CalPERS Is Unsustainable Jeff Nielsen

The mainstream, U.S. media continue to ignore a steadily worsening pension crisis, most likely because it is one more huge contradiction of all their “U.S. economic recovery” propaganda. Unlike the $70 trillion or so in “unfunded liabilities” which is certain to bankrupt the U.S. federal government – but not today, the U.S. pension-crisis is already here.

When the chief actuary of the nation's largest, state pension plan (CalPERS) bluntly states, “We are facing decades...of...unsustainable pension costs”, this should have attracted the attention of journalists across the U.S. Unfortunately, they all appear to be much too busy handing out their “U.S. economic recovery” party-hats to be paying attention.

Some people may not see a direct connection between the health of U.S. pension plans and the health of the overall economy, however the connection is clear – and has never been greater than it is today. The huge, demographic bulge known as “the baby-boomers” are beginning to retire.

After plundering government coffers for their entire lives by demanding exorbitant social programs which they were unwilling to pay for with their own taxes, they have literally mortgaged the futures of their own children and grand-children. But the “plague” these “locusts” have inflicted on the U.S. economy goes well beyond that.

These are the same baby-boomers who dismantled the U.S. manufacturing sector, and shipped it to Asia – so that they could pay less for the ever-increasing hoard of consumer-goods which they have accumulated with manic zeal. In the process, they have also eliminated most of the well-paying jobs which they benefited from, but which they have taken away from their children and grandchildren.

Despite the baby-boomers having the best-paying jobs of any generation in history, and ridiculously low taxes (relative to the gold-plated social programs they demanded), these pampered prima donnas have been so recklessly irresponsible with their own spending that this generation has less in savings than previous generations.

As a result, this bloc of selfish spendthrifts is more dependent on lavish pensions (and pie-in-the-sky medical benefits for seniors) than their own parents. The problem is that this group has mismanaged their own pension-plans just as badly as they have mismanaged the overall economy and government finances. In other words, just as they have doing all their lives, U.S. baby-boomers are planning on spending money they don't have all through their retirements – in order to fund their lavish lifestyles.

However, having squeezed all of the wealth out of the U.S. economy, and squeezed all the wealth out of their children and grandchildren, there is no money to top-up their mismanaged, under-funded pension plans (along with the equally generous retirement medical plans which accompany them). The bottom line is that this generation of financial-failures is already facing a multi-trilllion dollar shortfall - which is totally separate from the $70 trillion funding-gap in Social Security and Medicare (see “U.S. Pension Crisis: the $3 TRILLION question”).

This is a crisis which is developing from the bottom up. Vallejo, the one-time state capital of California, was already forced into bankruptcy due to the unsustainable retirement benefit plans of its municipal workers. Meanwhile, on the opposite coast, municipal leaders lament that they only have enough funds to pay for either the pension/medical plans of their former police officers and firefighters, or the salaries of the current police and firefighters.

Further aggravating this crisis at the local level, many municipal governments were severely “burned” through being conned into various forms of “exotic financing” by Wall Street scam-artists. Municipalities and public institutions not just in the U.S., but all over the world, have been crippled by countless billions in losses – while paying these financial predators fat fees to ruin them.

It is within this context that we can begin to examine the problems of the pension-plans, themselves. To start with, the “financial model” (and solvency) of most of these pension funds is based on the premise of a rate of return far in excess of the historical, average rate of return in the U.S. economy. This is despite the fact that the U.S.'s steadily growing mountain of never-to-be-repaid debt requires an ever-greater percentage of the U.S.'s GDP just to service the interest payments on this debt.

As a matter of elementary arithmetic, this steadily increasing financial drain on the U.S. economy mandates that future growth must be below historical averages. Thus, most of the entire U.S. pension system is dependent for its solvency on a rate of economic growth which cannot possibly exist.

The perfect example of this is Wall Street. Despite bearing their own crippling burdens of debt, these “financial geniuses” thought that they could outperform the broader economy (by a wide margin) through taking the excessive, ten-to-one leverage of their existing business model, and ratcheting it up to an insane average of 30:1 (across the entire sector), while individually such leverage often reached 50:1.

As we have seen, this wasn't a “business model” at all, but rather a massive Ponzi-scheme perpetrated against the entire world. Mesmerized by the inherently fraudulent business-practices of the Wall Street crime syndicate, the supposedly conservative managers of these pension plans began to chase higher returns through purchasing riskier and more leveraged investments – including loading up on the over-leveraged, Wall Street fraud-factories, themselves.

Many of these Ponzi-scheme operators have already gone “belly-up”, with their shareholders (such as U.S. pension plans) seeing their holdings go to zero (or close to it). Meanwhile some of those who only survived through government nationalization (such as AIG and Citigroup (C)) will never recover to their former market caps (even if they can be subsidized to the end of this crisis) because they have been forced to liquidate vast chunks of their assets.

As if this still wasn't bad enough, the same rampant corruption which saturates the U.S. government has also thoroughly “infected” U.S. pension funds (see “U.S. pension-fund criminals fight to protect crime empire”). These pension funds pay fat salaries to their administrators – supposedly so that they would use their business acumen to buy the best assets available for the pension funds they were operating.

Instead, these corrupt opportunists allowed “lobbyists” (i.e. Wall Street bag-men) to “persuade” them to buy what the lobbyists told them to buy – through financial inducements which would be called “bribes” anywhere outside the United States.

In short, large pension funds all across the United States have the same financial nightmares in front of them as the U.S. government (at all three levels), and the Wall Street crime syndicate.

Unless the Obama regime wants to write a cheque for trillions of dollars to restore health to pension funds across the U.S., the only alternative is gigantic reductions in benefits. However, as with many facets of the U.S. economy, the degree of insolvency is so great that almost certainly these pension plans will require large, government hand-outs, while still being forced into large reductions in benefits.

With greedy, baby-boomers having hogged all the spending-power in the U.S. economy to themselves (and having exhausted that spending power), the implications are obvious for the U.S.'s consumer economy: decades of greatly reduced spending. The consequences of this generational change in spending habits are equally obvious (see “The Death of the U.S. consumer economy”).

Reduced spending, persisting over decades, will hammer the earnings of the retail-based economy. This, in turn, means depressed valuations (and endless lay-offs) for these companies for decades – which will aggravate the insolvency of U.S. pension plans even more (meaning more government hand-outs, and more reductions in benefits).

Desperate for money, retiring baby-boomers will be forced to dump their only remaining assets: U.S. real estate. Needing to try to raise at least $1 or $2 trillion just to come close to maintaining their standard of living, this means an endless line-up of “motivated sellers” which will also exist for decades.

As of today, there is no indication that anyone in the U.S. government is paying attention to this crisis. This is hardly surprising. The same “leaders” who have managed to ignore their own future, funding-crisis until it has soared to a total which exceeds global GDP can hardly be expected to act on a similar crisis, but less than 1/10th of that size.

Like lemmings racing for a cliff, the vast majority of Americans remain completely oblivious to their pending “financial suicide”. For this, the pseudo-journalists of the U.S. propaganda-machine bear most of the blame.

As with all Ponzi-schemes, the U.S. economy is totally dependent in maintaining “confidence” in this massive con-game. Thus, while a plethora of U.S. financial crises continue to worsen (including the pension-crisis) all we are likely to hear from the propaganda-machine are chorus after chorus of “Don't Worry, Be Happy”.