When talk turns to what might derail today's debt-driven “recovery,” the big names and easy stories get most of the attention: China with its soaring debt, volatile equities and heavy-handed intervention; Japan with its stratospheric debt and science fictiony demographics; Greece, which needs no explanation; the developing countries with their weak currencies and mountain of dollar-denominated debt. And of course America's triple bubble of stocks, bonds and derivatives.

Underfunded pension plans, to the extent they come up at all, tend to be mentioned in passing largely because most of them are 1) too small to matter on their own and 2) too hard to understand for most people to form a strong opinion.

But they deserve a closer look. In the US there are dozens of state and local pension plans that in the aggregate are underfunded by several trillion dollars (meaning they've promised this much to beneficiaries but don't have it). When one plan blows up it will impact lots of others, so the aggregate number is a pretty good indicator of the real risk.

The generally-accepted poster child for pension mismanagement is Chicago. As the Wharton business School recently noted:

Chicago's unfunded liabilities are 10 times its revenues. Just assume that they're going to have to pay 5% of that [number annually]. That means you're looking at 50% of their cash that will have go to pensions.

For a more detailed account of the mess that is Chicago see Emanuel fiddles while Chicago burns by enraged Illinois resident Mike Shedlock.

But, you might reasonably say, pension funds have big investment portfolios so they must be making fortunes in today's bull markets. You'd be right in some cases. But apparently it's still not enough to offset rising liabilities as baby boomer teachers, cops and fire fighters retire. And now, as financial markets peak and start to roll over, it's getting harder to make any money at all. Consider the plight of huge California pension plan CalPERS: