The Federal Reserve was trapped.
The Great Recession hammered the entire globe. The economy was falling apart. Major companies were failing.
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So the Fed cut rates again and again … and again, keeping us locked near zero for years, waiting for things to turn around.
And after nearly a decade, we’ve got strong employment again, the housing market has recovered and the stock market has run to new highs.
Unfortunately, the ultralow rates stuck around far longer than anyone expected, creating a problem that could easily become the next black swan event that topples the stock market and your plans for retirement…
The favorite refrain from the various investment managers and mega brokerage firms is that people aren’t saving enough for their retirement. We’ve been underestimating how much we need to sock away if we want to maintain our standard of living through our golden years.
Well, it looks like we’re not the only ones who are struggling to save enough money.
On June 9, I wrote about the growing number of states that are facing a massive pension shortfall. Illinois has amassed roughly a trillion dollars in debt, and most of it is its pension gap. Some others include:
- Kentucky has a $33 billion pension shortfall.
- New Jersey has an $80 billion pension gap.
- Hawaii has a $12 billion pension gap.
- New York has a gap of between $65 billion and $140 billion. (They just can’t agree on the style of accounting used to determine the number.)
- And the city of Detroit — as if it hasn’t suffered through enough— is sitting on a gap of $195 million.
That’s just the tip of the iceberg for the states.
Of course, the federal government isn’t any more responsible. The federal pension gap has risen to more than $3.5 trillion, while the Social Security funding gap has swollen to more than $13 trillion.
But the shortfall in pension savings has a more insidious problem that too many people are not watching, which could easily turn into the black swan event that sinks the economy.
The Secret Pension Problem
Corporations have used the same accounting techniques when it comes to funding and growing their pensions. And many are just as far behind as the states and the federal government.
Earlier this week, UPS announced that it was freezing its pension for 70,000 nonunion workers, affecting approximately 16% of its workforce. The company’s pension had a nearly $10 billion shortfall, as it was only 76% funded.
UPS is following the example of DuPont and Lockheed Martin, which have already frozen their pension programs.
FedEx and Delta Air Lines have both issued debt to help fund their pensions.
Meanwhile, General Electric is sitting on a pension gap of more than $31 billion, and it’s still growing.
In fact, roughly 39% of the Fortune 500 companies with pensions had frozen them by the end of 2015 — that’s up from 21% in 2009.
Mercer reports that the collective pension deficit totaled $408 billion at the end of 2016 for the S&P 1500.
Teetering Mountain of Debt
We’re fast approaching ridiculous levels of debt. Not to make light of this situation, but it reminds me of an episode of The Simpsons. Homer and the kids don’t want to take out the trash, so they pile it higher and higher, coming up with more creative ways to keep the mountain standing, because the second it topples, the loser must deal with it.
The federal government and corporations are piling up more and more pension debt across the country, and eventually it’s all going to fall over. But it’s not just one unlucky soul who will have to deal with the mess. We will all get hit with it. The market will take a hit. The millions of people who were depending on those funds for their retirement will need to scurry to come up with an alternative plan.
Make sure you have a plan in place now to protect your wealth against the coming collapse and have your retirement secure in your own hands.
Sr. Managing Editor, Sovereign Investor Daily
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