Pension Canaries in the Coal Mine

Today the Financial Times reported that “California has acted as the canary in a financial coal mine lately for the rest of the US.”

They have recognized the problem of promising much without the ability to deliver. But they haven’t got a real solution.

“Northwestern University calculated before the latest bear market that, using risk-adjusted assumptions, there was a 50 per cent chance of a shortfall of $2,660,000,000,000. Andrew Biggs, a former Social Security economist, said private sector actuaries would peg public shortfalls at $3,500,000,000,000. Basically 25% of GDP.”

The Canary is dead, but how do we evacuate the coal mine?

Currently, it appears that everyone just hopes for a miracle. But as I often say, “Hope is Not a Strategy

Why this is important to you

The only solution to this shortfall, unless some magic investment scheme is developed where the pensions can generate abnormal returns, is a combination of borrowing to pay the bill, rasing taxes, or lowering benefits.

  • Borrowing is just about out of the question as we already used this leg of the stool to get where we are at.
  • Raising taxes is politically challenging.
  • Lowering benefits is also politically challenging.

The result will likely be a combination of the two which means higher taxes in the future.

And this isn’t just true of California, hence the canary in the coal mine reference. When the California Canary dies, it means that it’s not safe for anyone.

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