MuniLand: state pension funding declines despite reforms

U.S. state pension funding declines despite reforms. Here is a direct video link.

As we consider the funding deficits prevalent in pension plans today we should appreciate that large deficits persist even though US stocks have soared in a dream of their own over the past year as shown in the chart below, where the S&P price level is plotted as against macro economic indicators as well as high yield bond prices. (These 3 economic indicators are supposed to be highly correlated.)


Chart source: zerohedge.com

One does not need to be clairvoyant to predict how much worse savings deficits will measure once stock valuations revert to their historic mean–some 40%+ lower than present levels. As the commentator notes in the video clip, higher fixed income rates when they come will definitely help income flows into pensions as money comes due and can be rolled over at higher yields. But at the same time, the typical pension mix (and retirement portfolio recommended by financial types) is 60% equity and 40% fixed income today. So when the 60% of the money in equities plunges in value anywhere within historic norms (-25% to -50%) a jump up in income earned on the fixed income side will not be able to offset the overall capital declines and funding deficits will once more compound in the wrong direction.

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