In response to Pension Problem Too Big To Ignore? Jack Dean at Pension Tsunami pinged me with an interesting anecdote:

Hello Mish

I had a call today — the first of its kind — from a retired teacher who is drawing a CalSTRS pension. She has a disabled son and is scared to death about the future solvency of the fund — mainly for his sake, because when she dies he’ll really need the pension that she’ll pass on to him.

It’s disturbing to see what our politicians have put in motion.

She is correct to be worried, very worried. Promises that cannot be met, won’t be met.

Pension debt keeps racking up despite the soaring stock market.

Chart from the Bloomberg article Pension Crisis Too Big for Markets to Ignore.

Meanwhile, market valuations are the most stretched in history by many measures.

GMO 7-Year Expected Returns

Source: GMO

*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forwardlooking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Forecast Analysis

GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, even nominal returns are expected to be negative for seven full years.

Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.

Related Articles

  1. Chicago Pension Liabilities Jump 168%, Understated by $11.5 Billion
  2. Five Chicago Suburbs Headed for Bankruptcy (More Illinois Cities Will Follow
  3. Dallas on Verge of Bankruptcy Due to Pensions; Just a Matter of Time (For Dallas, Houston, LA, Oakland, Chicago, etc)
  4. Criminal Witch Hunt in Dallas Pension Fiasco
  5. Not Just Dallas: Fort Worth Employees’ Pension Plan in Deep Trouble

Mike “Mish” Shedlock