Puerto Rico is drowning in debt—$70 billion worth—but it would be wrong to think that only those in Puerto Rico would be affected by some of the measures being suggested to manage the situation.
Bondholders, both in Puerto Rico and in the rest of the U.S. as well, will be in for a tough time if some of the strategies suggested are used—and that will weigh on both plan participants and retirees, since their retirement accounts may be laced with Puerto Rican bonds.
In addition, retirees in Puerto Rico, and participants in the island’s public employee pension plans, could be left out in the cold, since those plans are coasting on empty—to the tune of $46 billion in unfunded liability.
Plenty of bonds were sold, but the Puerto Rico government failed to make contributions to fund its pension plans. The governor, Alejandro Garcia Padilla, has opposed cutting pensions as a way to help reduce the island’s debt, calling it unconstitutional. But there aren’t a whole lot of alternatives—and none of them are very palatable.
According to Bloomberg, “The island’s plight affects most people with a mutual fund invested in the municipal bond market” because Puerto Rico’s bonds are exempt from taxes at every level of government throughout the U.S. “As a result, they are held by about half of open-end muni funds,” which means lots of retirees outside Puerto Rico are holding them, whether they know it or not.
Congress is currently considering a range of options that range from bailout to bankruptcy (the island is not eligible to declare bankruptcy without legislation to allow it) to bond haircuts for investors, as well as possibly handing over control of Puerto Rico’s economy to a federal oversight board and restructuring its debt load. The island is in a tough spot, with an economy that has been contracting for years, a shrinking population and a growing poverty rate.
Many U.S. pension and retirement funds will be left holding the bag if Puerto Rico defaults (a massive payment is due May 1) or if bondholders are made to take a haircut. The fallout will spread far beyond the island, and can only add to the woes of people already struggling to save enough to be able to retire.
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