Here's How Government Pension Funds Are Trying To Close Their $7 Trillion Funding Gap

Authored by Simon Black via,

There may perhaps be no other group of investors that’s more DESPERATE today than pension funds.

Pensions, of course, are the giant funds responsible for paying out retirement benefits to workers.

The idea is that both the employer and the employee typically contribute a set percentage of the employee’s salary throughout his or her career with the promise that, upon retirement, he or she will receive a fixed monthly payment.

Many state and local governments rely on these ‘defined benefit’ pension pension plans, as do a handful of large corporations.

The reason that these pension fund are so desperate is that the vast majority of them are underfunded.

We talk a lot of about how Social Security is rapidly running out of money.

But according to Credit-rating agency Moody’s, state and local government pension plans are also $7 trillion short in funding.

And corporate pension funds are underfunded by $375 billion.

The reason is quite simple: investment returns are simply too low.

Pension fund managers invest all of their funds’ cash in various assets– stocks, bonds, real estate, etc. with the hope of generating safe investment returns.

And that’s precisely the problem.

With interest rates still hovering near the lowest levels they’ve ever been in 5,000+ years of recorded human history, it’s very difficult to achieve a significant investment return without taking on substantial risk.

Most pension funds require a minimum annual investment return of between 7% to 8% in order to stay solvent and be able to pay out their beneficiaries over the long-term.

California Public Employee’s Retirement System (CalPERS), for example, is one of the largest pension funds in the world.

And over the last 10 years CalPERS’ investment return has averaged just 5.1%. They need 7% to stay afloat.

SAFELY earning 7% is a difficult task today: government bonds in the US yield around 2%. Even junk bonds, which are ultra-risky, yield just 5%.

Real estate returns are also falling, with the average apartment building yielding between 3-4% according to the National Association of Real Estate Investment Trusts.

In fact the biggest apartment-focused real estate investment trust, Equity Residential, earns less than 3%.

Bottom line, it’s EXTREMELY difficult for very large funds to safely earn 7-8%.

And this matters… because they’re responsible for YOUR retirement.

I write a lot about the need to have a good ‘Plan B’… a backup plan in case the primary option doesn’t work out.

Well, considering that most federal, state, local, and corporate pensions are VASTLY underfunded AND consistently fail to meet their investment targets, it seems pretty obvious that Plan A for retirement isn’t going to work out.

Having a retirement Plan B means getting creative and taking matters into your own hands.

Part of this includes setting up a better retirement structure.

For instance, a self-directed SEP IRA and solo(k) both allow contributing nearly 10x more each year for your retirement than a conventional structure.

Moreover, the right retirement structure provides far greater flexibility in where you can invest your savings.

Instead of being tethered to overpriced stocks, bonds, and mutual funds, a good retirement structure allows investment in alternative assets like international real estate or cryptocurrency.

One type of asset to consider for your retirement is royalties.

A royalty is money that other people pay you in order to use an asset that you own.

For example, inventors who own patents receive royalties whenever big companies use their ideas.

Songwriters collect royalties whenever their music is streamed on Spotify or used in a TV commercial.

Investors who own mineral rights on a property collect royalties whenever a mining company pulls gold or silver out of the ground from that property.

Warren Buffett compares a royalty to owning a tollbooth: after you make an initial investment to build the toll road, the upkeep is minimal.

But you collect cash forever as vehicles pay you to use it.

Royalties are starting to become more popular investments, especially among pension funds.

Last month the Canada Pension Plan Investment Board committed up to $325 million for a portion of the future royalties in Venetoclax, a cancer drug.

Also in July, mining giant Glencore announced it was in talks with Ontario Teachers’ Pension Plan for a 50:50 venture for its royalty assets (including a royalty for the Antamina copper-zinc mine in Peru, which was expected to fetch around $250 million).

Lots of funds have also been launched specifically to invest in music royalties.

Round Hill Music Royalty Fund owns rights to more than 4,000 songs from artists like Frank Sinatra, the Beatles, Aerosmith and Billie Holiday.

Specifically, they own the rights to Land of a Thousand Dances, a song written by Chris Kenner and popularized by Wilson Pickett in 1966.

The song appears in the movie Forrest Gump and various video games, and it generates between $300,000-$400,000 a year, according to the fund’s CEO.

Another hedge fund, Shamrock Capital, raised $250 million last year to buy the rights to music, movies, TV shows and even video games.

I’ve even done this myself, buying rights to a country music song.

So anytime the song is streamed on Spotify or downloaded in iTunes, I received a royalty.

And while the earnings are by no means guaranteed, music royalties can often earn between 10% to 25% or more each year.

That’s hard to find in today’s investment environment.

And while the big institutional money is coming into royalties, there are still plenty of opportunities for the small investor. It just takes a little bit of digging.


GUS100CORRINA Stan522 Wed, 08/16/2017 - 15:52 Permalink

In thsi era of CENTRAL BANK MANIPULATION and PHENOMENAL RETURNS from technology companies, it is really hard to understand why there is any problem at all unless you were not invested in these technology companies.I guess that is where the issue is at: The PENSION FUNDS needed a safe return and the technolgy companies were not very safe.AMAZING when one thinks about it.

In reply to by Stan522

Creepy_Azz_Crackaah (not verified) stitch-rock Wed, 08/16/2017 - 17:45 Permalink

I'm guessing that everything that you have is in Bitcoin, plus you borrowed to buy Bitcoin (desperate much?).

I'll have to keep your phrases for future use. "Bitch-ass troll" and "moron retard." I"ll be sure to give you credit...

In reply to by stitch-rock

thisguyoverhere Wed, 08/16/2017 - 15:54 Permalink

Retirement will be mandatory.

Best case scenario:

Place 5-8 people in a line blindfolded.

One long high velocity round in the rifle chamber.

Pull the trigger.

More likely:

Higher rates of:
Starvation, Disease,Crime, general misery and homlessness

Then sprinkle in some psychopathic leader/adherrant to churchianity (think Joel Osteen or Pat Robertson types). telling everyone about how they shouldn't help those in need because its god's judgement, they deserve it. All the while the churchianity person on news interview flashes occult gang signs because his/her god is the enemy of mankind.

fuckstar Wed, 08/16/2017 - 16:02 Permalink

7 trillion short in funding and they already "lost" as in burned through every generation born after The Great War Part Deux, and mortgaged the survivors and their puppies forever. We serfs were cheaper and worked harder than slaves, but we got uppity so The Man is cutting us down.

VIS MAIOR Wed, 08/16/2017 - 16:32 Permalink

bitcoin is just more catalysator to inflation-more printig petrodollar.  bitcoin make milionares from 0 work or productivity. if they start selling and use fiat to retire- buble will boom. booth boobles ,retirement and bitcoin - whole system is based on making money from nothing. lazy people.. 

headhunt Wed, 08/16/2017 - 16:53 Permalink

The reason for this is 'unions' and politicians.F'ing politicians suck the cock of unions and expect the rest of society to take it up the ass to pay them.Fuck the politicians and their cushy pensions and healthcare and fuck the unions, especially the government unions, and their cushy pensions and healthcare.

Herdee Wed, 08/16/2017 - 17:50 Permalink

Can you fight the eventual devaluation that's going to come to the U.S. dollar though? What if it's 30% and then up to 50%? Paper is designed to become worthless.

cynicalskeptic Wed, 08/16/2017 - 17:58 Permalink

Trillions go unaccounted for in Pentgon budgets.  Trillions are given out to Wall Street with no accountabiity.  The world's financial system is a disaster yet nobody even tries to fix anything.   TPTB just keep kicking the can down the road.......I suspect that all this is happening because there is NO INTENTION of dealing with any of these problems.   Why bother when it won't matter.I suspect that a cataclysm of immense proportions is in the wind - something that will leave much of the planet in ashes - and TPTB will be hiding in their own deep underground bunkers or with the 'government' officials that are supposed to provide 'continuity'.  Of course there wn't be much left to govern.   Other governments are making preparations to provide for their populace but not the US.  Russia runs civil defense drills for 5 million.  The US....Just let me die quickly.    Would've been nice to get some warning though..... wouldn't have had kids.    I wonder how many psychopaths will get a spot in the survival bunkers while some of the best and brightest die on the surface?

Robert A. Heinlein Wed, 08/16/2017 - 18:06 Permalink

It's not hard to fix according to the mayor of Chitcago. Just raise taxes. As many times as need to cover the gov workers pentions.  Oh, you thought you were working for yourself.  Silly boy.  

peippe Wed, 08/16/2017 - 18:07 Permalink

really like the canadian fund investing in the cancer treatment drug.....if the drug is very successful, and some canadian pensioners happen to be on it, they may live long enough to drain the pension plan of the profits it realized investing in the life extending cancer drug, right?

silverer Wed, 08/16/2017 - 20:54 Permalink

"Canada Pension Plan Investment Board committed up to $325 million for a portion of the future royalties in Venetoclax, a cancer drug."

I hope they considered whether people will have the money to buy what is likely a super expensive drug. People just might decide to do the easy barbituate/alcohol "cure", and leave their money to their family instead of heaping it on yet another rip-off drug company.

Thethingreenline Wed, 08/16/2017 - 21:34 Permalink

There they go again:
Bashing the pensions,
Bashing the pensions,
Bashing the pensions.
Gobels said, tell a lie often enough and it becomes real.
They keep telling everyone the pensions are unsound so they don't have to pay them! Can't people see the con?
TTGL slung shit for 25 years and deserves the pension.
TTGL made concessions on other benefits and they need to hold up their part of the bargain!!
If needed, bail out the pensions like they bailed out the banks.