The Forgotten Victims of Puerto Rico's Bankruptcy

The Forgotten Victims of Puerto Rico’s Bankruptcy

The Forgotten Victims of Puerto Rico’s Bankruptcy

The US territory of Puerto Rico declared bankruptcy in early May. The island’s government has more than $70 billion in debt that it cannot pay, along with $49 billion in unfunded pensions. While much has been written about the fate of the Puerto Rican government or about external investors losing money, the effects of Puerto Rico’s financial status on ordinary Puerto Ricans hasn’t been covered nearly as well.

Unfunded Pensions

Like many American cities and states, Puerto Rico set up generous pension plans for its teachers and public sector workers. Unfortunately, those plans were never properly funded or well-managed. Younger employees and teachers are being squeezed to pay the benefits of retirees, but even still those pensions plans look set to run out of money within the next couple of years.

Investing in Government Bonds

Many people in Puerto Rico invested in Puerto Rican government bonds. The bonds offered higher yields than high-interest savings accounts and were exempt from taxation, making them seem to be a sound investment. Many people invested in them for patriotic reasons, taking pride in being Puerto Rican and supporting their government. Their trust was misplaced, however, as they find themselves potentially facing severe losses during the bankruptcy process.

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Complacent Investing Is Harmful

Investing has become so commonplace that people forget what investments actually are. Investments will not always go up, and many will go down. People have become so used to markets going up during good times that they can’t fathom markets going down. They don’t do their homework and look at the underlying fundamentals behind their investments.

Investing is not a risk-free activity. When you purchase stocks, you are becoming a partial owner of that company. If that company fails, you will lose your money. When you purchase corporate bonds, you are lending money to a company. If the company can’t pay its debts and defaults on its bonds, you will lose that money. When you purchase government bonds, you are lending money to the government. And if the government defaults, you lose your money.

Government Bonds – Are They a Sound Investment?

Many people think that government bonds can’t default. No way the government would not pay the money it owes us, they think. Besides, the government always has money and can get more through taxation.

Yet there is only one reason governments issue bonds – because they cannot or have not raised enough money from taxes to pay for the things they want to do. Investing in bonds issued by governments is just facilitating wasteful and unsustainable government spending. But everyone does it, hoping that they can get repaid with interest before a default.

Bond investing is also incentivized by ratings from rating agencies that give government bonds high investment-grade status. Capital requirements for financial institutions treat those bonds as almost risk-free capital, encouraging banks and other financial companies to acquire them, thus helping fund government operations.

The reality is that there is only one risk-free, AAA asset, and that is gold. An ounce of gold remains an ounce of gold, its purchasing power remains stable over time, and it will never default. In fact, when companies and governments default and stock markets crash, gold increases in value. Its status as a safe haven in times of crisis and a stable store of wealth means that it is constantly in demand.

With a Gold IRA you can protect your retirement assets by investing in gold while still keeping all the tax advantages of a conventional IRA. You don’t have to worry about whether your pension will be properly funded or if the stocks and bonds the pension fund invested in will crash or default. Your assets will be safe and sound, right there when you need them, and you’ll be spared the worry of wondering how to fund your retirement. Don’t let what’s happening to Puerto Rican workers and investors happen to you.