Greece is in the news for all the wrong reasons. Its debt levels are simply untenable, leaving the country in a tailspin. And citizens voted no in a recent referendum on austerity measures and other reforms. If we’re not careful, our own domestic public pensions could live the same Greek tragedy because they’re so underfunded.
As I’ve mentioned on my radio show, deficits of any kind can only run for so long. Unlike the federal government, states can’t print money, so the hard pension funding reality will set in eventually.
One issue is assumptions are too high. Funds often assume returns of 10% on the high end and 5% on the low end – or around 8% generally. But those returns just aren’t materializing.
Overstating future returns lessens the severity that unfunded liabilities actually present.
But the reality is many state and local pensions have severely negative present cash flow. When we get a down market, something will have to give.
Local governments can declare bankruptcy if needed. State governments can’t, but that could change. Like Greece, none of the choices are ideal. These groups could have to sell assets. And given the state of the economy and dwindling tax bases, it’s becoming harder for them to issue bonds.
Cutting benefits may be the only choice, but that’s unconstitutional in many states. Illinois did it anyway and lost in court. Now they’re trying to rewrite their constitution. How long will that take?
Meanwhile, the snowball keeps rolling.
Now, it’s not all doom and gloom! Not every teacher needs to think they’re out of a pension. But it’s wise to have a plan in case things go bad. For pensioners, a little financial planning on the side could go a long way.