Last week, I talked about mounting problems for state and city pension funds … along with the possibility that some of them could ultimately go belly up.
And while a lot of folks continue to say such a thing could never happen, I have yet to hear a good explanation for where the needed money is going to come from.
How much more money can state and local governments extract from their residents before the levee breaks? Before bondholders run for the hills? Before citizens rebel? And before businesses move elsewhere, heaping on more economic pain in the process?
Moreover, as I concluded last week, Uncle Sam is certainly not going to bail these funds out.
If anything, he’s the poster boy for failing retirement systems. Consider the latest news we heard just this past week …
The Social Security Trust Fund Has Now Entered a PERMANENT Period of Deficits!
That’s the conclusion reached by the Congressional Budget Office’s latest report on the U.S. budget.
[More from Nilus Mattive: "Dead Ahead: State and City Pension Failures"]
As you might remember, last year marked the system’s first annual deficit since the 1980s. But even then, Social Security’s trustees were still claiming it would only be a temporary slip … and that a permanent state of deficits would begin in 2016 at the earliest.
Apparently that’s no longer the case!
According to the CBO:
* Social Security will collect $45 billion less than it pays out this year …
* It will come up $547 billion short from 2012 through 2021 …
* Plus, the disability portion of the program will run out of money within six years!
As I’ve explained before, there are number of reasons that Social Security is falling apart, including continued expansion of coverage (even to folks who don’t contribute) … the latest recession … along with simple demographic trends such as an aging population and increasing life expectancies. And none of this has been helped by Washington’s recent decision to let all employees contribute two percentage points LESS into the system this year!
Yes, I’m personally grateful for that reprieve. But anyone who accepts lawmakers’ promise to make up for the related shortfall is out of their mind!
For starters, the CBO is projecting an overall deficit of $1.5 trillion for 2011 — so it’s not like Uncle Sam is sitting around with a stack of cash.
On top of that, these are the very same politicians who consistently borrowed aggressively from the Social Security fund as it ran surpluses over the last thirty years.
This situation is tantamount to asking the fox to REPLENISH the hen house!
If Anything, Washington Is Now Trying to
Kick the Can FURTHER Down the Line …
I fully expected this year to be the turning point when Washington decided to tackle our nation’s current retirement mess.
And make no mistake — big changes ARE coming at some point. There’s simply no way around it.
But it sounds like President Obama is now content to drag his feet on the issue and wait until after a re-election attempt.
Social Security was given just a passing mention in Obama's State of the Union Address.
Social Security was given just a passing mention in Obama’s State of the Union Address.
During his State of the Union address, all he said was that we need “a bipartisan solution to strengthen Social Security for future generations.”
The bipartisan panel that Obama previously put together has already suggested raising the retirement age to 69 among other things. Yet there was no mention of any of this during his speech — probably because recent polls suggest that the majority of Americans don’t support such a move.
Obviously, there are NOT going to be easy fixes. But like any problem … the sooner we get serious about addressing it, the better.
The CBO’s latest report is like a blaring horn, reminding us that our nation’s biggest pension woes lie ahead … and are bearing down on us at faster and faster pace.
Will politicians continue playing chicken all the way until the final collision?
I sure hope not. But I continue to recommend planning as if they will — especially by building a diversified income portfolio of your own.
As to where to find the best sources for income, let’s take a look at the current menu choices:
A. Near-zero returns from money market funds and CDs …
B. 3.3 percent a year from a 10-year U.S. Treasury … with no hope of future interest rate increases and exposure to Washington’s fiscal mess …
C. Maybe 4 percent a year from an “AA rated” 10-year municipal bond … with little transparency on the issuer’s financial health and substantial downside risk from here …
D. As much or MORE than any of these other choices from cash-rich companies with long histories of continuously increasing shareholder payments
I think the choice is pretty simple right now, which is why I continue adding dividend stocks to my own father’s income portfolio, and why I recommend you consider them as well.
There’s no doubt that any income portfolio should be well diversified, and there will be plenty of buying opportunities in other categories at some point.
But today, while Washington — along with many states and cities are going broke fast — U.S. corporations have never had more cash on hand …
And as an income investor, you need to go where the money is!
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Source: Money and Markets