Here's Why All Pension Funds Are Doomed, Doomed, Doomed

Of Two Minds ^ | 26 May 2016 | Charles Hugh Smith

[Lorianne]

There are limits on what the Fed can do when this bubble bursts, as it inevitably will, as surely as night follows day.

It's no secret that virtually every pension fund is dead man walking, doomed by central banks' imposition of low yields on safe investments, i.e. Zero Interest Rate Policy (ZIRP).

Given that both The Economist and The Wall Street Journal have covered the impossibility of pension funds achieving their expected returns, this reality cannot be a surprise to anyone in a leadership role.

[link]Many unhappy returns: Pension funds and endowments are too optimistic

[link]Public Pension Funds Roll Back Return Targets: Few managers count on returns of 8%-plus a year anymore; governments scramble to make up funding.

Here's problem #1 in a nutshell: the average public pension fund still expects to earn an average annual return of 7.69%, year after year, decade after decade.

This is roughly triple the nominal (not adjusted for inflation) yield on a 30-year Treasury bond (about 2.65%). The only way any fund manager can earn 7.7% or more in a low-yield environment is to make extremely high risk bets that consistently pay off.

This is like playing one hand after another in a casino and never losing. Sorry, but high risk gambling doesn't work that way: the higher the risk, the bigger the gains; but equally important, the bigger the losses when the hot hand turns cold.

[The Antiyuppie]

I disagree. There is certainly something they can do about it. Massive inflation.

[Original Lurker]

A government pencil pusher puts in 30 years and retires when they’re 48. A New York state patrolman retires with 150% of his salary after 30 years when he’s 52. On and on and on..!!

And THEN you have this type non-sense. (I actually know people who said “good for her”)

http://www.foxnews.com/politics/2013/03/26/alameda-county-administrator-to-get-423644-year-after-retirement.html

[who_would_fardels_bear]

It seems to be the case that interest rates have almost always been lower than the inflation rate.

If you invest safely, then over time you will lose money to inflation.

There was a time when you could get 15% or more on a CD, but that was when the inflation rate was 18-20%.

So it has always been the case that safe investing has always lost out to inflation.

So there is nothing new when all you get is 1% when inflation is running at 2% ... or much higher if you don't believe the CPI.

[Paladin2]

So, Trump’s solution to the US gov’t debt is potentially sound if the idiots in Congress can stop making thee debt bigger.

[Moonman62]

So, Trump’s solution to the US gov’t debt is potentially sound if the idiots in Congress can stop making thee debt bigger.

...

I would call them crooks, not idiots.

[BobL]

I don’t buy the pensions are doomed motif, as private pensions have legal requirements to stay solvent, or at least very close to that.

Public pensions are a whole different story and they are doomed - pretty much due to elected leaders getting in bed with union supporters and promising MASSIVE BENEFITS, in exchange for votes, with the key being that regulators let them get away with pay-as-you-go, something not permitted for private pensions. That should have NEVER been allowed to happen...but it has.

[oldtech]

I have to says it’s hard for many of us to feel sorry for those with losing pension funds. I worked for 57 yrs. with no pension & the interest on what little I was able to save is less than 1%. I know many who(as yet)are unable to save anything.

[GnuThere]

I had never looked at that guy’s blog before - pretty interesting!

[lurk]

Go totally debt free as a priority. It lowers the pressure on what a pension is expected to cover.

[Gay State Conservative]

I fully expect to “outlive” both the pension I now receive *and* my Social Security checks.So I'm gonna enjoy them while they're there which,luckily,coincides with the fact that I'm now in very good health.

[SteveH]

the public pensions also have legal safeguards, usually resolving to the state’s general fund.

so far as i am aware, retirees feel safer in public pensions than in private pensions which sometimes always subject to bankruptcy of the parent company.

[SteveH]

how long do you expect social security to last? just wondering...

[Gay State Conservative]

how long do you expect social security to last? just wondering...

A program called "Social Security" will,IMO,exist for decades and decades to come.However,the democRAT Party,with or without the GOP's tacit (or active) support,will change it to the point where it's unrecognizable to many of those getting it today.Mainly,it will become a means-tested program which means that those who worked hard,saved and amassed any kind of "net worth" in *addition* to those who have any kind of other income (a pension or IRA) will be then deemed to be ineligible.At that point "Social Security" will become just another welfare program.

That's when *my* checks will stop.

[bog trotter]

Been there, done that.
Seem to be getting by better than when working.

[SteveH]

oh.

(a bit sorry i asked...)

[abb]

Social Security is ALREADY means-tested.

https://www.ssa.gov/planners/taxes.html

Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.

No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:

file a federal tax return as an “individual” and your combined income* is:

between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.

more than $34,000, up to 85 percent of your benefits may be taxable.

file a joint return, and you and your spouse have a combined income* that is:

between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits

more than $44,000, up to 85 percent of your benefits may be taxable.

http://fairmark.com/retirement/socsec/pia.htm

Understanding the Social Security Benefit Calculation

The practical impact of this formula is that a worker with lower wages might expect to receive a social security benefit that replaces about 45% of those wages on an inflation-adjusted basis, assuming the worker retires at full retirement age. A worker with much higher earnings will receive a larger social security benefit, but it may replace only about 25% of covered wages.

[Go_Raiders]

Pension funds have never been structured around a 100% safe portfolio. Funds are typically diversified in real estate, stocks, several classes of bonds, precious metals, and money market funds. The asset allocation is periodically rebalanced to reduce risk. You can’t just say, “oh boo hoo, T-Bills are only paying 2%” when the bond itself has become more valuable due to the strong dollar.

This analysis is stupid, stupid, stupid.

[af_vet_1981]

Here's problem #1 in a nutshell: the average public pension fund still expects to earn an average annual return of 7.69%, year after year, decade after decade.

The title is misleading. The article does not mention private pension funds.

[BobL]

“the public pensions also have legal safeguards”

Tell that to Detroit, Chicago, or Illinois. It’s pay as you go in those places, which is why they’re so broke. Otherwise, you wouldn’t be reading about problems with municipal pensions.