World Economy

Financial Crisis Hurting Americans

In recent years, some US cities have filed for bankruptcy when their spending obligations outweighed their revenue
Illinois is in a state of complete financial chaos. The state has even delayed payments to state lottery winners.Illinois is in a state of complete financial chaos. The state has even delayed payments to state lottery winners.

Revenue growth at American companies is almost non-existent as consumers put the brakes on spending (since they don't have any extra money to spend). So, corporate America is resorting to cutting costs to maintain its profits. To achieve this, many companies are cutting wages, reducing their full-time workforce, and freezing pensions. It's the easiest thing for them to do.

And this is putting in jeopardy the retirement lifestyles of millions of Americans, media analyst Michael Lombardi wrote for Lombardi Letter.

Consider this: just recently, it was reported that United Parcel Service, Inc. would be freezing the pension plans for 70,000 of its non-union workers over the next five years .What choice did UPS have? It has a soaring pension deficit of close to $10 billion.

UPS isn't the only company that is freezing its pension plan; in 2014, more than one out of three Fortune 500 companies froze their defined benefit plans in one way or another.

And this isn't going to stop anytime soon. According to Mercer, a consulting firm, at the end of 2016, the pension deficit of S&P 1,500 companies amounted to $408 billion. According to a report from Citigroup Inc, at the end of 2016, pension plans at S&P 1,500 companies were only 76% funded. But it's not just corporate America doing this. The public sector is struggling to keep their pension plans afloat, too.

As has been well documented, after the housing bubble burst in 2007 and 2008, many cities suddenly found themselves struggling to pay their bills because their main sources of revenue—property taxes—took a hit.

"In recent years, we have seen some US cities file for bankruptcy when their spending obligations outweighed their revenue. In many cases, the pension and retirement accounts of city workers were wiped out.

"Now we are seeing states struggle. Currently, the deer in the headlights is the state of Illinois. Unfortunately, the bankruptcy of Illinois might be a forgone conclusion, as it carries a massive pension deficit and a budget that's completely out of whack.

There's a retirement crisis in the US economy right now. Those who are not saving on their own, which is most of the US population, could find themselves not financially ready for retirement for many years to come. That's the reality of America today.

Illinois Doomed

The soon-to-be second-longest business expansion in American history is grinding to a close. If Illinois couldn't get its act together then, it certainly isn't going to do it now. The new Great Depression coming to America could be a replica of what is happening in the prairie state, another media analyst Benjamin A. Smith commented for the Lombardi Letter.


The "Land of Lincoln" has several issues to deal with, but a flagging economy tops them all. Illinois's economic growth has tallied just 4% since 2007, which is lower than the 10% growth that the state experienced during the 1929 Great Depression. Furthermore, there are fewer Illinoisans working now than 10 years ago. This is quite shocking, considering that US economic growth averaged around 2% nationally since 2009. No wonder tax revenue has plummeted in the state.

The chickens have come home to roost. In an effort to avoid dealing with the big elephant in the room—massive pension and retiree healthcare costs—Illinois tried to tax its way out of the problem. Income taxes, property taxes, and sales taxes have all risen significantly. Illinois lawmakers raised state personal income taxes by 67% alone in 2011. The result, as you might have guessed, has depressed economic activity. Less discretionary spending has meant less business investment and more people leaving the state.

The consequences of multiple years of stagnation are yielding real-world consequences. Illinois's credit rating has been lowered to junk status (the worst in the Union). The state has $14.5 billion in unpaid bills to various public works contractors. This means that things like road repairs may be neglected. The state can't pay private insurers the health insurance payments that are due. Bond spreads (the cost of financing) since the torrent of credit downgrades have exploded. The state has even delayed payments to state lottery winners, who have been forced to file lawsuits to collect their claims.

Illinois is in a state of complete financial chaos. As Governor of Illinois Bruce Rauner said earlier this month after the Illinois Legislature failed to pass a 2017 budget in early June, "We're like a banana republic. We can't manage our money."


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