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?