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America has a $2 trillion pension problem

Investopedia logo Investopedia 11/10/2017 Robert Milburn

Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not necessarily represent the views of MSN or Microsoft.

Unless you’ve been living underneath a rock, you’ve undoubtedly read or heard something about “The Coming Pension Crisis.” If the sheer size of this multi-trillion dollar pension shortfall doesn’t disturb you, consider this: A slowing U.S. economy (or outright recession) would actually exacerbate this expanding pension problem by resetting expectations about future market returns.

Let’s take a closer look.

The whole problem is based on the actuarial assumption that pension funds can earn 7% compound returns, according to visionary thinker and bestselling author John Mauldin in a recent conversation with Hedgeye CEO Keith McCullough. However, if markets tumbled, these pension funds would not be able to cover liabilities. And there you have it … voila … a full-blown pension crisis.

Here’s a disconcerting number that puts the enormity of this problem into perspective.

$2,000,000,000,000

Two trillion! That’s the amount of unfunded pension liabilities currently sitting on the books of state and local governments. Remember, that assumes an average 7% compound return, Mauldin explains.

Alter the expected return and the problem reveals itself as much, much larger. If you assume 4% compound returns, for instance, the unfunded pension liability swells to $4 trillion, Mauldin says. What if the unthinkable happens and we land ourselves in a recession with stocks falling over 40%?

“Now you have an unfunded liability in the range of $7–8 trillion,” Mauldin explains.

Making matters worse, U.S. economic growth would then be weighed down by this ballooning debt. While Mauldin says the U.S. appears to be “chugging along” just fine right now, the implications for the U.S. economy lugging around all this debt could be dire when the next recession does hit.

“I think because of the debts in this country, public and private together, that the recovery from the next recession is going to be even slower,” Mauldin says. “That’s because debt is a drag on growth. There’s no question about it and all of the data points that way.” 

Mauldin underscores the gravity of this situation for state and local governments in his widely read newsletter: Thoughts From the Frontline recently:

“We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion. Following the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues. Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work.”

Click here to watch the entire interview between Mauldin and McCullough. They tackle everything from the Fed’s extraordinary monetary experiments to how driverless cars might cripple the U.S. jobs market and why half of financial advisors might lose their jobs in the next 10 years.

Related video: Roth or regular retirement plans? (Provided by Money Talks News)

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