U.S. Looming Pensions Crisis: State Budgets Soon to Be Under Siege
By: John Mauldin
Dec 08, 2012
In 2003, I was writing about the unfunded liabilities of state and local pensions. It was part of Bull’s Eye Investing, which came out in 2004. I caught some flak for being so pessimistic about the potential problems. Quoting:
Unless steps are taken soon, it is possible we can see shortfalls approaching $1 trillion–$2 trillion in state-sponsored pension funds within 10 years. A deficit of this size on the state level can truly be called a crisis. A tax increase or other adjustments to fund this will be a large drag on the economy.
Today in Outside the Box we explore the very sad fact that once again I was unduly optimistic. My good friend Ed Easterling shows that it is quite likely that the pension shortfalls are approaching $4 trillion. And the longer we wait to deal with the problem, the worse it will get.
The biggest part of the problem, as I wrote back in 2003, is unrealistic assumptions about future investment returns. That has not changed. You can find consultants who will tell you there is “only” a $1 trillion problem. However, if you assume that interest rates will remain low and equity returns will look like they did the last ten years, then the underfunding might look more like $4.6 trillion.