They're Using Bernie Madoff Math To Hide A Crisis

Authored by Nick Giambruno via,

Politicians are always generous with other people’s money… until it runs out.

Near the peak of the late-’90s tech bubble, California’s legislature passed the largest pension increase in its history.

Today, with as much as $750 billion in unfunded public pension debt, California has one of the worst pension situations in the country. But it’s far from alone.

Illinois has a staggering $250 billion in unfunded pension obligations. State pension plans in Connecticut, Pennsylvania, New Jersey, and many other states are taking on water, too.

Unfunded public pension liabilities in the US have surpassed $5 trillion.

Taxpayers Are Stuck With the Bill

There used to be a simple formula for a secure retirement. American workers would work for a big company for decades. Then, at a certain age, they were eligible for a monthly pension check… for life.

Once common, pensions have virtually disappeared from the private sector. Today, less than 4% of companies offer them. It’s another vector in the devalued standard of living of the average American.

Essentially, only government employees get pensions now.

The government isn’t subject to the same constraints as the private sector. So it has no problem promising benefits it can’t afford to pay.

That’s because government revenue doesn’t come from the voluntary exchange of goods or services. It comes from taxes, which it extracts via coercion.

Politicians only care about the next election. So there’s no way to hold them accountable in the long term.

They automatically do the most expedient thing in the short term, like promising extravagant pension benefits. In the long term, their successors have to deal with the consequences.

Naturally, not one of the politicians who voted for California’s record pension increase is still in office.

It’s bad enough that politicians give themselves and other state employees extravagant retirement benefits and stick the taxpayers with the bill.

But the story gets worse…

Government pension plans use all sorts of accounting wizardry that would land someone in the private sector in prison.

Bernie Madoff Math

The single most important number for a pension plan is its assumed rate of return. This is the rate the plan’s investments are expected to make.

As in other areas of life, the government takes special privileges here. It uses accounting practices that the private sector can’t—not legally, anyway.

Essentially, government pension plans choose whatever rate of return they’d like.

Lawrence McQuillan—a senior fellow at the Independent Institute—says that government pension plans “work on the assumption that they’re going to generate returns 25% higher than Warren Buffett every single year into perpetuity.”

These assumptions are totally disconnected from reality.

Government pension plans overestimate investment returns using unrealistically high rates of return. They routinely pull numbers out of thin air.

The results they come up with are insane.

In effect, this artificially shrinks a pension fund’s liabilities, making it look more solvent than it really is.

In other words, the government is using Bernie Madoff math.

This lets politicians contribute less money than the fund needs to be truly solvent. That, in turn, frees up money to bribe constituents for votes, or do whatever else the politicians want.

On average, government pension plans assume about a 7–8% rate of return (even after years of underperformance).

False Assumptions


A recent study found that the average 2016 return for a public pension was an awful 0.6%, compared to an average assumed return of 7.6%.At those assumed rates, a dollar invested today would double in around nine years. This rosy assumption allows a pension plan to say, for example, that $25,000 in the fund today will cover a $50,000 obligation in 2026.

California’s public employee pension plan is the largest pension plan in the US. It recently voted to reduce its assumed rate of return from 7.5 to 7% over three years.

The move—which doesn’t go nearly far enough—generated enormous political controversy.

Lowering the rate of return to a more realistic number, if even slightly, means politicians would need to contribute more to a pension fund. That means drastic spending cuts or higher taxes elsewhere.

This is why, in most cases, it’s politically impossible for a government pension plan to stick with anything close to realistic assumptions.

The Biggest Financial Bubble in World History… and Pensions Are Still Broke

In the ’50s and ’60s, government pension funds were, on average, over 90% invested in bonds and cash.

Most importantly, they were structured so that assets matched future liabilities. It was conservative, and it made sense.

That’s not how public pensions look today.

Matching liabilities with safe fixed income investments has become impractical, thanks to the Federal Reserve and the historic bubble it’s created in the bond market.

The economy has been on life support since the 2008 financial crisis. The Fed has pumped it up with unprecedented amounts of “stimulus.” This has created enormous distortions and misallocations of capital, especially in the bond market.

Think of the trillions of dollars in money printing programs—euphemistically called quantitative easing (QE) 1, 2, and 3. In short, the Fed created trillions of dollars out of thin air and used them to buy up bonds, creating an epic bubble.

Meanwhile, with zero and even negative interest rates in many countries, rates are the lowest they’ve been in 5,000 years of recorded human history.

What’s happening in the bond market could not happen in a free market. It’s only possible in the current “Alice in Wonderland” economy created by central bankers.

This is not hyperbole. We’re really in uncharted territory. (Interest rates were never lower than 6% in ancient Greece and ranged from 4 to over 12% in ancient Rome.)

Allegedly, the Fed has done all of this to save the economy.

In truth, it’s warped the economy and turned the bond market into the largest financial bubble in human history.

This, of course, affects pensions.

First, today’s artificially low interest rates make it very difficult to match future liabilities with income from bonds at a reasonable cost. So pensions have had to turn to riskier assets like stocks, real estate, and alternative investments.

With interest rates near all-time lows, bond prices are at an all-time high. That benefits pension plans because it pumps up asset values and makes the funds look more solvent.

But, even with the bond market in a historic bubble…

Even with the stock market at all-time highs and more overvalued than almost ever…

And even with the Bernie Madoff math…

Public pensions are still insolvent.

Despite the eye-watering returns in the bond and stock markets over the past 10 years, pension liabilities have still gone up.

According to Moody’s:

The optimistic "best case" of cumulative 25% investment return would reduce net pension liabilities by just 1% through 2019 year-end because of past bad investment returns and weak contributions. Meanwhile, the "base case" scenario of 19% returns would see net pension liabilities rise by 15%.

This is an unsolvable problem.

Many public pensions are hopelessly insolvent. It will all be apparent in the next market downturn, which probably isn’t far off.

I think we’re headed into an enormous crisis.

Unfortunately, most people have no idea how to prepare.

I think everyone should own some physical gold. Gold is the ultimate form of wealth insurance. It’s preserved wealth through every kind of crisis imaginable. It will preserve wealth during the next crisis, too.

But if you want to be truly “crisis-proof,” there's more to do…

How will you protect yourself when this crisis explodes? New York Times best-selling author Doug Casey and I just released a PDF guide that will show you exactly how. Click here to download it now.


doctor10 AGuy Wed, 08/23/2017 - 17:27 Permalink

this is more of a statement about the worth of capital and cash in a surveillance society. "Anything" worth investing in -that you discuss by phone or email-is immediately glommed onto by the Deep State and their NY cronies. Has been so for at least a decade-mebbe 15 years.

At the end of the day its why interest rates -at least in 100% traceable accountable taxable regulatble and ultimately takable dollars are basically 0% give or take a few fractions of a percent.

Watch the interest rates on bitcoins-

tell me otherwise

Ask East Germany and the Soviet Union exactly how well a surveillance society worked out during the 20th century. The 21st is no different in that regard

In reply to by AGuy

sunshine_units AGuy Wed, 08/23/2017 - 18:13 Permalink

There was absolutely nothing wrong with Bernie Madoff's MATH.It was his ETHICS and INTEGRITY that were the issue!He was like Bugs Bunny.  Madoff basically said...."One for you, one for me.  One for you, one, two for me.  One for you, one, two, THREE for me!"Bernie SANDERS is the only one of the two with a MATH problem!

In reply to by AGuy

Radical Marijuana Stan Smith Wed, 08/23/2017 - 17:52 Permalink

The overall situation is almost infinitely worse than merely a "Ponzi Scheme."The article above was typical Zero Hedge material, in as much as it grossly understates the situation: "money" made out of nothing as debts was used to "pay" for strip-mining the natural resources of the planet as fast as possible. People who made "money" within the established systems were FORCED by governments to participate in FRAUDS which enabled the total human population and activities to grow at about an exponential rate, based upon deliberately ignoring that the planet was finite.In lesser kinds of pyramid schemes, such as the Ponzi Sheme, or the Bernie Madoff scheme, one has a choice to NOT participate. However, there are no genuine choices possible regarding to not participate inside of the overall social pyramid schemes of Globalized Neolithic Civilization, because those were based on the history of successful warfare, always maximizing the short-term interests, due to the imperatives being driven by the maximization of the maliciousness of the murder systems, inside the overall context where MONEY IS MEASUREMENT BACKED BY MURDER.Those who appeared to make "money" were actually FORCED to participate in fundamentally fraudulent financial accounting systems which were effectively killing the future life of the planet. Moreover, IF, IF, IF one is genuinely more realistic about the foreseeable future of the exponentially increasing unsustainability of strip-mining the planet, while turning those resources into garbage and pollution as fast as possible, THEN, one must propose alternative death controls, with alternative murder systems as the most important and extreme forms of those death controls. However, given that the existing death control systems developed throughout history to become as deceitful and possible, it is politically impossible to sufficiently change the perception of the combined money/murder systems enough to comprehend how and why the entire political economy developed inside of the human ecology, such that the debt controls were backed by the death controls.It is barely possible to exaggerate the degree to which all public discussions regarding political economy have become based on absurdly backward BULLSHIT. The issues regarding unsustainable pensions are merely some of the tips of those icebergs of fundamentally fraudulent financial accounting systems, which deliberately ignore and misunderstand human beings and civilization as much as possible, because civilization necessarily operates according to the principles and methods of organized crime, which has the necessary corollaries that civilization becomes the biggest form of organized crime, dominated by the best organized gangsters, which are currently the banksters.The first line of the article above reads:

"Politicians are always generous with other people’s money… until it runs out."

That encapsulates a bunch of ridiculously superficial presumptions regarding "money."Hence, while the rest of that article presents some superficially correct analysis, it continues to almost completely take for granted NOT understanding human beings and civilization as manifestations of general energy systems. To more adequately "redefine Ponzi Scheme" requires series of intellectual scientific revolutions and profound paradigm shifts. Although human beings and civilization live according to the laws of nature, since the only connections between the laws of nature and the laws of men are the abilities to back up lies with violence, civilization has become almost totally based on integrated systems of legalized lies, backed by legalized violence, whose most important forms have become the ways the the powers of public governments enforce frauds by private banks, while about exponentially advancing technologies have enabled that to become about exponentially more fraudulent.

In reply to by Stan Smith

JuliaS Stan Smith Wed, 08/23/2017 - 18:31 Permalink

Government and law enforcement have an interesting system going, working in collusion.The way to make money is to set up laws preventing majority from breaking them, but letting few individuals through to the other side. Hard working people are kept entertaining the illusion that their labor efforts will be adequately compensated, so they keep working. Criminals then take from workers what they aren't allowed to take by law and what government supposedly agreed not to collect when it came up with the laws. Then law enforcement comes in, catches crooks and compensates proceeds of crime. They also do it just often enough to stuff their pockets, but not so often as to deter criminals entirely. This is evident in the drug war, which revolves around effects as oppose to causes.So, politicians tell people to work and expect rewards. They let others then to collect such benefits by stealing / murdering / extorting etc. Then that money travels back into the hands of government and law enforcement (not all of it, again, but just enough to maintain the illusion that the law is being maintained, without actually addressing or permanently fixing any of the foundations).Government's job is to ensure workers keep working, criminals keep stealing and police keeps taking money that they wouldn't be able to collect off law abiding citizens otherwise.A fine balancing act, which at this point is caving in on itself. Greed has pushed law enforcement to the point where they aren't even pretending anymore. Civil forfeiture exposes what the system was all about since inception. Real crooks who run the show are getting desperate. They have, indeed, almost run out of other people's money.

In reply to by Stan Smith

Mon T (not verified) Wed, 08/23/2017 - 16:35 Permalink

This is great. Please keep Shepwave making short market buy and sell calls. Aggressive trading

Rebelrebel7 (not verified) Wed, 08/23/2017 - 16:54 Permalink

To say that if anyone in the private sector would be in jail if they attempted what government has, regarding pension plans is an absolute lie! US Steel and railroad companies have dumped the responsibilities of paying employee pension plans onto the tax payer, Harold Hamm is now attempting to do that in the coal industry, the truckers pensions have faced a similar fate with truckers now only receiving 1/4-1/3 of what they were promised. I have met retirees from local manufacturers which sold their companies and the new owner ended the pension plans  altogether,  which should be illegal, but isn't .The entire economy is based on Madoff math because of fractional reserve lending.A bird in the hand is worth two in the bush, and the reality is that nobody can honestly tell anybody what the future will hold.

arby63 Wed, 08/23/2017 - 16:53 Permalink

When it truly does run out--and it will--and all of the other lies and methods of deceit fail: That's when you know we're in serious trouble. Don't know when or how. Maybe not for a thousand years. 

SantaClaws Wed, 08/23/2017 - 16:57 Permalink

Don't forget the small(est) state of RI.  Its Governor and former Treasurer, Gina Raimundo, is single-handedly driving the state's pension funds into oblivion.  She is responsible for what Forbes' Edward Siedle has described as the worst financial scandal in the state's history.…;…

Mena Arkansas Wed, 08/23/2017 - 17:35 Permalink

The pensioners are just going to have to take a 90% haircut.Don't be thinking about a tax-payer bailout funded by those that don't have the sweet pension deal these .gov workers got.

moorewasthebestbond (not verified) Wed, 08/23/2017 - 18:02 Permalink

Chris Christie was essentially Bernie Madoff's lobbyist and PR man before entering the political ring. Go figure.

CRM114 Wed, 08/23/2017 - 18:09 Permalink

So, everyone who works for the IRS will end up destitute when they retire?Dying of starvation in a lonely, miserable, freezing single-wide?I'm gutted, I tell you, just heartbroken......

Anon2017 Wed, 08/23/2017 - 21:47 Permalink

The California state employee pension benefit increase became law in late 1999 and was adopted by virtually every local government and agency in the state in the next few years. So how many Republican political organizations across the US sponsored ballot initiatives to rein in state and local pension benefits in subsequent years in the states that allow ballot initiatives? I know of only one, in California. Governor Schwartzenegger got an intitiative on the ballot but it was poorly supported by the Republican establishment and it failed on election day.In the decade or so after the California pension benefit increase became law, some 30 states (including California) placed marriage initiatives on the their ballots (sponsored by Republican politicians) and they passed in almost every case, including in California. I guess we get the kind of government we deserve.    

Thisfuckenlife Wed, 08/23/2017 - 21:54 Permalink

Isn't this a good thing though? We want the government to go into default so it forces the system to auto-correct itself in ways it would never voluntarily do.The pain they will experience is deserved, because of the uncaring nature of voters who allowed it to happen. Only by painful elimination of their entitlement will they finally come to realize that rooting for their sports team was NOT more important than their actual livelihood should have been.*Spit* on their feelings.