Today’s segment is a major slap in the face for all our public sector employees.

Most people are aware that public sector employee pensions are in trouble. But new numbers indicate the situation is much worse than previously thought.

How’s $6 trillion in the hole for benefits that have already been earned sound?

[ad#Google Adsense 336×280-IA]These aren’t projections of what could be owed… They’re benefits that have already been earned but haven’t yet been paid out.

And here’s the amazing part of this tragedy: Most (but not all) of the problem is due to current actuarial practices, which ignore the long-term risk of investments held in these retirement plans.

The result? Their calculations of projected pension liabilities and costs are way off.

Let me explain how out of whack they are…

All pensions are required to hold Treasurys. They can hold other securities as well, but they are required by law to hold a certain amount of default-free Treasurys. The 10-year Treasury is paying only about 1.57%, and the 30-year is around 2.23%.

But pension plans, on average, assume a return of 7.5% on their investments. In order to compensate for the incredibly low yields on the Treasurys they must hold, they have to take more high-risk holdings (like stocks) to hit their 7.5% target.

And it’s this additional risk that current actuarial procedures are underestimating.

When you consider the costs of the added risk and the low Treasury rates… the funding deficit is not the $1.5 trillion reported by public pension plans; it’s actually $6 trillion.

And in the long term, these risky assets could actually return less than the default-free Treasurys.

To make matters worse, the $160 billion in annual contributions to these plans doesn’t even pay for the newly earned benefits; it just creates additional future debt. This is a nightmare on our doorsteps.

And of course, it comes down to only two possible solutions: Either the retirees will take it on the chin or taxpayers will wind up picking up the slack. My gut tells me it will be both.

These plans are in trouble, and every year they get deeper into trouble. Many taxpayers are aware that state and local government pension plans are underfunded… but they aren’t aware of just how bad the situation is. And it’s bad.

If you’re counting on a public sector pension plan to fund your retirement, I’d start putting aside a lot more money (more than you may have planned to save).

Good investing,

Steve

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Source: Wealthy Retirement