by Mish

"Hello Mish

I had a call today — the first of its kind — from a retired teacher who is drawing a CalSTRS pension. She has a disabled son and is scared to death about the future solvency of the fund — mainly for his sake, because when she dies he’ll really need the pension that she’ll pass on to him.

It’s disturbing to see what our politicians have put in motion"

She is correct to be worried, very worried. Promises that cannot be met, won’t be met.

Pension debt keeps racking up despite the soaring stock market.

Chart from the Bloomberg article Pension Crisis Too Big for Markets to Ignore.

Meanwhile, market valuations are the most stretched in history by many measures.

GMO 7-Year Expected Returns

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Source: GMO

"*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forwardlooking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years."

Forecast Analysis

GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, even nominal returns are expected to be negative for seven full years.

Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.

Pension Problem Too Big To Ignore?

Bloomberg writer Danielle DiMartino Booth says the Pension Crisis Too Big for Markets to Ignore. But I have a question: If the problem is too big to be ignored, why is nearly everyone complacent?

CalPERS Pension Promises: Myth, Reality, What’s Next?

On July 13, the Fresno Bee reported California’s big pension fund sees flat earnings for a second year.

Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute.

The California Policy Center estimates Required Pension Contributions Will Nearly Double in 5 Years. I claim it will be much worse.

Dallas on Verge of Bankruptcy Due to Pensions; Just a Matter of Time

Dallas is on the verge of bankruptcy due to untenable pension problems.

Criminal Witch Hunt in Dallas Pension Fiasco

In the wake of the near collapse of the Dallas police and fire pension fund, a Dallas News editorial says Former Police, Fire Pension Managers Should Face Criminal Investigation.

Five Major Pension Problems – One Simple Solution

Even with this huge rally in stocks and corporate bonds, pension plans are in incredibly poor shape.

Dallas Pension Showdown: Mayor Seeks to “Target Those Who Got Rich From System”

The Dallas Police and Fire Pension plan is severely underfunded. Not even a $1.1 billion taxpayer bailout the plan officials request will make the plan whole.

85% of Pension Funds to Fail in Three Decades

Bridgewater Associates did an analysis of pension funds recently and concluded 85% of them will fail if returns average 4%.

UPS Fears $3.8 Billion Liability Over Bankrupt Central States Pension Plan

In 2007, UPS dumped its pensioners into the Central States Pension Fund, a fund now destined for bankruptcy.