Agora, Pensions and Mortgages

State pension funds across the U.S. have lost $1 trillion over the last year… and that’s just the beginning. Welcome to the great deleveraging issue of your 5 Min. Forecast.

In 2002, we forecast that the tech bubble would mutate into a housing and consumption bubble… and when that burst it would do far greater harm than techs, because so many more “innocents” would be adversely affected. This morning, we’ve got an entire issue of data points that show what the deleveraging of America looks and feels like.

According to a study published this week by the Center for Retirement Research at Boston College, public pensions will need $270 billion in new contributions over the next four years just to stay afloat, and another $100 billion annually for the 20 years afterward. All during the greatest wave of public retirement in U.S. history -- the last chapter of the baby boom.

As a consequence, states all over the country are coming clean: Kentucky has unfunded pension liabilities exceeding $27 billion. In Illinois, Chicago alone is $17 billion in the hole. New Mexico is unfunded by $4.6 billion. Teachers in West Virginia are short $4 billion… this list is long.

Over 14 million Americans are counting on a public pension to help fund their retirement. We’ll visit this topic again soon. And then again. And again… In the meantime, we strongly advise you take matters into your own hands.

This crisis in pension funding comes at a really bad time. “Check out the unemployment rate among baby boomers,” for example, says Rob Parenteau, whose been mining Friday’s job report for worthy nuggets.

“The unemployment rate for the 45-55 age cohort is about to break the spring of 1983 highs that followed the double-dip recession of 1980-2.

“This segment represents the tail end of the baby boom that should be both in its peak earnings years, as well as in a position to save out of retirement. The 55-and-over unemployment rate is also at an all-time post-World War II high, while the percent of the total unemployed who have been out of work for 15 weeks or longer is also at a post-World War II high of 43%.

“This shedding of workers in the prime saving age range of 45-55 poses a challenge to those trying rebuild their savings. Given the damage done to portfolios, crude estimates indicate the gross personal saving rate should be migrating toward 8%, while it’s currently half that. Although the 91.5% of the labor force still employed may continue to cut back spending to achieve savings goals, clearly, there is a rising cohort of older unemployed workers who will need to draw down their saving rates, as unemployment benefits are unlikely to pay their existing bills.

“The upcoming personal tax cuts may help cushion this blow, but we believe the heavy hit to older workers -- probably the same workers hardest hit by falling home and equity prices -- could make further gains in the household saving rate more difficult to achieve.”

And so it goes.

Americans across the board are already falling behind on loans at a record rate. In the last quarter of 2008, a record 4.2% of all consumer loans were delinquent at least 30 days, says data from the Fed this week. Another 4% were in default.

“The wheels have fallen off the economy," James Chessen, chief economist for the American Bankers Association, told USA Today. "There have been significant job losses, and that translates into people having a hard time paying their bills."

And as we’ve been expecting for nearly a year, prime and Alt-A mortgage delinquencies are soaring: From the Office of Thrift Supervision (sic):

Subprime mortgages are suffering the highest rate of delinquency.

But the delinquency growth rate among prime and Alt-As, from the beginning of 2008 to the end, more than doubled. Plus, delinquent prime and Alt-A loans far outnumber subprime.

That makes our forecast last May all the more daunting… we have likely yet to see the worst of the housing bust.