The pension time bomb is something we have to watch closely as a country. For example, Illinois state bond is close to getting rated under a junk status. We are not talking about a failing city like Detroit, but a whole state. Pension fund is designed to not take financial slowdowns thus ever slowdown or negative growth rate will accelerate exponentially the unfunded liabilities.
The chart below shows the funding gap between what the fund’s liability/payout versus fund availability. The lower the funding ratio, the more money the state has to come up with to meet its pension obligations.
The pension time bomb is similar to that of Japan’s demographic challenges (which has other implications such as decreasing consumer spending, lower productivity, lower participation rates in the equity market etc.), but they are starting to test different methods of solving that by allow relaxing the legality/length of stay for foreigners to JP etc.
World Economic Forum actually projected the global unfunded liabilities in pension funds will grow to $400 trillion within the next 30 years, give or take a few trillion dollars here and there. It’s about time to start to focus on this before the domino effects (of states getting rated junk bond status one by one).
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