After degrading for decades, America’s public pension system is finally at its breaking point, and the first shoe is about to drop in Illinois. Is this the beginning of the end?
Illinois isn’t the only state underwater. New Jersey, California, and several others are close behind. And when one falls, the rest could quickly follow.
When that happens, we’re poised for a vicious chain reaction that could decimate our economy. Americans everywhere will feel it — young or old, pension holder or not. Here are the risks, and what you may want to do to prepare…
Troubling Harbinger in Illinois
The epicenter of the U.S. public pension crisis is in Illinois. This should give you an idea of how bad things are there: On top of the state pension program being utterly insolvent, Illinois can’t even afford to pay lottery winners or feed prisoners.
Illinois legislators are grasping at straws. According to a recent report, the state has $15 billion in unpaid bills and $251 billion in unfunded liabilities. $119.1 billion of those unfunded liabilities are tied to shortfalls in the state’s failing pension program.
After months of desperate number crunching, Illinois finally passed a budget this week. But legislators employed massive tax hikes to make it happen — a 32% increase on state income tax and 33% increase on state corporate tax.
Illinois’ new budget doesn’t mean much, though. It raises a paltry $5 billion, just a drop in the bucket when you look at the state’s $15 billion deficit.
Even Illinois Governor Bruce Rauner agrees that it’s a hopeless, last-ditch effort:
“This is a two-by-four smacked across the foreheads of the people of Illinois,” Rauner said. “This tax hike will solve none of our problems and in fact, long run, it’ll just make our problems worse.”
And if all that wasn’t enough, Moody’s is putting Illinois under consideration for a credit downgrade — potentially making it the first U.S. state to receive “junk” rating status. If that comes to pass, borrowing costs for Illinois will uptick dramatically, and it could be the final nail in the coffin.
Just the Beginning…
The situation in Illinois is taking center stage right now, but several other states are poised to follow. And when Illinois does fall, it will only accelerate their demise.
Kentucky, New Jersey, Arizona, and Connecticut are at the top of the list. Their pension woes and budgetary shortfalls are nearly as big as Illinois’.
And the rest of the country? It’s only marginally better off. Bloomberg reports that just 15 states have pension funding ratios above 80%.
U.S. public pensions are underfunded by at least $1.8 trillion, possibly as high as $8 trillion, according to expert estimates. They’re paying out more money than they’re taking in, plain and simple. And they’re falling hopelessly short on their projected returns too. Most funds aim for approximately 7.5% return, but they barely broke 1.5% last year.
All this shows is that, more than ever, pensions are snowballing into insolvent oblivion. And sadly, a collapse is the only thing that will stop them.
The Threat to Your Wealth (And How to Preserve It)
America’s public pension system is nothing but a tinderbox waiting to be lit, and Illinois just struck a match. No matter what, the only way this quagmire of pension insolvency can end is in a pile of ashes.
That alone is sufficient reason for Americans to start seeking safe haven stores of wealth right now.
Consider the Fed’s most likely response to this imminent collapse, which will only make matters worse. It’s safe to assume the Fed will fall back on its old tricks from 2008: print more money and use quantitative easing to slap a band-aid over the problem.
While the Fed tries to pretend away this pension collapse with fast-and-loose, helicopter monetary policy, inflation will surge and the dollar will drop like a stone.
But one “real money” asset will do the exact opposite: gold.
See, gold’s inherent value never changes, only its price does. And that price depends on several external factors like supply, demand, and valuation of the currency used to buy it — in our case, that currency is dollars.
So when the dollar falls, what happens to gold prices? Well, it means you have to spend more dollars to buy the same quantity of gold. And that just sends gold prices higher and higher.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.
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