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Time to Act: Pension Funds are Drying Up

On numerous occasions, I've told you to remain on lookout for threats to your savings, including the proposed new MyRA account.

If you've been counting on your pension, whether from work or even Social Security, you may want to revise those plans, as most are way underfunded.

Research by Bridgewater Associates, the world's largest hedge fund, estimates that 85% of public pensions could go bust within 30 years.

Public pension funds currently have about $3 trillion in assets, but will need to pay out nearly $10 trillion over the next several decades.

That would require average annual returns around 9%, but Bridgewater estimates they'll only earn about 4%, leaving pensions severely underfunded as paid benefits exceed contributions and returns.

Here and elsewhere, governments have bought votes by overpromising benefits that will never be honored…

The World's Biggest Pension Fund Just Made a Huge Bet

A recent announcement by the world's largest public pension fund, the $1.26 trillion Japanese Government Pension Investment Fund (GPIF), is very telling.

Prime Minister Abe has made good on his promise to reform the GPIF. The Japanese government just reorganized the pension fund's Investment Committee, with the ultimate goal of taking on riskier investments.

Clearly, Japanese officials recognize the lack of returns from low-yield government bonds, and the growing requirements of paying benefits to the world's second-oldest population.

But that's created a serious dilemma in Japan, and well beyond.

If one of the country's largest sources of demand for its own government bonds dries up, who will buy them?

It's enough to cause one to suspect that Japan's massive $1.4 trillion, two-year QE program to buy government bonds is in large part to compensate for GPIF's decreasing demand.

The World Pensions Council has warned that QE-prompted artificially low government bond yields would hurt pension funds, saying "without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years."

The Problem's Not Just Abroad

I've been studying the struggles and failures of public pensions for years.

And I've long since concluded that these would face serious challenges, with a majority eventually unable to meet their promised commitments. It's not rocket science to realize that, for the most part, contributions + returns will never = obligations.

We all know about Detroit's $3.9 billion pension deficit, and how overly generous promises eventually led to its dubious distinction as the largest public bankruptcy in U.S. history.

What you may not know is that pension benefits to retirees, responsible for half the city's liabilities, aren't sacrosanct like most thought.

And it's starting to play out pretty much as I'd expected…

Join the conversation. Click here to jump to comments…

About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. Carpenter Y. Arpa-V | April 28, 2014

    Am an SSA, U.S. Military and Veteran Pensioner. How do I go by I protecting my self-interest and preservation when according to what you said that pension funds are drying?

  2. Mark | April 28, 2014

    Back in the day, maybe 20 years ago. I was vested in a teamster pension. I'm still 10 years from retirement. Do you think they will deliever?

  3. H. Craig Bradley | April 30, 2014



    My Uncle is a retired Teamster on a teamster pension. They already took away a good retiree health plan and substituted an inferior (cheaper one) in its place. I believe it pertained to the Medicare Supplemental Insurance (secondary to Medicare for Teamsters over 65). From what I read, the Teamsters Pension Fund is only 60% funded.

    So, unless you are already retired, you probably can expect a reduced pension when the money eventually runs out or it is taken-over by the Pension Guarantee Benefit Corporation ( Federal insurance scheme for bankrupt pensions). The most they can pay-out per pensioner by law is $55,000/year. Therefore, Large beneficiaries will get their hair cut. No more "Cadillac Plans". Everyone is equal now. So, Better keep on truck'in.

  4. H. Craig Bradley | April 30, 2014


    A public pension solution at the state and local level, where incidentally, most government workers are located in the U.S. would be to raise taxes and/or cut services. In the end, they may have no other choice. If you only can earn 5% on your investments on average each year, then you have to increase employee/employer contributions and/or reduce pension benefits.

    In the short term, the Public Employee Unions control (own) politicians in states like California and New York and large cities in those states. So, they will either raise local taxes and city fees and/or make drastic service and budget cuts. I guess they could default on the municipal bond holders and the state's general obligation bond investors. Which is more politically acceptable?

  5. Econpete | May 3, 2014

    Pensions are premised on a discount rate, which is what makes them ponzi schemes. 401k's have a discount rate of 0 therefore they are fully funded. When a pension is "fully funded" it usually only has about 25 percent of future liabilities. The only way the liabilities can be met is with infinite, perpetual growth in asset values. But, because economics is the study of distributing finite resources and science says that every force has an opposite and equal reaction; what goes up must come down! Thus guaranteeing future returns is a Ponzi scheme that is dependent on population growth, the size of the discount rate and the ability to force/attract future participants. When rates are near zero, the total fertility rate is below replacement, and people all stop contributing to these scams, the music stops and so do pension pay outs. Good luck and start saving your pennies… The metal may become valuable someday, haha.

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