The $ 78 trillion problem

$ 78 trillion is a huge number, and according to Citigroup, this is the amount of unfunded pension obligations undertaken by the richest 20 countries by the Organization for Economic Co-operation and Development (OECD). These countries include the United States, Britain, Canada, Australia, France, Germany, Japan and Central Europe, among others.

The report also notes that most US and UK corporate pension plans are also severely underfunded.

The problem here is that governments have borrowed more money than can ever be repaid and have promised rights that are hopelessly underfunded. We are already seeing the impact of unfunded pension funds.

Detroit went bankrupt, mostly because it couldn’t afford to pay its retirees. If the city’s retirees had not agreed to a series of cuts to the retirement plan, according to the Kresge Foundation’s Rip Rapson, “Detroit could have been in bankruptcy for perhaps a decade.”

Now in the United States, the State Accounting Standards Board requires governments to adopt strict accounting methods similar to those long used by private sector accountants, and in many cases GASB reforms require governments to disclose pension liabilities that were not previously all audits have been introduced.

As a result, when unfunded pension, medical and other liabilities were officially included in its balance sheet, Orange County Fire Department debts exceeded its assets by $ 169 million for the fiscal year ended June. According to OC Watchdog of the registry, “this is a drop of over 680% in its net position or over $ 420 million in one year.”

These new accounting rules also revealed that California’s balanced budget for 2014-15 was actually $ 175.1 billion in red, due to state retirement obligations that had to be included in its balance sheet for the first time.

Recent data reveal that retirement plans have less than three-quarters of the assets they need to pay current and future retirees. “Before the recession, many of these plans were fully funded or almost fully funded,” said Russ Walker, vice president of Wilshire Consulting.

In 2007, the ratio of state pension funding, a measure of assets and liabilities, was 95%. The funding level of 80% is generally considered to be the minimum health level for public pension plans.

To fill these gaps, most funds now rely on “exceptional return on assets.” But in this world of zero and now even negative interest rates, the expectation of an “exceptional return” is hardly realistic. Remember that funds usually need an annual return of 7% -8%, which they do not receive in the current financial environment.

In Japan, its public pension reserve fund, the largest of its kind in the world, lost $ 64.22 billion, its biggest quarterly loss from the financial crisis for the quarter to September, driven by global stock sales.

The Europe and Central Asia region is no better. The financial crisis quickly turned into an economic crisis with major consequences for all public programs, including pension systems. The future deficit of the pension system is expected to be three times higher than that currently experienced in the most affected countries, and is expected to remain at this level for more than 20 years before improving slightly.

These problems with pension funds are already a huge problem, but as usual we will not see how any politician raises them. No politician will inform the voters that there is no money to fulfill all the promises that have been made, let alone the new promises that they will make in the current campaign.

These global debts and deficits are not political issues, but financial realities. The clock is ticking and while politicians do not want to discuss these issues, rubber will soon be on its way.

It’s just math. We know how many people are retiring and we know how much they have been promised, so we know the price. We also know how much is budgeted and what return these funds receive on the markets. And now, according to Citigroup, we know that there is a huge shortage of $ 78 trillion worldwide.

There are solutions, but time is running out.

1. You can encourage real economic growth by encouraging companies to grow and grow. This does not mean raising corporate taxes, it means working with companies and promoting corporate growth. This would create more jobs, which means more tax revenue.

2. Prioritize government spending and stick to balanced budgets. This means that politicians will actually have to make difficult decisions. They will have to cut or cancel ineffective programs and focus on the critical ones that are most appropriate for the people and the country.

3. Given that we all live longer, we need to raise the age for receiving benefits. Some countries have already started implementing this policy.

4. Reduce the payment of pensioners. Again, this is what Detroit has developed with its retirees.

5. You can also raise taxes. This is a favorite option for every politician. The problem is that higher taxes take money out of people’s pockets. Remember that most citizens do not have a private or public retirement plan and will have to save for their own retirement. In Chicago, they are seeking a 30 percent property tax increase just to meet their $ 20 billion pension fund obligations and are rising.

This is just another factor in the growing “loss of confidence in government” that will lead to a massive reversal of the trend. Ultimately, this will lead to a global sovereign debt crisis and a massive global flow of capital from the most risky areas.

Investors who are in a strong monetary position will not only be able to protect their wealth during the coming crisis, but also increase it significantly. We are getting closer and closer to the show!