US: Pensions on the brink of bankruptcy

The deficit of public pension funds of states and cities in the US threatens to bankrupt much of the country, as happened with Detroit and most recently Puerto Rico. A study reveals that the actual hole system triples the official deficit figures is located at 1.38 trillion. Chicago may be the last city to fall, but the situation is also complicated in Fort Worth, New Orleans, Philadelphia, South Carolina and Dallas. The states of Illinois, Kentucky and New Jersey are not spared.

The pension system deficit amounted to US 3.85 trillion, according to a recent study published by the Hoover Institution. The research highlights the problem of sustainable pensions in the developed economies is about to implode in the short term in several cities and states. Joshua Rauh, study author and professor of finance at the Stanford Graduate School of Business, believes the next financial crisis will occur for this reason and puts Chicago as the first victim, a person who will not be covered in 19 years with the income tax records the city.

Rauh explains that most cities and states offer retirement benefits to public employees who are financed from payroll taxes but used to pay current pensions. ” They hope to cover future costs of upcoming pension with return on assets generated by the system, but even the most optimistic forecasts future spending will be covered , ” he says on the ball of debt that is being generated around public pensions .

Fort Worth, New Orleans, Philadelphia and Dallas also encounter trouble paying pensions in the short term. So that no more solution will make painful choices: raise taxes or cut benefits, which would recognize the failure of the system. The pension problem aggravated the financial situation of these cities. In fact, Detroit went bankrupt in part by the unpayable debt retirements. Puerto Rico, recently filed for bankruptcy law, a pension liability 123,000 million. But it might not be the only case Illinois, Kentucky and New Jersey are poised to become the next Puerto Rico, according to Rauh.

The problem of population aging will occur in the medium term, the paper points out that the main problem is mismanagement of the assets of pension funds. The system needs an annual yield of 7% to cover the liabilities, however, in recent years barely reach 3%. Since the mid-eighties the various state laws have allowed pension funds to increase their exposure to riskier positions outside fixed income, making it harder to comply with the provisions that guarantee the sustainability of the system.

Rauh research shows that the worst asset management raises the deficit of public funds three times more than the liability recognized by states and cities, amounting to 1.38 trillion dollars. The Social Security itself estimates that in 17 years there will be sufficient funds to cover pension commitment if the debt is not raised.

The problem has already broken out in several parts of the country. South Carolina has recognized that the deficit amounted to 24.100 million, three times its annual budget, and it will be difficult to pay pensions in the short term. The pension fund of Michigan public school accrues a liability of 26.700 million after 41 consecutive years having more than revenue expenditure.

In 2014, the federal government under President Obama decided to allow pension funds to cut payments to curb liquidity tensions. Illinois two years ago to the new law filed to reduce the amount of their beneficiaries. Kansas also did the same, reports El Economista.