LIVE Gold Prices $  | E-Mail Subscriptions | Update GoldSeek | GoldSeek Radio 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page >> News >> Story  Disclaimer 
Latest Headlines to Launch New Website

Is Gold Price Action Warning Of Imminent Monetary Collapse Part 2?
By: Hubert Moolman

Gold and Silver Are Just Getting Started
By: Frank Holmes, US Funds

Silver Makes High Wave Candle at Target – Here’s What to Expect…
By: Clive Maund

Gold Blows Through Upside Resistance - The Chase Is On
By: Avi Gilburt

U.S. Mint To Reduce Gold & Silver Eagle Production Over The Next 12-18 Months
By: Steve St. Angelo, SRSrocco Report

Gold's sharp rise throws Financial Times into an erroneous sulk
By: Chris Powell, GATA

Precious Metals Update Video: Gold's unusual strength
By: Ira Epstein

Asian Metals Market Update: July-29-2020
By: Chintan Karnani, Insignia Consultants

Gold's rise is a 'mystery' because journalism always fails to pursue it
By: Chris Powell, GATA


GoldSeek Web

The Detroit Template

-- Posted Thursday, 8 August 2013 | | Disqus

By Eric Sprott and Etienne Bordeleau

On July 18 2013, the city of Detroit officially filed for bankruptcy under Chapter 9. At $18 billion, this is the largest municipal bankruptcy in U.S. history.1 According to the current “proposal to creditors”2, the city’s pension plans have been chronically underfunded and the gap between the plan’s assets and liabilities now stands at approximately $3.5 billion. Additionally, the value of unfunded “other post-employment benefits” (OPEB) such as life insurance, health care, etc., now reaches $5.7 billion. There is thus a $9.2 billion gap between the total assets and the liabilities of Detroit’s pension and benefits system (Table 1 below).

According to the restructuring plan, the city intends to write off the entirety of the $3.5 billion pension deficit and give the OPEB liabilities (which are basically not funded at all) the same treatment as bondholders – a 90% haircut. The net result is that pensioners could lose $8.6 billion of future benefits, or 41% of the value of all the benefits (pension plus OPEB) they were entitled to before the city’s bankruptcy filing. Obviously, such a large clawback will have a profound effect on the livelihoods of the pensioners. Doubtless, this will have repercussions that will also affect the economic activity of the communities in which they live. What still puzzles us is how predictable Detroit’s problems were and how little was done to fix them before it was too late.

Source: City of Detroit – Proposal to Creditors, June 14 2013

Unfortunately, Detroit’s case is far from unique. A recent report by Standard & Poor’s highlights that, for 2012, the total deficit of S&P 500 companies’ pension plans and OPEBs amounted to $452 billion and $235 billion, respectively.3 Another report by the Boston College Center for Retirement Research surveyed 126 state and municipal pension plans and found that, for 2011, they were underfunded by approximately $1 trillion.4 Unfortunately, the report does not provide numbers for OPEB liabilities, but another report by the Pew Charitable Trust reports that for the 30 largest American cities, the average funding status for OPEB obligations is 5%.5 This suggests that this is a much bigger problem than what has been publicly reported.

While these numbers appear imposing, in reality, they are just the tip of the iceberg. The promises made by the U.S. Federal Government to its citizens are even more unmanageable. Every year since 2003, the U.S. Treasury reports the net present value of its future obligations for a 75-year horizon (the fiscal gap). This represents (almost) the real debt load of future generations. This metric, by the way, is almost always ignored by the mainstream media.

As of the end of the last fiscal year, the reported total Federal Obligations were approximately $85.4 trillion, an increase of $4.5 trillion from the prior year.6 However, those numbers do not fully reflect the total obligations of the government towards its citizens, since it does not take into account any obligations past the 75-year window.

Economist and Boston University Professor Laurence Kotlikoff has long been recognized as an expert on government finances.7 Based on the 2013 Trustees Report on Social Security’s longrun finances, he finds that the “infinite horizon” fiscal gap for social security alone (the difference between the present value of all future promised benefits and tax revenues) is around $23.1 trillion. To put these numbers into context, the U.S. GDP for this year is forecasted to be a bit more than $16 trillion.

Professor Kotlikoff calculates that to fully eliminate the shortfall in Social Security funding, the government would need to either cut all present and future social security benefits by 22%, or increase the Federal Insurance Contributions Act tax (FICA) by 32% (from 12.4% to 16.4%). But this is just to fix Social Security!

For the U.S. Federal Government as a whole, Kotlikoff estimates the fiscal gap to be around $222 trillion! This is many orders of magnitude larger than GDP. In order to wipe out this gap, the Federal Government would need to permanently increase all taxes by 64% or reduce all expenditures (with the exception of debt servicing) by a whopping 40%.

The problem is clear; every level of government has promised too much and is now faced with the politically unappealing prospect of either drastically increasing taxes for the working age population or significantly reducing benefits for the retired (or future retired). As evidenced by the Detroit bankruptcy, the longer we wait, the worse it will get. The greater the delay, the more pain and suffering citizens will face when the benefits and safety nets they have come to expect from the government suddenly disappear. Of course, the U.S. Federal Government is very unlikely to default in the same fashion as Detroit, but we should not be surprised if the “Detroit Template” of balancing the books predominantly by cuts to pensions and OPEB benefits is adopted by others. However, given that the Federal government would need to cut all expenses by 40% to balance the books (according to Kotlikoff), it is not hard to imagine that Social Security, Medicare and Medicaid would suffer haircuts in excess of those experienced by the Detroit pensioners.

Over time, politicians from all stripes have proven adept at cognitive dissonance, but these increases in taxes and cuts to benefits will have to happen, one way or another; it is just a matter of time.

1 in-u-s-history/
2 Detroit%20Proposal%20for%20Creditors1.pdf
3 Puts-Pension-Plans-To-The-Test.html
5 benefits-pozen
6 gaap-based-2012-financial-data
7See Professor Kotlikoff’s website at:

-- Posted Thursday, 8 August 2013 | Digg This Article | Source:

comments powered by Disqus


Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to >> Story

E-mail Page  | Print  | Disclaimer 

© 1995 - 2019 Supports

©, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer


The views contained here may not represent the views of, Gold Seek LLC, its affiliates or advertisers., Gold Seek LLC makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of, Gold Seek LLC, is strictly prohibited. In no event shall, Gold Seek LLC or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.