Desperate U.S. States Are Turning To
"Getting A New Credit Card
To Pay Off The Old Credit Card"
“When you’re borrowing money for pensions, you’re getting a new credit card to pay off the old one, and you still haven’t paid off the old one.”"Solving' this problem by issuing bonds is an enticing option but at heart, it amounts to what one might call a 'pension liability-bond arbitrage.' The idea is to borrow the money to plug the pension gap and invest it at a rate of return that's higher than the coupon on the bonds, thus saving money over the long-haul. Of course, much like transferring a balance on a high interest credit card onto a new card with a teaser rate (or refinancing a high interest credit card via a P2P loan) this gimmick only works if you do not max out the original card again, because if you do, all you've done is doubled your debt burden. As it relates to pension liabilities, this means that what you absolutely cannot do is use the cash infusion as an excuse to get lax when it comes to pension funding because after all, that's what caused the problem in the first place."
- Zero Hedge on Underfunded U.S. Pension Fund Crisis
LINK HERE to the commentary
"Instead, the deals are typically used to make troubled pension systems seem a little less troubled for a few years, allowing elected officials to celebrate a pension reform without having to make the system sustainable over the long term. The flood of cash from the bonds may also tempt officials into taking a break from their pension-funding schedule — the very action that has caused so much pension distress to begin with. Skipping annual pension contributions produces an off-balance-sheet debt that can start growing exponentially."
- NY Times
LINK HERE to the article