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Throughout the 20th century, the success of the US economy can be tied to generations of hard-working private and public sector employees who traded in sweat equity for an opportunity to enjoy their retirement with steady, predictable income from pension funds.
However, the foundations of many of these pension funds have become wildly unstable as funding gaps in some states have now swelled in the hundreds of billions of dollars between what is available and what needs to be paid out.
From a financial standpoint, pensions are funded primarily from a combination of employer contributions for employees, individual employee contributions, and investment returns to the fund. The largest providers of pension funds over the last few decades have been local states and governments, many of whom have faced socio-economic needs in recent years that have seen funds diverted to other priorities, such as infrastructure and health care.
Given COVID-19 shutdowns across the US in the last year, the rate of funding gaps have widened dramatically and pension funds have been forced to take on additional risk to increase investment returns. These pension funds are tasked with solving the estimated $1.6 Trillion funding gap that they’ve started with in 2021. Already, they are facing an under-funding situation where they hold 68% of what they’re required to pay in the future.
A Map of State Pension Funding Ratios (Funding/Obligations), taken from the Equable Institute.
As shown in the graph above, there were only eight states in 2019 that had enough funding to meet its obligations to beneficiaries. While the full collection of states are yet to disclose 2020 numbers, experts predict that Tennessee will be the only state that can fulfill its obligations at this time.
Is Bitcoin The Answer?
Facing critical shortfalls in its funding ratios, pension funds have been forced to take on an increased risk to generate greater returns to meet payout obligations. The move to higher-risk investments is a significant deviation from its fixed income roots; however, the funds must find alternatives in order to generate 7-8%+ returns annually despite bond yields averaging below 1% over the last 12 months.
Recently, the California Public Employees’ Retirement System (Calpers) was forced to start investing billions of dollars into high-risk distressed debt in the hope that it will help them close the gap. Unfortunately, the high-risk nature of these investments can come with high probability of failure and the potential to fall further into financial distress.
As a result, pension fund sponsors and state officials have shifted focus towards Bitcoin as an asset that can deliver upside while mitigating downside loss risk. The result has been a wave of pension funds expanding their investment horizons to carve a portion of their asset allocation into digital assets. In fact, many funds are even exploring the idea of investing in Bitcoin mining.
A leader in the Bitcoin mining space that has drawn the interest of pension fund managers and retail investors is RIOT, which is a publicly-traded company that follows the trend of Bitcoin’s price. With the increased risk, pension funds have been rewarded in the last year with prices of RIOT increasing by 541% compared to Bitcoin’s appreciation of 174%.
As more investors enter the cryptocurrency market, Bitcoin is well-positioned to benefit from the need of pension funds seeking an alternative investment with billions of dollars of beneficiary funds. The benefit of Bitcoin is that it will enable the funds to gain exposure to the significant upside without requiring them to take on an unnecessary risk that could jeopardize the future of their fund and their beneficiaries.