Watching the spectacle of buffoons in Congress fall all over themselves this week raging over the absurd bonuses at AIG, one could only hope that we were witnessing the level of populist outrage reach its zenith, or more accurately, its nadir. Unfortunately, it's going to get worse.

Why? Because we are just starting to see the unraveling of public pension systems that could well shake some of society's basic foundations. Policemen, policewomen, firefighters, teachers and other public employees form the backbone of society. Many of these people happily take jobs offering lower wages in return for the psychic income of public service and, of equal importance, the financial income of a generous pension when they retire.

Around the nation, we are just beginning to observe the damages that this bear market has exacted on the deferred dream of a great pension. Even before financial markets headed south in early 2008, many pension funds for public employees were underfunded by 15% or 20%.

Between what's happened in the stock market, the private equity and hedge fund worlds, and the national political climate, the day of reckoning is now right around the corner. The Wall Street Journal reported this week that Wisconsin is now telling pensioners to take reductions in their monthly income.

It's not clear whether all states and municipalities will be able to enjoy that degree of flexibility. Pensions, for the most part, are legal obligations of a government entity and bankruptcy is often the only way to void them. Several experts have told me they expect a wave of bankruptcies over the next decade as municipal pension plans get washed away by a tsunami of demographics and breakthroughs in longevity. In New York City, the average policeman retires at full pension at 48 years old and can expect to be paid over $2.1 million during the remainder of his life. In Houston, city workers can retire at full pension at 45 years old.

Throw a 45% bear market and a healthy dose of political corruption into this sorry state of affairs, and the day of reckoning moves that much closer. A generation of politicians agreed to absurd promises to public workers because they knew it would be some other politician's problem.