2012 May 28 Monday
Public Pension Funds Headed For Financial Disaster

Lots of state and local governments use very unrealistic assumptions about rates of return on public pension fund investments and are headed for a fall. The City of New York assumes an absurdly high long term rate of return for their pension funds.

In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.

Billionaire Mayor Michael Bloomberg quite correctly points out that even 7% is indefensible.

“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February.

Absolutely hysterical. Laughable. He knows. Listen to him. NYC and many other government units are headed for financial disaster. Huge cuts in services. Huge cuts in pension pay-outs. Big tax increases. We are living beyond our means.

Expect many city bankruptcies due to pension fund liabilities they have no chance of paying in full. Back in November 2011 Michael Lewis wrote a great piece in Vanity Fair about how California cities are headed for bankruptcy due to unpayable public employee pension fund liabilities. San Jose's going down baby.

I expect the problem to be far worse than currently projected even by the pessimists because I expect much lower economic growth (or even an extended period of contraction) due to Peak Oil and deteriorating demographics. Oil extraction costs have gotten too high.

Global inflation might have already pushed the costs of exploring and producing oil from new most expensive projects - known in the industry jargon as the marginal cost of production - above $100 per barrel, according to JBC energy consultancy.

Rising oil extraction costs have already helped cause the Social Security actuaries to pull in by 3 years the date of total drainage of that fund. The real financial disaster comes sooner. Get ready for hard times.

Share |      By Randall Parker at 2012 May 28 09:47 PM  Economics Sovereign Crises


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