Bankrupt Pensions

But you never had a dream like this before
And you don't want to ask for more
Sometimes you leave a mark
Before you know the score
--Ric Ocasek

The always insightful Stephanie Pomboy argues that biggest consequence of the Fed's decade-long experiment in financial repression has been that it has virtually bankrupted the US pension system.

No lesser authority than the Federal Reserve estimated, quite ironically, that the funding shortfall of US pension plans was greater than $6 trillion by end of Q3 2018. Pomboy suggests that the scariest part of this shortfall isn't even its enormous magnitude. Rather, it is the fact that the funding shortfall widened after a decade of rampant financial asset inflation and a 10 year economic expansion.

What's been going on here? Financial repression is about strangling yields of fixed income instruments--instruments that have traditionally been the lifeblood of pension funds. Instead of getting 6-8% that they have historically counted on, pension plans have been getting far less than half that yield. Consequently, it's a good bet that pension fund managers, like all other investors, are now holding riskier assets than before to maintain any semblance of return in a low yield world.

Pomboy points out that serious effort to shore up pension finances will significantly impact the economy. Spending cuts, higher taxes, and less capital formation will leave a big mark.

Of course, this doesn't even consider the possibility that all those riskier assets now held on pension fund books might blow up if general prices decline in the months or years ahead.