Unfunded Liabilities and Debt Will Destroy Hartford, Connecticut & the Country

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from Maudlin Economics,

The bubble in governmentpromises has started to burst.

Unfunded pension liabilities at the state and local levels have quintupled in the last decade to roughly $4–$6 trillion. That’s a massive problem, given that combined state and local revenues total around $2.6 trillion per year.

This is all before we take into account a recession, which will almost certainly happen in the next 5 years—and I really think sooner.

Following that, the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today.

In the past few years, cities like Detroit, Stockton, and Harrisburg have filed for bankruptcy.

It looks like Hartford, Connecticut could be the next domino to fall—with the city needing at least an additional $40 million in annual state funding to stave off insolvency.

Hartford has looked to the state for help, only to find its financial situation is also a mess. Connecticut is on track to run a $3.5 billion deficit over the next two years.

But even that seems like a minor problem, when compared to the $50 billion in unfunded pension liabilities the state has.

Hartford and Connecticut’s plight is simply a microcosm of the problem across the entire US.

I believe we’re now very close to the tipping point of the retirement and pension crisis we started hearing about 20 years ago.

The disastrous combination of insolvent pension systems and massive savings shortfalls means many of the 3.5 million Americans who turn 65 over the next dozen years aren’t going to have the retirements they planned for.

As I’ve said before, this pension and unfunded government liabilities crisis is one we can’t muddle through. It’s so big that it will affect each of us in some way.

Having ballooned by over 120% in the last decade, total federal debt now stands at $19.85 trillion. That’s more than one full year of the entire nation’s collective economic output.

Servicing this massive debt pile has only been possible because of the Federal Reserve’s willingness to keep interest at emergency levels since 2008. However, the rising interest rate environment spells trouble for the largest debtor nation in history.

According to the Office of Management and Budget (OMB), by 2020 (just three short years from now), the interest on the national debt will almost double to $474 billion. That’s assuming the yield on the 10-year Treasury doesn’t rise above 3.8%.

By 2026, the OMB projects that figure to be $787 billion–assuming the 10-year yield stays at 4% or below.

Repaying this huge pile of debt will require either reduced spending or some kind of debt liquidation where we restructure everything. Those are the only options, and both will have a profound effect on our lives and portfolios.

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