Rodney Johnson | Thursday, June 28, 2012 >>
The bad news for pensioners just doesn’t stop.
In 2009, the Pew Center issued a report called “The $1 Trillion Funding Gap.” The report estimated that city, state and local pensions (collectively referred to as public pensions) and retirement benefits were underfunded by $1 trillion. That was a big number. And now it’s bigger.
The Pew Center just issued an update. Between 2009 and 2011, the funding gap exploded from $1 trillion to $1.4 trillion! Cities, counties and states are not filling up their pension funds, they’re falling behind in what they owe.
One group we can blame for this is politicians…
Legislators at all levels have avoided making the hard decisions required to properly fund pensions.
It’s not as if no one knows about the problem. We’ve been writing about it since 2006. City and state governments have held talks on the subject since the 1990s. But no one ever did anything about it.
Now, after the Great Recession and while we are still in the economic Winter Season, people are paying attention. Cities like Providence and Central Falls in Rhode Island, Pritchard in Alabama and Vallejo in California are just a few examples of towns laid low by the pensions they owe.
Some declare bankruptcy. Others, like Central Falls, tell their current retirees – people who are already retired – that they will take a huge cut in pension payments. Immediately. Still others, like Pritchard, simply quit paying anything at all.
The city of San Diego, which we outlined in our last book The Great Crash Ahead, made successive bad deals with its pension funds and has recently forced its employees to pay in more while accepting lower benefits.
Ben’s House of Pain
But the pain doesn’t stop with falling benefits and higher require payments. There’s also the other side of the funds – what states earn. For the pain on this side of the coin, thank Ben Bernanke.
We have pointed out time and again that no monetary action comes without pain. The entire reason for taking action is to move wealth from one group to another… to give one group a benefit at another group’s expense. Well, if you’re an investor, if you’re a pensioner, welcome to Ben’s House of Pain.
On June 20, the Federal Reserve announced the continuation of Operation Twist, where the Fed will sell its short maturity Treasury bonds (those maturing in less than three years). It will use the money to buy long maturity Treasury bonds.
The goal is clearly to keep interest rates low and even force them lower. Who does it help? Borrowers, of course! Why else would 30-year mortgages currently be at 3.53% while inflation is 2.3%? This is the lowest mortgage rates have ever been in history!
The Fed is engineering lower rates to favor borrowers, which by definition means that it’s punishing savers, both individuals like you and me AND institutions like pension funds that rely on fixed income to meet their long-term liabilities.
So those same cities, counties and states that have not put enough money aside to pay their obligations to retirees are now seeing what little they do have set aside earn a pittance!
What’s the Solution?
There is one, but you won’t like it. Because YOU are the solution. Well, at least your money is.
When it comes to unfunded liabilities, there aren’t many choices. Tax your citizens more. Require higher payments from workers. Reduce benefits. Extend out the eligibility age (which is another way of reducing benefits). All of these things take wealth from people to put it in the hands of government so that they can meet at least some of their obligations.
This is not a pretty situation, and given the state of the economy, expect things to get worse, not better.
This is where you get to make a choice. Do you sit idly by and watch your pension checks and other funds dwindle, or do you take a stand and become proactive?
Start building your own future today. Take steps to build income streams wherever you can. Strong dividend-paying companies are a good place to look, but know that the equity price will likely underperform for many years. Don’t expect to make your money on capital gains.
Another way to build income streams is to stay agile in the market. Be prepared to take advantage of a bust ahead, by selling short a particular equity. And be ready to jump on board a boom.
Finally, make the cash you bring in through those income streams work for you. Find the highest yielding, safest places to put your dollars. As I mentioned in a Survive & Prosper article in February – The Best Place to Find Income – utility bonds are a good place to park your cash. EverBank’s High Yield Money Market Account, with its promise of a 1.06 average percentage yield and a bonus rate of 1.35%, is another good place for your money.
Unless you take action now, you can kiss your retirement goodbye.
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