Pension Ponzi Exposed: Minnesota Underfunding Triples After Tweaking This One Small Assumption…
by Tyler Durden
ZeroHedge.com
Sep 1, 2017
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.
The Rest…HERE
