Pension System Collapsing; Higher Taxes and Austerity Ahead

As debt-infested European countries are struggling with implementing austerity measures, American taxpayers should buckle up for a taste. The U.S. economy is on its way to austerity measures, but not by choice.

According to a study done by investment research firm Morningstar, Inc., 21 states in the U.S. economy have pension systems that are in poor financial condition or that are not fiscally sound. Among the states, Illinois, Kentucky, and Connecticut are the lowest-funded states—at 43.4%, 50.5%, and 53.4%, respectively. (Source: Morningstar, November 26, 2012.) As per Morningstar’s standards, a pension system must have a funded ratio of 70.0% or more in the U.S. economy to be considered financially sound, meaning it should have at least $0.70 for every dollar of liabilities.

Other states, such as Arizona, are struggling to get their pension system in order, as well. In 2010, the state was short the $12.0 billion it needed to pay for its obligation. Fast-forwarding to 2011, the gap had grown and Arizona’s pension system needed $13.0 billion to cover its $48.0 billion pension obligation. (Source: Arizona Capitol Times, December 7, 2012.)

Kentucky’s pension system is following in the same footsteps. It needs $33.0 billion to overcome its unfunded liabilities. (Source: Courier Journal, December 11, 2012.)

My question: where will the states get the money to fund their pension systems? If you guessed the federal government, then you may be right. As the pension system deteriorates in the U.S. economy, I believe states will have no choice but to look at the federal government to bail them out.

Hence, you can see why I wouldn’t be surprised to see austerity measures pour into the U.S. economy in one form or another. They could just come from lower pension payments and higher taxes, or from an extension of the official retirement age. Just to give you some perspective; each resident in Alaska is on the hook for $10,235 for unfunded liabilities in its pension system.

The U.S. economy is at a critical point. In time, our problem here in the U.S. economy could become very similar to the ones faced by the debt-infested eurozone countries—governments spent too much or promised too much in the past, and now they pay the price. The U.S. economy looks to be heading in the same direction. If the creditors giving loans to the eurozone countries are asking to implement austerity measures, those who bought U.S. government debt will do the same…unless the Federal Reserve eventually owns all debt.

The U.S. economy is structurally damaged. It could take decades and rigorous austerity measures to get out of this mess, as change won’t occur in the blink of an eye.

Where the Market Stands; Where It’s Headed:

What’s happening to the stock of Apple Inc. (NASDAQ/AAPL)? It looks like it’s falling off a cliff…almost like panic selling. My bet is that many funds got nervous, hit the panic button, and are getting out of the stock. But Apple is not the big story; 2013 is the big story. I expect to see many big-name stocks suffer in 2013 as the multi-year bear market rally comes to an end.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in Profit Confidential, October 6, 2008. From October 6, 2008 to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.