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Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management.

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Mish Shedlock Talks America's Pension Problem

Mike Shedlock

An espoused self educated Austrian Economist, Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Read more at http://globaleconomicanalysis.blogspot.com

Published 04-18-15

Mish Shedlock talks about the magnitude of the mounting Pension Problem in America and uses his home state of Illinois as a prime example. According to a State Budget Solutions, last year's state unfunded pensions reached an all-time high of $4.7 trillion. This funding gap state public pension plans are underfunded by $4.7 trillion, up from $4.1 trillion in 2013. Overall, the combined plans' funded status has dipped three percentage points to 36%. Split among all Americans, the unfunded liability is over $15,000 per person.

Illinois Pension Obligations


Illinois' Pending Pension Crisis

"Illinois Pension's in general are 39% funded! This is after this massive rally we have had since 2009 in financial assets. Some of the worst ones are only about 20% funded. I think the Teacher's Pension Plan is about that and the General Assembly and Judicial Pension Plan are also on the bottom."

"Various cities in Illinois have problems, Chicago being one of them. The City of Chicago has a huge pension crisis right now. We have things in Illinois like "Home Rule Taxes" where cities can levy their own taxes in addition to the state. That is why we have varying sales tax that range anywhere from 6% to 10%, depending on locality."

"I believe Chicago is Bankrupt!"

"I have been working with the Illinois Policy Institute. There are a number of cities in Illinois (I am not going to name them), but I am aware of five cities (one of them a major city - not Chicago) that are ready to file bankruptsy - and it is all over the pension issue! The problem is they can't file bankruptcy because the state doesn't allow it."

"The fundamental problem is they have made more promises than they can possibly keep!"


Gaming The Pension System

The problem is "you have police and fire workers who can retire after 20 years ... and collect up to 70% of their earnings based on the 5 highest years salaries. We see a lot of pension spiking in the last few years where for example police work overtime (which counts towards their best five years) so these workers stand to collect far more in retirement (total years in retirement) than they actually ever made while working (total years worked).

Pension Debt Cartoon

"Tax payers are actually funding the employees portion of the pensions by excessive wages and direct contributions."

"Chicago (has) floated General Obligation Bonds to actually just fund current expenses. That is illegal! We have bonds here in Illinois that are called tax exempt on the basis they are supposed to be funding long term infrastructure expenses that are funding short term needs."


Property Taxes The Jurisdiction Of Underfunded Cities & Towns

"Taxes in Illinois are are already obscene. A homeowner on a $600,000 home can expect to pay $14-15,000 per year - every year on property taxes. Do you really own your own home in Illinois? On top of tht you have 10% sales tax."

"Pensions are so underfunded in Illinois that they are going to go bust in the next slowdown. I believe one (a slowdown) is on the way."


The New, Looming Problem For States, Cities And Towns

Negative interest rates are sweeping the globe. How will states, cities and towns fund themselves and their pension obligations in an era of potential negative nominal bond rates?

  • Returns on the heavily weighted funds' bond holdings are being potentially destroyed, while
  • State/Municipal bond offerings are likely to face mounting issues around maintaining investor attraction with such monstrous overhang levels of unfunded pension liabilities.

Government Bond Yields

Percentage of Countries with Negative Bond Yields

"How will states, cities and towns fund (attract) long term assets with 15 year negative bonds?"

 

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