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Why Record Stock Prices Won’t Save Pensions The stock market continues to reach new record highs, giving pensions a much needed boost. But fund managers and beneficiaries shouldn’t get too excited. Rising stock prices may be enough to help failing pensions tread water for a little longer, but a critical analysis of the situation proves their fate is already sealed. Looking Back: Pensions’ Path to CollapseWe’ve covered the plight of America’s pensions thoroughly over the last several months, watching them degrade into hopeless insolvency one by one. Here’s how they got to where they are today… It started with a Federal law passed in 2014, which lets struggling public pensions slash benefits if granted permission by the U.S. Department of the Treasury. Earlier this year, a Cleveland-based ironworker pension took advantage of the new law for the first time. In the months following, public pensions in states like Illinois, Kentucky, Connecticut, New Jersey, Texas, and Arizona were forced to consider doing the same. These states, plus a whole laundry list of others, are stuck with totally upside down budgets. And their underfunded pension programs are the primary culprit. All said, only 15 states in the country can boast pension funding ratios in excess of 80%. The rest are barely keeping their heads above water. And then the contagion started spreading to private pensions. Two of the country’s largest private employers, UPS and General Mills (both Fortune 500 companies), announced some form of pension benefit reduction last July — confirming the recent findings of a private report by Willis Towers Watson that shows private pensions are headed down the same path as their public counterparts. Today, pension managers and beneficiaries are clinging to one last shred of hope: the notion that burgeoning stock prices will be enough to boost funds’ investment returns and close their shortfalls. Sadly, the evidence shows their hope is likely misplaced… Why Climbing Stocks Won’t Rescue Pensions Ever heard the saying… a rising tide lifts all ships? Well, the same is true when it comes to the upward momentum of a bull market. When stocks soar, anything exposed to them tends to get a pleasant bump as well. That includes pensions. But the rising tide of stock prices today can only lift pension funds’ ships so far… because those ships are full of gaping holes. See, pensions do hold stocks as a portion of their portfolios. Actually, pensions are holding more stocks today than is historically typical, due to the low yield environment in “safer” assets like bonds, Treasuries, and so forth. However, even with pensions holding a larger ratio of stocks to other assets, the current bull market is still leaving them with an overwhelming burden of unfunded liabilities (obligated payouts to beneficiaries). That’s because the majority of pension fund capital is still held in bonds and similar assets. And pension liabilities are calculated based on the “discount rate” of those investments — essentially the rate of return, which depends heavily on rate policy from the Fed. Newsmax Finance reports (emphasis ours):
Ultimately, rising stocks are nothing but a reprieve for failing pensions. While fund managers may be able to use the current climate to keep their plans funded for the time being, the long-term prognosis remains grim. 1 Profitable Play On the Pension Fallout The American pension system as it stands today is an economic powder keg. The only question is how it’s going to be ignited. Meanwhile, we’re living amidst the third longest bull market in U.S. history… and our economy is long overdue for a correction. You don’t have to be an expert to see this is a recipe for disaster. If pensions can’t close their funding gaps during a raging bull market, how in the world will they do it in a bad bear market? However, there is still a way to hedge your savings against the risks we’re facing in today’s unprecedented environment. There’s one asset play that will likely net many people a handsome profit when this brewing crisis finally gives way: physical precious metals. Gold, silver, and other metals will benefit from this scenario in three key ways:
Today, you have the unique opportunity to act on this information before everyone else flees to precious metals and prices jolt upward. So if you haven’t prepared an appropriate position in gold yet, use this chance to your advantage and do so soon.
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