What are you going to do for income in retirement?

Social Security is already bust… For 2010, it paid out more in benefits than it brought in through Social Security taxes. If you’re in your 40s or younger, you can’t rely on Social Security.

Chances are, your OTHER pension won’t be able pay you either (if you have one), as I’ll explain today.

[ad#Google Adsense 336×280-IA]Even worse, even if you have NO pension yourself, don’t think you’re immune from the problems. The reality is, YOU – the taxpayer – will be forced to pay the promised benefits that pension funds won’t be able to deliver.

The crisis in pension funds is much worse than you can imagine.

Right now, pension funds in the U.S. are underfunded by at least $1 trillion. “Underfunded” means the difference between the promises made and the money set aside to meet those promises.

The thing is, that trillion-dollar underfunding is understated by a wide margin… The true number is probably closer to $3 trillion. Here’s why…

Pension funds currently expect they can earn an 8% return on the money they have. They think they’re solvent because they can grow the assets they have at 8% a year. But that’s foolish…

Pension funds simply can’t earn 8% right now. Here’s why:

Think about this… If your pension fund holds half its assets in safe bonds earning roughly 3% now (which is what 10-year Treasury bonds pay), how much would your pension fund need to earn on the other half of its assets to earn a total return of 8%? The answer is 13%. That’s not going to happen.

My friend Meb Faber recently wrote a “white paper” on this subject…

He says, assuming a more conservative return, “the 50 U.S. states’ pension plans have $1.94 trillion in assets versus liabilities of $5.17 trillion, resulting in a funding ratio of only 38% and cumulative unfunded pension liabilities of $3.23 trillion. [Paying out these pension benefits] would require significant debt issuance or increased tax revenue.”

The size of the problem is staggering. And guess who is on the hook…


Here’s how Meb explains it:

The health of U.S. pension funds is of critical importance to U.S. citizens, as they [U.S. citizens] are the backstop for both private and public pension funds as taxpayers… Most state constitutions require these debts to be paid.
There are over 200 defined benefit plans operated by the states covering 20 million employees, 7 million retirees, and roughly 90 percent of public sector workers in the states. How many pension funds will go bust at 4% returns???
When a state comes up short funding their pension liabilities, they “put” those liabilities into the hands of taxpayers. Considering the sheer size of pension plans, this taxpayer backstop could reach trillions of dollars. Novy-Marx estimates underfunded liabilities for state pensions equate to an obligation of roughly $10,000 for each United States citizen.

[ad#article-bottom]So if you’re in your 40s or younger…

1) Don’t bank on Social Security for your retirement income. It doesn’t have the money.

2) Don’t bank on your other pension plan, either. Using realistic assumptions, it’s likely underfunded, too, and won’t be able to pay you when the time comes.

3) Finally, as a taxpayer, get ready to pick up the tab for the already-promised pension benefits when these pension plans are out of money.

The problems with traditional pensions are too big to cover in this little essay. My best advice is: DON’T rely on government-created pensions in particular and continue to build your own nest egg outside of a promised pension.

Good investing,

— Steve Sjuggerud

[ad#jack p.s.]

Source:  Daily Wealth