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19.05.2017 16:44 Age: 36 days
Category: News

US faces widespread bankruptcy of pension funds


President Trump is not the only threat to the USA.

According to an academic study (The Hoover Institution, Stanford Graduate School of Business), the US public pension system has developed a $3.4tn funding hole. The study reveals that some states (Illinois, Arizona, Ohio and Nevada) and cities (Chicago, Dallas, Houston, El Paso) have underfunded their pension programs and have hidden these fiscal holes with accounting tricks. It is alleged that this shortfall could be 3 times larger than official figures.  

This situation is somewhat reminiscent of what happened in the cities of Detroit and San Bernardino which had to file for bankruptcy in 2013. 

To properly address this situation, these states and cities would have no choice but to increase their contributions to their pension funds by cutting spending on vital services and raising taxes to avoid bankruptcy. 

These states and cities are currently contributing 7.3% of their revenues on average to public pension funds. The study estimates that some cities would have to increase this participation to 20% of their revenues in order to prevent a rise in their deficit. 

The study warns that “over a 5 to 10-year horizon we are going to see more bankruptcies of cities where the unfunded pension liabilities will play a large role”. In the event that the pensions funds become insolvent, “the consequences would be so disastrous that the Federal government would have to bail them out”. 

Read the Financial Times article here 


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