U.S. government pension funds currently have the lowest cash holdings since the 2008 financial crisis, and corporate pensions’ cash holdings are barely above the 13-year low they hit in 2021, which could spell disaster in the event of a financial crisis.
Over the past 15 years, public pensions had 2.45% cash holdings and private pensions had 2.07% on average, but those have dropped to 1.9% and 1.7% respectively, according to The Wall Street Journal. The figures were higher even in 2008, when some retirement funds had to sell at inopportune times to make payments; one economist told the Daily Caller News Foundation this could threaten Americans’ pensions in the event of a financial crisis, which could force funds to sell off assets at low prices in order to continue payments, resulting in a massive loss in value.
“The insolvency of many pension funds, which was caused by making promises that could never be paid, will eventually rear its head in a financial crisis — it is just a question of when the music will stop and who will be left without a seat,” E.J. Antoni, research fellow for regional economics at The Heritage Foundation, told the DCNF.
Keeping too much cash on hand can lower returns for pension funds, but keeping too little can end up forcing companies to sell assets at unfavorable prices just to keep cash on hand for payments, according to the WSJ. Low interest rates in recent years drove fund managers to exchange liquid cash for higher risk assets, failing to anticipate that rates would eventually rise, according to Antoni.
“This is part of the classic boom-bust cycle caused by the Federal Reserve’s manipulation of interest rates. The overleverage is not limited to pension funds, however, which is one reason why most businesses have slowed hiring or begun layoffs,” Antoni told the DCNF.
The $307 billion California State Teachers’ Retirement System had the equivalent of eight and a half years worth of benefits in liquid non-cash assets in November, down from ten and a half years in July, according to the WSJ.
Some funds are now pushing to build up their cash on hand in anticipation of a rocky 2023, which will likely include another rate hike from the Federal Reserve and may induce a recession, according to the WSJ.
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