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

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


truthalwayswinsout Sep 2, 2017 7:34 PM Permalink

They will get screwed and get just 1/2 of what they were promised.They will never blame the Democrats for all the promises but the government unions that demanded these outrageous pension plans will blame it on Trump. 

headhunt Sep 2, 2017 4:39 PM Permalink

Every one of these government sponsored pension are from government unions - the unions are controlled by demorats for 75 plus years. This is all the leftists commie unions doing.Hold on to your ass because giant tax increases are coming, property tax and resulting increases in rent to pay those property taxes.Everyone gets fucked except unions, and government union employees

803Mastiff Sep 2, 2017 2:58 PM Permalink

Peoples spend the first 21 years of life trying to get away from their daddy and the rest of their lives looking for a daddy to take care of them.... Sep 2, 2017 2:14 PM Permalink

Ladies and gentlemen, boy and girls, it's all one big fraud.  Everything!  Everything!!  Everything!!!And by all means, don't forget to vote for your favorite scum sucking, bottom dwelling, POS, parasitic, egotistic, bloviating, narcissistic, punch-able, crooked, phychotic, reviled, FAVORITE POLITICIAN.  

Anon2017 Dilluminati Sep 2, 2017 3:13 PM Permalink

"Why isn't anybody going to serve time in prison for this?" Because it was all done according to state law. Republican politicians decided correctly that there were more votes to be gained in distracting the public with religious issues like gay marriage and abortion while Democrats were afraid of offending their government worker base.Who wants to be a real downer on the campaign trail? Remember what happened to Chris Christie!  

In reply to by Dilluminati

hooligan2009 btcbull Sep 2, 2017 1:23 PM Permalink

i have a couple.the key points I took from the pdf link are:1. "..the true health of a pension plan is determined not by GASB annual accounting rules but by funding policy."2. "..TRA Board of Trustees proposed $1.6 billion in benefit reductions and $92 million in annual contribution increases."3. "investment returns from fiscal year 2016, which were indeed lackluster at -0.10 percent. However, for the fiscal year that ended on June 30, 2017, the SBI returned 15.1 percent......4. "The year-to-year GASB numbers will fluctuate wildly and do not provide appropriate guidance for oversight of pension funding, which is best viewed through a very long-term, key questions.a) what are the rate of return assumptions and how long has the pension fund got left to run? it is hard to see where the risk lies for the Fund - is there a predominance of liabilities falling due in under 5 years, 5-10 years or longer? how much falls due in which maturity buckets? note that if returns are poor for nearby years, the returns available for longer terms must be much higher to revert to the mean long run (30-35 years).if i were the board, i would fully fund the short term liabilities with low risk investments and be more adventurous for those liabilities falling due in more than, say ten years.b) are the same return assumptions applied to each maturity bucket? or are all returns still based on average returns actually achieved (but unlikely to be repeated with MOARRR qe over the next  thirty to thirty five years  - in the past returns  have "averaged an 8.7 percent annual return over the past 30 years, ...Returns over 35 years have averaged 10.2 percent per year.c) the investment portfolio (without matching liabilities?) look slike it is consistent with a target return of around 7-8% with around the same risk of 8% - that is returns will be between 0 and 16% for 14 years out of 21 years and will be above and below that for the other 7 years out of 21 years. KEY POINT - how much of this 8% risk is being taken BEFAUSE THE SCHEME IS NOT BEING PROPERLY FUNDED BY CONRIBUTIONS!!!so, those are my thoughts.what is the mturity profile of liabilities?are these liabilities matched against assets with lower risks and returns, for shorter maturities and higher risks and returns for longer maturities?is the investment portfolio taking excessive risks to compensate for lack of contributions?- of course, higher risks require higher fees to manage, so i would also be very conscious of the management fees paid for managing these higher risk assets - in my experience, higher fees serve to ONLY REDUCE RETURNS, without rewarding the higher risks taken.goodl luck!

In reply to by btcbull

hooligan2009 hooligan2009 Sep 2, 2017 1:40 PM Permalink

p.s. the trustees would be better served investing in the complete supply chain of geriatric care directly or via the stock market - these are pensioners true rates of inflation and costs in retirement. it would be too radical to invest in time-shares (or similar, like diving or golf resorts) here and overseas for pensioners to go for vacations or to take "time-outs".the objective of the pension fund is to provide food, health, power and housing in retirement - investing in paper/fiat assets seems like a dumbfuk (sic) idea to me. you can't eat actuarial assumptions or booms and busts in fiat currency.

In reply to by hooligan2009

Arrest Hillary Sep 2, 2017 11:22 AM Permalink

Run up the tab .... the bar is open .... and the tax payers are on the hook ? (We can't all retire as opulently as public employees .... so, tax the hell out of government retirement checks .... call it administrative fees ?)

YUNOSELL Sep 2, 2017 11:14 AM Permalink

But let's just all pretend that all these pensions are solvent like the world does with Greece, and keep kicking to can forward for someone else to deal with it -- "I'm not going to be the snowflake that causes the avalanche, not on my watch"

chemcounter Sep 2, 2017 11:14 AM Permalink

This is why the powerful love pensions. You are indebted for life. Every government employee I know saves little to no money because they are counting on their pension in retirement. They have new cars and mortgage everything on the longest terms available. They expect the same level of income, or more, for life. I would love to see the day of reconning but realize how it would affect everyone's quality of life.

Lost in translation Sep 3, 2017 12:24 AM Permalink

A dear friend of ours left the private sector to teach business/CTE at an inland valley high school. Met with her this week, talk turned to retirement.

J: you thinking about retirement, Lost?

Me: not really. I'd like to, but in all probability I'll work 'til I'm room temperature.

J: you guys don't get a retirement? Don't they have a pension?

Me: not for part-timers, I'm on my own. So I just save like mad, buy silver, and so on.

J: I'm not going to make it 30 years here, it's an insane asylum.

Me: will CalSTRS be enough if you go early?

J: if I can make it to 60 it will. I'll get $6300.

Me: a year? That's all?

J: a month.

Me: a MONTH!? CalSTRS pays THAT much!?!?

J: no, they pay around half of that sum. The balance comes from a 403b the district offers us, which we've been contributing to each paycheck. The 403b will pay the rest.

Me: < silently thinking, "uh oh..." >

Your Creator Sep 2, 2017 9:46 AM Permalink

no pensions for leftist politicians . They get rewarded for piss poor stewarship.  They always have money to burn when it somes to stuff that is not needed. stupid things.

Solio Sep 2, 2017 9:36 AM Permalink

Just squish down the y axis and it become a straight line. But, also squeeze down the x axis and it just becomes a point.What's the point? Must support the criminals.

Solio Sep 2, 2017 9:34 AM Permalink

Just squish down the y axis and it become a straight line. But, also squeeze down the x axis and it just becomes a point.What's the point? Must support the criminals.

Pop3y3too Sep 2, 2017 9:27 AM Permalink

"The Minnesota Teachers' Pension expected to go broke in 2052." 35 years?  Who here expects this shit show to last another 35 years? I'm guessing 10 years tops before we're all living like Greeks or Venezuelans or....Ethiopians.  

Last of the Mi… Sep 2, 2017 8:15 AM Permalink

I smell more wall street "bundle and sell" bonds and derivatives coming. Nothing that another 10 trillion or so in debt and worthless paper that will ultimately be shouldered by the tax payer can't fix.

hooligan2009 Sep 2, 2017 7:39 AM Permalink

let's do these sums for an individual aged 55 years needing a 50,000 pension in ten years (that is, 40,000 in todays bucks and 25% inflation at 2.5% per annum for ten years).assume the annuity rate is going to be 5% in ten years time.that individual needs 1 million bucks in ten years to get a 50,000 per annum annuity = around 1,000 a week to cover health care, food, utilities, taxes, city taxes etc.if the individual has a deficit of 50% today, that means the individual "only" has 500,000 saved up to the age of 55 and needs another 500,000 from contriubtions and investment returs to roll up to one million bucks in ten years appreciate that 500,000 to 1 million let's assume an average 5% p.a. investment return over the next ten years which means the individual must save 10,000 a year (ok, 9,945.80, but who is counting).step it up to a 6% investment return only 3,300 is required - at 7%, the individual can WITHDRAW 3,200 bucks a year!put it another way - what is the combination of how much can the indidual afford and the minimum RETURN required.if the individual can only afford 200 bucks a month or 2,400 a year, what is the required investment return to LIFT the starting balance of 500,000, the contributions of 2,400 a year to the required closing balance of 1 million bucks?answer = a little over 6% after fees.the scary bit is that using ten year treasury yield of 2%, requires annual contributions of around 31,000 a year -the relaxed bit si that using a ten year return (fang plus tesla) of 20% per annum investment return means that you can pay yourself a 77,000 pension RIGHT NOW and still end up with a million bucks in ten the way, my prediction is that "real" investment returns from bonds and equities will be an average negative 2-4% per annum for the next ten years after expenses - either via inflation or falls in nominal prices of equities/increases in bond yields to around 4% from the current average 1.5% across the yield curve.duration of equities = 15 yearsduration of bonds = 7 years2% rise in yields = 30% fall in equities and 14% fall in bonds - inflation at around 2%, investment manager fees/trustee and admin expenses around 1%.

JBPeebles hooligan2009 Sep 2, 2017 7:38 PM Permalink

Had to minus you because it's not allowed to project a return of more than 12% in any projections. NASD rules. The problem we have with pension underfunding is due to too high expectations.It's better to underpromise and overdeliver. NASD regs don't allow higher projections for a reason--they imply higher rates of risk.You're right to anticipate inflation in the projection of spending. A good financial analysis program will project multiple scenarios with inflation at current levels and higher ones.You can enter the data to determine how much your retirement will cost--with estimates being 70% of your pre-retirements wages but that's very undependable. Some expenses might go up, most notably out of pocket co-pays and deductibles.The largest cost during retirement is health care. I saw one estimate that put that at $250,000 per retiree. Now Social Security has been indexed to inflation, or at least the goverment's version of it.Instead of accurately charting price inflation, the government has chosen to base COLA on the spending profile of a much younger person. This has capped the growth in costs that a retiree must face, and necessitated a reevaluation of projected costs in retirement.To be truly free in retirement you may have to leave the United States. If you can work, you'll probably qualify for health care coverage. You'll need to know the place you're going intimately. Otherwise you could find yourself at risk. Still, if you're comfortable somewhere and qualify, the care can be just as good as home.You may have to travel back to the U.S. to use your Medicare. This is an added cost.As for what to invest in, your job as a financial adviser--at least to act in that capacity for your own benefit--is to get the highest risk-adjusted return not the highest return. Higher yielding assets do so for a reason--they involve higher risk. Now the recent market may be evidence that risk-related return analysis no longer matters and it doesn't until of course it really does matter. At that point, you may not be able to reenter the workforce.If you wait for the correction, it can hit at any time and that could be the day you retire. So move assets into increasingly less risky assets as you near your date. This could be a so-called retirement target fund. Historically, this would be less than 50% equities at the start of retirement  but the likelihood that you'll be alive for two decades or longer encourages more equities.Remember that your client can't take any losses inside tax-deferred retirement accounts. This justifies a higher rate of risk reduction as they won't probably ever get their losses back. Have them keep a six month emergency fund--maybe longer for retirees--outside the IRA/tax deferred bucket so they don't have to sell into the correction. Worse, they'll eat the highest income tax rates on those withdrawals regardless of performance.I'd make an exception for myself in this market by going with offsite, allocated physical gold 20%+ but wouldn't recommend that for others without understanding their risk tolerance--how likely they will be to sell if it goes down. I don't give advice without knowing the client's specific situation and you need to be highly cautious of overly rosy forecasts offered to you or those you can help and may have to take care of.

In reply to by hooligan2009

BingoBoggins Sep 2, 2017 2:04 AM Permalink

just made the jump from the land of 10,000 laws to Wisconsin- numero uno in funding 100% .na na na boo boo ...edit: but remember the absolute union hatred for gov Walker when he instigated reform? how much you wanna bet it don't go away?All kidding aside, people, I will continue to observe the behaviors...

VWAndy Sep 2, 2017 1:48 AM Permalink

Well really wtf did yall think ZIRP was?  Think of it like a bucket with a hole in it that keeps getting bigger. This is what I call an exponential blunder. It will cascade until its either wipped out or stopped. The banksters did this to you. Not me,not the libtards,not the skinheads, no no it was the banksters and their buddies in government.  Yall got ZIRPed! Maybe you should do the math yourself from now on? 

Phillyguy Sep 2, 2017 12:33 AM Permalink

Let me get this straight. There are $ trillions available from taxpayers to pay for wars in Afghanistan, Iraq, Libya, Yemen, Syria, North Korea, Iran and Venezuela? There are hundreds of billions more to fund the pentagon, NSA. Meanwhile Congress cuts taxes for the wealthy and inheritance taxes to perpetuate wealth, but there never seems to be money available to fund pensions? What kind of society is this?

squid Phillyguy Sep 2, 2017 10:51 PM Permalink

You've almost go it....There are trillions available for war in all the lands you mention (and likely many more we know nothing about) NOT paid for by tax payers but paid for by the current tax payers future grand children. Fixed it for yah. And here's the thing....congress has a re-election rate of ~92%. Figure that one out. Squid

In reply to by Phillyguy