I've warned before about pension shortfalls in the USA, particularly in government pensions. I've also warned about the dangers of too much debt, whether governmental, corporate or personal.
Puerto Rico has just become a case study in what happens when the two problems intersect.
When [Puerto Rico] declared bankruptcy in 2017, it was the biggest bankruptcy case in US history ... So there’s been more than two years of negotiation between bondholders and all the various officials, pensions, unions, etc.
And on Friday they announced the deal.
Bondholders will take a huge cut of more than 60%. But, as part of the deal, many local retirees in Puerto Rico will see their pensions cut.
Pension payments are an enormous part of the Puerto Rico budget. And since the government here doesn’t have the option of conjuring more money out of thin air, they had no choice but to cut pensions in order to free up cash to pay bondholders.
This is absolutely a sign of things to come in the United States.
Just like Puerto Rico, the US government is heavily in debt. It’s actually much worse.
Puerto Rico’s debt-to-GDP was ‘only’ 70%. The federal government’s debt exceeds 100% of GDP.
And, just like Puerto Rico, the #1 most expensive item in the federal budget is retiree benefits (Social Security and Medicare).
The difference is that Uncle Sam is able to kick the can a lot farther down the road. They have the ‘benefit’ of going deeper into debt because the Federal Reserve will just print more money to buy US government bonds.
But even that has limits.
Social Security is already cashflow negative, and the program’s giant trust funds are starting to deplete their cash reserves.
There are simply too many retirees receiving benefits and not enough people paying into the system. It’s simple arithmetic.
. . .
This isn’t just a US problem either. A recent report from Citibank estimated that, among the world’s 20 wealthiest nations, the total pension gap is an eye-popping $78 TRILLION.
That makes Puerto Rico’s problem tiny by comparison. And realistically there’s just no way for governments to solve a problem that large.
There's more at the link.
A headline in the New York Times pointed out: "$129 Billion Puerto Rico Bankruptcy Plan Could Be Model for States". It could indeed. With several states in very deep water, financially speaking, it may be the only option open to them. I'm not even sure if it's legally possible for a state to declare bankruptcy (it's a disputed point), but if that's what has to happen to fix the problem, it will happen, one way or another. Meanwhile, some cities are already cutting services in an attempt to satisfy their pension obligations. That's bad news if you live in them . . . and there's no long-term solution in sight. Meanwhile, our politicians are too busy feathering their own nests, and frittering away their time on less pressing, less practical issues like impeachment or political correctness or what have you, to solve the real problems facing this country.
To see how your state is shaping up in terms of income, debt, and shortfalls in funding its obligations, see the recently-published 2019 "Financial State of the States" report (link is to an Adobe Acrobat document in .PDF format), and also consult the State Data Lab report. Another useful source of day-to-day information is the Pension Tsunami Web site.
You really need to stay on top of this information, and prepare accordingly if you live in a state that's just not making it. Sooner or later, that reality's going to affect you, too.