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Last week The New York Times dropped a bombshell, reporting that “policy makers are working behind the scenes to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.”
This is truly huge news, with far-reaching consequences. But it shouldn’t come as a surprise if you’ve been reading my columns …
Back in July, I explained how state pension funds around the country had essentially blown their fiduciary responsibilities to retirees and their broader constituencies.
Specifically, I wrote:
“Second, despite the major losses they actually experienced in their portfolios, they are acting as if those losses haven’t completely happened yet. Instead, they are basically just figuring that things will turn around if they wait long enough …
“And interestingly enough, when these same investors were winning big a few years ago, they put off contributing more of their current earnings into their accounts … essentially letting their profits carry the day, or even borrowing money from their accounts!
“Even today, with their balances way off what they should be, they are failing to contribute to their accounts. Some are even playing ‘shell games,’ by moving money around to make it look like they’re in better shape than they really are.
“All the while, they’re creeping ever closer to their final day of reckoning.”
Then, this past September, I discussed some of the specific state pension plans at risk of imminent failure, along with arguments and steps legislators were employing to wiggle out of past promises.
Now, you’ll get no argument from me that many employee organizations expected — nay, demanded — far too much every time they went to the negotiating table. Yet I still place most of the blame for this impending crisis on career politicians.
Like coddling parents who never say “no” to their children, they were willing to promise anything to get elected and then to stay in office …
They were happy to ignore budgets and dole out money that wasn’t even in the kitty yet …
And they stubbornly put off pending problems, acting as if the piper would never show up asking for payment.
From capitol to capitol, it was just one big game of musical chairs. Now the needle has careened off the record with one last deafening screech.
Worse, the States Are Just One Facet of This Massive National Pension Crisis!
Similar pension problems are emerging among U.S. cities, too — where local governments can already declare bankruptcy and, in some cases, hang pensioners out to dry.
And even in places where constitutions currently protect pensions, mounting problems at the state level may ultimately unravel — or at least sharply impact — retirement benefits at the local level.
Just take a look at the latest headlines and you’ll see just how widespread the problems are …
In New York City, pension costs have more than quadrupled in the past decade, from $1.5 billion in 2001 to $7 billion this year! That’s why Mayor Bloomberg recently echoed Governor Cuomo’s state-level battle to rein in pension costs, threatening huge layoffs unless unions accept drastic retirement reforms.
Meanwhile, in Cincinnati, lawmakers currently owe retirees about $1 billion more than they have socked away. And as this story explains, it’s a real mess.
Just some of the highlights:
[More from Nilus Mattive: "4 Steps to a Richer Retirement"]
Look, we’ve already seen this movie with corporate pension problems over the last decade. Countless plans failed … countless more were shuttered for current employees … and a whole mess of people lost important benefits there were counting on.
Plus, as I’ve noted in the past, the government’s backup insurance plan for these failed private plans is itself underfunded by many billions.
With these same issues appearing in cities and states from one coast to the other, a lot of folks have been asking if Washington will step in.
Well, if that New York Times article is any indication, the answer is yes — Washington may step in to LET state and local governments renege on at least some of the benefits they owe retirees!
It’s not like Uncle Sam really has a choice. In addition to owing private pensioners more than what’s in the kitty, there’s also that pesky issue of massive shortfalls in the Social Security program.
So What Can You Do to Protect Yourself?
It doesn’t matter if you’re a government worker or just a regular citizen … this national pension crisis is going to affect you — directly or indirectly.
It may mean a sharp decrease in your retirement benefits. Or it could reduce the public services available in your city or town. And it will almost definitely lead to higher taxes.
So I suggest you get as much information as you can on the rapidly-developing state and local debt crises striking our nation … and learn how to hedge against these problems with new investments that are now available.
I consider it absolutely critical that build up your own income-generating portfolio as quickly as possible, preferably in tax-sheltered accounts.
I’m helping my own dad do this right now, because we recognize that his state pension is no more guaranteed than anyone else’s.
As the latest headlines demonstrate, past promises to retirees are no longer sacred and benefits are no longer guaranteed. So if you’ve been putting off your personal protection plan, please make it your first priority in 2011.
– Nilus Mattive
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Source: Money and Markets