|Published on July 10 2017 This Inevitable Crisis Just Became Imminent |
by Justin Spittler, editor, Casey Daily Dispatch
It’s about to become the first U.S. state with a “junk” credit rating.
It’s broke…and running out of time. It doesn’t have enough money to fix its roads. It can’t feed its prisoners. It can’t even pay its lottery winners.
I’m talking about Illinois.
Two weeks ago, I told you how the state was on the edge of a major debt crisis. Since then, state politicians have scrambled to keep the situation from spiraling out of control.
In fact, they just passed their first budget in over two years. It raised personal income taxes by 32% and the corporate tax rate by 33%.
Those are huge tax increases. Surely this fixes the problem, right?
The budget will raise just $5 billion. That will barely put a dent in the state’s $15 billion deficit.
In short, it won’t fix anything. At best, it buys Illinois some time.
Bruce Rauner, the governor of Illinois, agrees:
This is a two-by-four smacked across the foreheads of the people of Illinois… This tax hike will solve none of our problems and in fact, long run, it’ll just make our problems worse.
Moody’s sees major “shortcomings” in the budget, too. The credit rating agency is especially worried about a lack of “broad bipartisan support.”
Because of this, Moody’s may cut Illinois’ credit rating to “junk” status. Standard & Poor’s, another major credit rating agency, has threatened to do the same.
If this happens, Illinois’ borrowing costs will skyrocket.
• And that’s the last thing Illinois can afford right now…
After all, it’s already $15 billion behind on its bills. And that doesn’t even include the state’s biggest liability: its broken public pension system.
A public pension, as you may know, is a state-run retirement fund. Teachers, firemen, and police officers finance these funds out of their paychecks.
For decades, government employees in Illinois could count on their pensions. But not anymore.
Today, Illinois’ pension system owes $250 billion more than it has. That’s more than the combined market value of four major Illinois-based corporations: Boeing (BA), Caterpillar (CAT), United Continental (UAL) and Allstate (ALL).
At this point, the pension system is bleeding so much cash that it’s bankrupting the state.
But Illinois isn’t the only state with this problem…
• Kentucky, New Jersey, Arizona, and Connecticut have huge holes in their pension funds, too…
To be fair, this isn’t a new problem. People have known that the public pension system is a ticking time bomb for years.
But the government hasn’t done a damn thing about it. All they’ve done is kick the can down the road.
Well, I have news for you. We’re now at the end of that road. Illinois’ budget crisis is proof of this.
In other words, the inevitable U.S. public pension crisis has become imminent.
And it will affect you, whether or not you live in Illinois or have a pension plan.
That’s the bad news. The good news is that it’s not too late to take action. Today, I’ll show you how to protect yourself. I’ll also explain why this crisis will soon reach every man, woman, and child in America…even those who don’t depend on a pension.
This isn’t hype. It’s not hyperbole. It’s basic math…
• Pension funds pay out more money than they take in…
A lot more.
According to Moody’s, U.S. public pensions are underfunded to the tune of $1.8 trillion. Other experts put the figure as high as $8 trillion.
Frankly, it doesn’t matter what figure you use. The point is that these funds owe more than they could ever pay back.
They’re insolvent. And it’s only getting worse.
• Last year, the average pension fund made a 1.5% return on its investments…
That’s well short of the 7.5% return that these funds projected to make.
It was the second straight year that pension funds missed their return targets.
It’s now virtually impossible for these funds to dig themselves out of the hole they find themselves in.
Even if these funds made 25% over the next two years, they would only reduce their liabilities by just 1%. And that’s the “best-case scenario,” according to Moody’s.
Even if they make 19% over the next two years (the base-case scenario), their liabilities will swell by 15%.
But even that’s a long shot. After all, these funds couldn’t even make 2% last year.
• At this point, governments should dismantle the public pension system…
But that obviously won’t happen. It’s political suicide.
So instead, pension funds have tried to close the gap by “reaching for yield.” In other words, they’ve loaded up on stocks.
That’s a big problem.
After all, stocks are risky. They fall much faster and harder than bonds during panics.
• The public pension system has never been more fragile…
Not only that, it’s cracking before our eyes.
But don’t worry. It’s not too late to prepare.
Here’s how you can protect yourself before the public pension system comes crashing down:
Move to another state. This might sound crazy. But if you live in a state with a broken pension system, your government will come after you. It will raise taxes just like the government of Illinois did. It’s the only way these states can keep their pension systems from collapsing.
So, it might be time to get out of Dodge if you live in a state like Illinois, Kentucky, New Jersey, Arizona, or Connecticut.
And you might want to consider living in one of the states below. They all have relatively stable pension systems and fairly low taxes:
5. District of Columbia
Buy gold. Right now, the pension crisis is a state problem. But the next time we have a major economic shock, it will become a nationwide crisis almost overnight.
When that happens, the federal government will step in. And it will try to “paper over” the pension crisis by printing more money.
This will destroy the value of the U.S. dollar. But it will make gold, which is real money, more valuable. So pick up some physical gold if you haven’t already.