8 billion (approximately).

Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%.

Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it.

Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is huge cuts to other needed services or with massive tax cuts to pension benefits.

The Situation Is Dire Even in the Best-Case Scenario. But What If…

The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart:

The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere.

What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all?

That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference.

But wait, it gets worse.

The graph we showed earlier stated that unfunded pension liabilities for state and local governments were $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns?

Now the admitted unfunded pension liability is $4 trillion.

But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.

We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion.

After the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues.

Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work.

We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.

It Goes Beyond a Financial Crisis. It’s a Social, Political Catastrophe

Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them.

What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep.

Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona.

This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown.

I was heavily involved in politics at both the national and local levels in the 80s and 90s and much of the 2000s. Trust me, local politics is far nastier and more vicious. And there is nothing more local than police and fire fighters and teachers seeing their pensions cut because the money isn't there. Tax increases of up to 100% are going to become commonplace.

But even these new revenues won’t be enough… because we will be acting with too little, too late.

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aloha_snakbar's picture

Americans w/o pensions don't *care*...

The Alarmist's picture

Yeah, except those entitled to the underfunded pensions have the full coercive power of the state behind them.

aloha_snakbar's picture

The same peeps that mishandled their pensions in the first place? Their problems, not mine...

TheLastTrump's picture

Yeah but they're going to make it your problem by heaping taxes on you that you won't be able to avoid.


So many people think they don't pay property taxes because they're renters. hahaha

YUNOSELL's picture

Why is he worrying so much -- it's something that will happen in the future -- the can can always be kicked further -- buy into the f*cking dip

cheka's picture

yet another reason deflationists will keep getting the sh-t kicked out of them

Perimetr's picture

It's ok

just print more money

JamesBond's picture

Or just raise interest rates to 5% where they should be.
Fuck the sloths that will get creamed when it happens. They should have known better than to hitch a ride on the zirp riverboat queen.


NoDebt's picture

5% ?!?!?!?!

I think I'm feeling a little... light headed..... <thump!>  (NoDebt passes out cold on the floor.)


J S Bach's picture

American pension plans - ahh, Bernie Sanders would be proud.  Ain't socialism grand?  Don't save for your own retirement.  Leave it in the hands of trustworthy government bureaucrats and all will be juuuuust fine.

Juggernaut x2's picture

So you're saying cops or firefighters that will receive $3M($100Kx30 years)over the course of their retired life didn't actually set that money aside themselves? 

dr kill's picture

KY losers. Let them eat possum.

MsCreant's picture

And we're gonna need that nail gun...

Antifaschistische's picture

most of the people running these pension ponzi's are already 'in the money' with huge cash out options.  They could care less what happens in 5 years.  Once the kitchen starts warming up they're bailing and taking the cash...see you later.   Police Union are at the top of that list.   Give me my $1 million dollar bye bye bonus and good luck with your future.

zoo's picture

inflation or deflation who cares! Morgan Freeman said we're at war, who has time for pensions when we have to fight the Russians!

rockstone's picture

Who's the 'they' in "they're"?

Rentier88's picture

You avoid them by living in a camper or on boat...See a lot more people in FL living on boats these days.

drendebe10's picture

Fukemall. Give the turds 301Ks like the rest of us. Fukemall

DontWorry's picture

So you hire a bunch of people to give you services like water, sewer, transportation and emergency response under false pretenses.  After you get the services you reneg on the bargian.

Juggernaut x2's picture

Overpaid, unionized fuckwits that you could pay some Mexican $10 an hour to do the same job?

Puerto Banus NA's picture

I´m one of those union fuckwits....also a federal service academy grad....does that count as double dipping??

Hope so....retired to my hone in costa rica years ago at is uncertain, eat dessert first..a 2$ chicano could have done my job 

Cloud9.5's picture

The will care when pensioners can no longer dine out, buy food, pay their mortgages, or buy cars.

Mekongerbigdonger's picture

Pension crisis is fear porn. Look at the cafr's there is trillions available in pensions across the country. Its simply a way for these parasites to steal trillions more from the people. I have seen this talked about on about 3-4yrs ago. 

Clock Crasher's picture

I remember reading pension doom articles here on ZH... in 2012.  Thought to myself, maybe now is a good time to get short, even the states are going bankrupt.

NoDebt's picture

I've been talking about it since the late 80s.  Because it's real and it's coming.  In fact, it's already here.  And it will rage for the next 20 years.


Raynja's picture

You're an idiot, it is real, it won't cause the market to crash, but it will make it hard to get it back up.



yogibear's picture

So many public pensioneers collecting well over $100,000/year.

Some well over $200,000/year.

Liiving the good life on the taxpayers.

Implied Violins's picture

Relax. George Carlin was right; the parasites will steal all of that money. Even though I am on the pension plan, I don't expect to ever see a dime of that money. The banksters will take it all, one way or another...

...and that will be their fucking DEATH KNELL. They take that money, they DIE. And I for one won't mind the exchange.

sessinpo's picture

It's mostly the plebs that. Read history. Very few of the wealthy die. They just move to greener pastures. Maybe a handful will not make it. But millions of plebs won't make it.

Peak Finance's picture


How hard is it to just CTRL + P 

Lt. Frank Drebin's picture

What effing pension!!!!! We normies don't get shit already, and I sure as hell aint paying for someone elses. In due time, I will be liquidating, getting in my Wally and turning in my passport. You may all go to hell.

Rant concluded.

scintillator9's picture

Be careful with that sentiment my friend.

At some point in time, one may hear "what effing IRA, 401(k) 403(b), etc", We normies didn't have that option with our 29 hour Obamacare special job working 3 of those jobs even with our Masters Degree in 12th Century Lesbian studies, so I ain't paying for someone else...... (I know a retirement account works much differently than a pension, but be rest assured, ALL low hanging fruit is on the radar screen to be plucked).

By the way, don't forget there is an exit tax depending on the size of one's assets, or how clever one is at hiding them.

a Smudge by any other name's picture

Yer right. 12 century lesbian studies is pretty tame. 1st century lesbian studies OTOH? Totally.

sessinpo's picture

"At some point in time, one may hear "what effing IRA, 401(k) 403(b), etc"


What they giveth, they will taketh away. We only think it was ours to begin with.

Hank Stinkhammer's picture

In a virtual economy based on nothing, nothing in the virtual 'economy' is worth caring about.


Meanwhile, back at the hobby ranch...

DennisR's picture

Fed Prints.  DOW 100,000.

Problem solved. 

koan's picture

You know how many towns depend on seniors pensions?

serotonindumptruck's picture

Who goes bankrupt first?

The States or the Federal government?

Hopefully, it doesn't come down to neighbor against neighbor, Trade Unionist against the Social Security recipient.

Brother against brother.

Father against son.

Aubiekong's picture

The federal government will never go bankrupt, they can print trillion dollar bills, quadrillion dollar bills,  you might starve to death with your wheelbarrow of billion dollar bills buy they can always print more....

Secret Weapon's picture

Yeah buddy.  Just like Weimar land.

TradingTroll's picture

But but but John, you said this is a 'muddle through economy' insinuating we would be fine.

I think people who write books should bear responsibility for crappy analysis. Anyone with a single brain cell knew the pension problems ten years ago. Aside from the past two years, most of that time Mauldin professed we would 'muddle through'.

booboo's picture

He was talking about on the other hand will be the "muddle"

TheLastTrump's picture

WTF. Same article, different day.


CaptainObvious's picture

I know, as I was reading this article, I was thinking, "Didn't I just read this same article just the other day?"  Tylers getting Alzheimer's, perhaps?

Oh, hey, it's a pension article, and The Thin Green Line hasn't shown up yet to bitch about his pension that he was PROMISED and we mean, nasty, cheap old taxpayers don't feel like paying because we're not the ones who PROMISED him the pension.  So let me just say in advance, TTGL, for you to go whine to the politicians who PROMISED you a pension in yesterday's dollars that today's tax dollars can't even pay the cover charge for, because I don't care.  Ain't nobody giving me a pension, and I bet I've earned less than you over the course of my career, so suck it up.

Aubiekong's picture

Because we understand the money will be printed out of thin air and there is nothing we can do about it anyway....

Seasmoke's picture

The public TAKERS are going to eventually get exactly what they deserve ....... ZERO.