The Need for a Reserve Fund to Fund Underfunded Pensions

by Glen Wallace


Here is another one of my responses to another essay by John Mauldin about the looming pension crisis:

This is something that the federal government should be building a lock box rainy day reserve fund for.  We should be looking under every revenue sofa cushion for every extra potential revenue source and raising corporate tax rates and taxes on the wealthy -- those best able to absorb the increased tax rates.  There are all sorts of taxes that could be imposed on Wall Street such as a high frequency trading tax and special capital gains tax that would only be applied to stock gains realized by the wealthy one percent.

While some may claim that the looming pension crisis is not their problem, it may well become everyone's problem insofar as we are all tied to the overall economy that will be negatively effected when the crisis hits.  Part of the problem is that, as John touched on in his piece, if all these retirees have their pensions reduced or eliminated altogether, all those retirees will have less money in their pockets to spend on purchases -- a reduction in aggregate demand.

Additionally, don't forget that the last economic crisis almost sunk the entire economy.  Maybe the pension crisis, when it hits, will not be something that, like the last crisis, that we can muddle through and dig ourselves out of.  The pensions may be too big to bail.  And an economic disaster that the economists warned could have happened in 2008, if it were too happen, could lead to a physical disaster on the scale of a natural disaster.  All the goods and services we take for granted in a developed economy could be in jeopardy in an economic crisis because all the providers of those goods and services, and in turn their vendors, depend on the ability raise funds through the ability to borrow money.  If a pension crisis, perhaps combined with another crisis such as mass student loan default, a complete stalling of the economy could lead to an inability of the chain of suppliers of those goods and services, including groceries, to reach the everyday consumer.  But instead of engaging in massive financial reform and the building of a massive rainy day bailout fund, we've only seen some mild patchwork repairs and bracing that everyone can only hope, perhaps unrealistically, will safeguard us from another crisis like we saw in 2008.  People don't seem to realize how disastrous an economic disaster could be and how it could lead to a civil emergency or how close we came to that happening in '08.  

   We should be seeing any potential economic disaster as something that we need to invest big dollars in too defend against just as we invest big dollars in the military for defense -- whether we need to spend so much for military for defense is an open debate, but my point is that the public generally agrees that spending large sums on defense is considered worth while and so they should be considering the possibility that investing in defense against economic calamity is worth while as well.  Maybe we should be shunting towards economic defense reserve funds some of that massive sum currently spent on the military.

Will the looming pension crisis lead to widespread municipal bankruptcies?

by Glen Wallace

The following is my response to John Mauldin's recent post Angst in America, Part 4: Disappearing Pensions:

Not mentioned in the article is the possibility of municipal bankruptcies as a means to avoid paying out on these government pensions. Correct me if I'm wrong, but I believe government debts to pensions can be discharged through bankruptcy (unlike student loan debt where the debt typically remains even if the debtor declares personal bankruptcy -- the student loan debt bubble, another storm cloud on the horizon that could potentially merge with the looming pension crisis cloud to perhaps form an economic 'perfect storm' situation).

I'm starting to wonder if maybe Meredith Whitney wasn't completely wrong about her prediction she made several years ago that widespread municipal bankruptcies would occur soon after she made her prediction. Instead of being all wrong, maybe she was merely premature in her predictions. Perhaps what threw her off was that she couldn't have predicted the Fed's rounds of QE and the profound stimulating effect QE would have on the stock market. I'm thinking she then couldn't have known that all those government pension funds would be able to cover those pensions for so long, drawing from such robust returns from the markets combined with being so much more heavily vested in the markets than in the past.

Maybe if the run up in the markets hadn't occurred soon after she made her prediction, Ms. Whitney would have been proven correct as all those government pensions and local governments wouldn't have been able to turn to the markets to keep pace with pension plans expecting such high rates of return? And rather than increasing property taxes exorbitantly to meet those pension debts, governments would declare bankruptcy in an effort to avoid servicing those debts. And now looking to the future, once the markets inevitably slow down and almost certainly decline for an extended period of time, will we be seeing widespread municipal bankruptcies on a scale similar to Meredith's earlier prediction?