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The majority of private and public pension plans are under-funded. This means many Americans receiving monthly checks are at risk of seeing their pensions drastically reduced or even disappearing.
Pension plans generally have a minimum returns that is required to satisfy their liabilities. This return is calculated by looking at employer contributions and growth of assets and determining the life expectancy of participants.
With people living longer, contributions down and returns below what was originally expected, we now find ourselves in a crisis.
Neither the stock market nor the bond market is expected to produce the robust returns of the past. On top of that, many pension plans are mandated to have 40 percent to 50 percent of their assets in government bonds, which currently yield only 1 percent to 3 percent.
The returns should be in double digits for pensions to become properly funded again, but with such a large portion of pension assets invested in government bonds, that will be next to impossible.
The Federal Reserve has kept interest rates low in an attempt to jump-start economic growth. but these low interest rates are making it increasingly difficult for pension plans to meet their obligations.
It is true that low interest raters can benefit the economy. But every day that yields on government bonds hover between 1 percent and 3 percent, the pension crisis will only get worse.
Ed Butowsky is the managing partner of Chapwood Investment Management and is an internationally recognized expert in the investment wealth management industry for over 25 years. Check out Ed’s discussion topics for a quick tip or two for your own financial well-being in his Media Center or follow Ed Butowsky on Facebook.Read More »