Cliffwater LLC, an independent advisory firm, has identified points of alarming fragility in public pensions nationwide.
In a study analyzing ten years of public pension returns, Cliffwater discovered that the median state pension plan in the US returned approximately 5.9%; the top three plans returning 7.1% (Oklahoma Teachers’ Retirement System), 6.8% (South Dakota Investment Council), and 6.7% (Missouri Local Government Employees Retirement System).
The problem is that the majority of US public pensions have assumed a long-term return of 7.5%, or an average of 1.6% above what they can actually produce.
In an interview with Bloomberg, Bill Gross warned of the unintended effects of low interests rates on return expectations:
“Fund managers that have been counting on returns of 7 percent to 8 percent may need to adjust that to around 4 percent, Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said during an Aug. 5 interview on Bloomberg TV. Public pensions, including the California Public Employees’ Retirement System, the largest in the U.S., are reporting gains of less than 1 percent for the fiscal year ended June 30.”
In short, a large majority of state pension plans are too underfunded to match their lofty investment goals. A condition which–according to John Chilton, Kentucky State’s Budget Director, reflecting on his state’s current pension plan–would have justified plan termination under federal law:
“…if Kentucky plans were subject to federal standards for single-employer private plans, six of the plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent. As such, federal law would require that all benefits be frozen and the plans terminated. This is true even using the old 2016 actuarial assumptions, rather than the more realistic discount rates and other assumptions required of private plans.”
Yet several public retirement systems seem confident they can produce returns at levels that, whether they realize it or not, exceed even those of Warren Buffett! In reality, however, most pension plans are destined to miss their targets for several years to come. And as more money is allocated toward these retirement systems in compensation for the dwindling returns, less money is available for salaries and other state services.
The pension system is positioned to implode
The Cliffwater study finds that over 50% of public pensions are invested in public equities. And among those pensions, portfolios are typically allocated as follows:
- 48% public equities
- 26% alternatives (private equity, real estate, hedge funds, etc.)
- 24% fixed income
- 2% cash
Despite their 48% equity exposure—which should have raised returns as equities have been experiencing one of the largest bubbles in history–public pension underfundings have actually been increasing! How is that possible?
But here’s the critical question: what will happen to public retirement systems nationwide once the equity bubble bursts?
The main point is this: several state pensions are either on the verge of bankruptcy or have been masking their insolvency by operating what appears to be a state-sanctioned ponzi scheme.
If you rely on a pension that has been yielding decent returns, you might want to do some hard research to see if–or to what extent–your pension fund is underfunded.
If you are like most American’s, your continued confidence in your pension’s capacity to maintain its returns is simply an act of faith; not an act of sound reason. In this case, you would be investing in the value of hope, but not in the intrinsic value of sound assets.
Why not hedge your wealth? Why not invest in assets whose value exceeds the value of money itself; whose value is recognized throughout the world; and whose value has been sought after throughout history?
Invest in a gold and silver IRA.
Your hard-earned wealth is not something to gamble away. And it certainly deserves more than a state-run ponzi scheme.