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Court ruling could affect pension plans

From Birch Gold Group

State and local governments around the country are struggling to reconcile the debt they owe to public pension programs. Several Californian localities, in particular, have been overwhelmed with insurmountable levels of pension debt obligation.

Bloomberg reports:

“State and local pensions across the U.S. have $1.8 trillion less than needed to cover all the benefits owed in the decades ahead, according to Federal Reserve Board data. The need to make up for such shortfalls has contributed to credit-rating cuts to Illinois, New Jersey and Chicago. Such financial pressure has also been acute in California, where it helped bankrupt the cities of Stockton, San Bernardino and Vallejo.”

Until last month, state law in California dictated that these governments do whatever necessary to keep pension plans intact, but now a new court decision is giving them free reign to gut the plans as they see fit.

“Along with death and taxes, Californians have counted on another inevitability: once pension promises are made to public employees, they can’t be rolled back.”

“That belief, which has guided officials as they deal with mounting bills to cash-strapped retirement plans, was shaken in August when a state appellate court said benefit cuts are permissible if the pensions remain ‘reasonable’ for workers.”

That’s not going to help them get rid of the problem anytime soon, though. With Baby Boomers set to retire in record numbers over the next several years, Negative Interest Rate Policy (NIRP) potentially on the table, and the possibility of trouble in the bond market (where most pensions are heavily invested), things could get a lot worse for pension holders – not just in California, but across the U.S.

A dangerous new precedent

Until this decision, California governments were explicitly required to maintain benefit levels of their public pension plans. If they took something away, it had to be replaced in-kind by some other benefit or form of compensation.

Now that rule is gone, and some believe it could cause governments around the U.S. to re-evaluate their obligations to pension holders too.

“Going from an absolute ‘no’ to a ‘yes, if it’s reasonable’ is a huge shift in the political debate as well as the legal debate,” former San Jose mayor Chuck Reed said to Bloomberg. “In order to save their jurisdictions from insolvency, some systems will be motivated to try to make some changes.”

Negative rates could make a bad situation worse

As if pension plans didn’t have enough working against them, there’s one big factor that could compound their plight even further: negative interest rates.

The problem stems from the fact that pension plans rely on steady returns from their investments in stocks and bonds to stay viable and solvent. Without those returns, pensions have no way to reliably pay out benefits obliged to plan holders.

And when the Fed pushes rates down, it becomes exceedingly difficult for pension managers to get those crucial investment returns.

According to John Mauldin, low interest rates on their own, such as the ones we’ve seen for the past several years, are enough to severely risk putting pensions in the red. However, if we enter the world of negative rates, which doesn’t seem terribly unlikely, it could set us up for a major collapse in the entire pension system.

Add to that the issue of how negative interest rates could tank the bond market, in which most pension plans are heavily invested, and you’ve got a perfect storm brewing.

Why gold could be pension holders’ best friend

As you’ve seen here, the prospect of relying entirely on a pension plan for your retirement isn’t ideal. Pensions can be cut; their holdings can be decimated by the whims of the market; and now the government can effectively legislate your hard-fought pension dollars away from you!

Unlike pensions, physical gold isn’t subject to any of those risks. The only person who holds power of the money you invest in gold is you.

Looking at how uncertain the situation is now, protecting your retirement with gold could make a lot of sense – regardless of the status of your own retirement savings, but especially if you’re invested in a pension plan.

  • Cadfael

    Start by eliminating those judges pensions first!

  • Sharon Phelan

    Gold values go up and down just like the stock market. I just don’t trust anything these days.

  • picomanning

    How many years in office does a U.S. Congressman need to serve before being eligible for a lifetime pension? How many years must a person work for the U.S. Postal Service before being able to receive a pension for life? How many workers, as a percentage of the population of workers, work for the government (and potential recipients of pensions)?
    Our economy is NOT growing. (Simple check: Low interest rates and the Fed’s unwillingness to raise rates.) If you’re a pensioner you might not suffer much. If you’re in your 40’s and believe you’re going to be just fine, you’re probably not.

  • I can own gold and silver and carry it into various places of business and redeem it at any time. And I am not at the mercy of a business operator to under price my bullion. He pays me spot prices. Sure, metals fluctuate and there are times where it goes for a long time without rising substantially in value. But compare metals to paper money and there really is no comparison. Better get your bets (investments) down before the IMF accepts China into the fray. Then your paper might just be worth 75% less than the face value.

  • Thanks for the comment, John. And regarding the IMF adding the Chinese yuan to the SDR, we’ll be discussing that in this space on Friday. An extremely important development for all Americans to keep an eye on…

  • JJM123

    They do fluctuate. I started with PMs late. Some silver I bought at $17, 25, 30 and only a little at 35. I am still at an overall loss but the only way it would drop 75% is if the world supply magically tripled or quadrupled.

  • John Ghackie

    Three “How many…?” questions and no answers!

  • The average investor unfortunately is mislead by advisors and the financial media to continually compare gold and silver as speculative investments. When people begin to gain the simple awareness that Gold and Silver are not speculative investments but simply a form of insurance they would immediately start exchanging 10-15% of their dollar based assets (investment portfolio) and buy Gold and Silver. The truth is a forever will be that Gold and Silver is simply a hedge on future purchasing power. once understood people would finally understand that the price of Gold and Silver is never the concern. The reality is Gold and Silver will protect future purchasing power so if any dreaded economic calamity becomes reality those with Gold and Silver will have a way to maintain life experience and some life style. Those who have none will unfortunately have nothing. If the calamity doesn’t occur in this lifetime people can simply pass the future purchasing power protection down to their heirs as at some point the economic calamity will occur as history shows this time and again.

  • There is one point where the price of Gold and Silver is a concern and that is the price when you can no longer afford the exchange. $5000k gold is a problem when you have not accumulated any Gold and now are effectively priced out. That is YOUR risk.

  • People purchase Life, Auto and Home insurance everyday without speculating on the premiums and yet these same people continue to compare the pricing of Gold and Silver as a speculative investment against equities, bonds and other securities. This is the massive disconnect and misunderstanding. Those who sell Gold and Silver and promote the asset base need to do a much better job of communicating the real value proposition and not get misdirected back into the disconnected debate about speculation.

  • Denny Parkstone

    this is total BS !!!! the agreement made 40 years ago was that you paid a portion of your pay into these plans.now,40 years later for some judges to say that they can be rolled back is BS and will start a flurry of lawsuits.you cant take money out of a persons paycheck for 40 years and then say u cannot pay them.like I said,this is bullshit !!

  • Denny Parkstone

    PS:they better start with the insane pensions that congress and judges get that are so called pensions !! I can see blood in the streets when they try and take a pension from people that put part of their paycheck into these pension plans for 40 years and more !!