By Mike “Mish” Shedlock | Bridgewater Associates did an analysis of pension funds recently and concluded 85% of them will fail if returns average 4%.
Bridgewater notes that public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades. It would take an investment return of roughly 9% a year to meet those obligations.
With the 30-Year long bond yielding a mere 3.5% and with stock valuation through the roof, I expect negative returns for 7-10 years.
Stretched out over 30 years, 4% seems about right. 9% is out of the question.
CNBC has further analysis in Report: 85% of pensions could fail in 30 years:
Influential and well-regarded hedge fund Bridgewater Associates Wednesday warns public pensions are likely to achieve 4% returns on their assets, or worse. If Bridgewater is right, that means 85% of public pension funds will be going bankrupt in three decades.
Bridgewater came to these conclusions by stress testing the nation’s public pension plans, much the way banks need to be evaluated on what could happen given a wide range out outcomes.
Many pension observers make the claim pensions will achieve 7% to 8% returns. But even if that assumption is correct, which is unlikely, public pensions are looking at a 20% shortfall, Bridgewater says. A 4% return is much more likely, the firm says.
Bridgewater set up a sophisticated model to simulate many of the possible market environments to see how they would affect public pension’s resources. In 20% of those scenarios, public pensions run out of money in 20 years. And in 80% of the scenarios, public pensions run out of money within 50 years, Bridgewater says.
Massive Number of Municipal Bankruptcies on Horizon
I wonder what Bridgewater’s model would predict starting with losses for the next seven to ten years, because that is what I think is highly likely.
Given the only way to shed pension obligations is bankruptcy, one hell of a lot of municipal bankruptcies are on the horizon unless some other legal maneuver is found.
Mike “Mish”Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.