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Sunday, February 22, 2009


the pension disaster materializing

it's been an ugly little open secret for some years among the financial community that defined-benefit retirement funds, both corporate and government, were just as woefully underfunded compared to the net present value of their obligations as social security and medicare. one of the predictable results in recent seasons has been the migration of pension funds from truly safe investing to ever greater degrees of yield chasing -- up to and inclunding deep end-user involvement in the very worst aspects of the securitization market and even taking up the ass end of the capital structure in preferred and common equities.

for a while, the rosy assumptions of high returns as a result of such yield chasing allowed pension funds to pretend that they were not in trouble. but now that the great crash of 2008 has forever demolished the securitization bubble and cut half or more out of a diversified equity portfolio, the fatal weakness of pension systems has become undeniable. zero hedge examines, as a proxy for the dying fund-of-funds industry, the deathly condition of the new york state retirement systems.

As the financial system collapses and states' budget deficits skyrocket, the lives of citizens are about to get very ugly as legislators' only options are to cut state employees (i.e. police officers, healthcare workers and educators) and raise taxes through the roof. One need look no further than California which is on the brink of collapse, as absent federal assistance, it will be unable to fund its $42 billion state deficit. New York is in no better position, and David Paterson has had numerous media appearances attempting to warn New Yorkers just how difficult lives in the state are about to become. In the meantime, public workers, current and retired, of troubled states will shortly begin receiving very disturbing news, as their pensions and benefit packages are about to be drastically reduced if not eliminated altogether. The culprit? The falling market. ...

Pension funds' calculations for actuarial purposes presume a roughly 8% annual growth in perpetuity, the result of which funnel through into the over- or under-funding estimates for a State's budget for any given period of time. The current dislocation implies that absent an approximately $50 billion injection of new capital, New York's Pension Funds are guaranteed to be unable to keep up with increasing cash outflow requirements. As we mentioned, New York is not alone in this predicament, with all major public employee reitrement funds currently down anywhere between 40% and 50%. While public anger is still focused merely on the huge deficit in the state's income statement, soon all hell will break loose when millions of current police, healthcare and educational retirees realize they will have go back to work as their pensions disappear. The speed of the market's collapse will determine how quickly that day comes.

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