The biggest companies in America have a record $600 billion retirement problem

The future of retirement in America has drawn a lot of worry. Whether it’s the government’s massive pension short fall or the low returns on investments leading to a “crisis”, there appears to be a lot of concern about nest eggs coming up short.

Well, here’s another worry for the list.

Privately funded pensions at S&P 500 companies are facing their largest deficit ever, according to David Bianco at Deutsche Bank. Due to the lowest yields on corporate bonds since the 1950s, the equity strategist for Deutsche projects a record shortfall for these funds.

“The ~130 basis points drop in Baa corp yields YTD likely added roughly $250 billion to the [present value] of liabilities,” said Bianco in a note to clients on Friday.

“Return on assets, which includes bonds, likely kept pace with the unwinding liability discount rate. Thus, we estimate liabilities to be $2.3 trillion and assets $1.7 trillion right now, for a record deficit of ~$600 billion, up from the $300-400 billion range of recent years.”

Put another way, due to the low returns on invested assets, companies’ income to fund their pension plans simply can’t keep up with the promised retirement payments. Bianco says this is an economy-wide issue, but is particularly worrisome in the auto, airlines, materials, industrials, and utilities industries where pensions are more common.

To be fair, the pension liabilities for these firms are reported at year-end so there might be an increase in the assets side of the projection. However, with bond markets continuing to see sinking yields and investment returns looking challenged that appears to be unlikely.

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