Pensions Are The Biggest Ponzi Scheme Of Man

Pensions And That Bernie Madoff Thing

At times it is wise to revisit the matter of pensions and how in many ways they are the biggest Ponzi Scheme of modern man. In a week where the stock markets took it on the chin and billions of dollars worth of wealth vanished in the blink of an eye, what better time to look back on what most people view the backbone of our retirement system which is pensions and the paper promises they represent. While much of the mainstream financial media has been telling us that all is well problems continue to grow in the area of pensions.

Pension payouts are often predicated on the idea the money invested in these funds will yield seven to eight percent a year and in today's low-interest rate environment, this has forced funds into ever riskier investments. This translates into buying more stocks at what may be the top of the market or allocating a larger portion of the funds' assets to investing in real estate often located on distant shores. The fact is top rated bonds yield little and sitting on cash is not an option for pension funds. In the U.S. alone, federal, state, and local government pensions are $7 trillion short on the funding they need to pay what they have promised.

The World Economic Forum reports that in 2015, worldwide pensions were underfunded by $70 trillion dollars and a more recent report from may of 2017, reinforces the view of an ugly day of reckoning ahead with the funding gap dwarfing the world GDP. Considering we also have almost $50 trillion of unfunded Social Security obligations you begin to see just how enormous the pot of future promises has grown. Adding to our woes, America’s private pensions also have a big hole to fill, a total of around 1,400 corporate pensions are a combined $553 billion behind in funding and 25% of those funds are expected to go broke in the next decade.

Part of the problem stems from the curse of living longer, not only is the gap driven by longer lifespans and reduced levels of savings. With this in mind, it is important to remember this is the retirement money of teachers, firemen, and working folks which they expected to be prudently placed in conservative and safe investments and are counting on to be there to ease the pain of aging. Needless to say, the math alone is troubling but when coupled with the overwhelming possibility of a major financial dislocation looming in the future a nightmare scenario for pensions drastically increases.

The PBGC America's Pension Net (click to enlarge)

The PBGC America's pension safety net is already under pressure and failing due to the inability of pension funds to meet their future obligations, this is even before considering the corruption and shenanigans government will unleash to solve this ill. One common solution also offered up in the WEC article was to increase contribution rates which translates into forcing current workers to pay more to support retired workers. Another example of the poor solutions being put forth to combat the awful demographics is trying to get people to have more children based on the fact there just aren’t enough young people being born to pay out benefits for retirees.

This problem is being addressed in South Korea, where about 13% of the population is currently of retirement age: 65 or older and where 40% of the population will be over 65 by 2060. South Korea's answer for the problem to this problem has been for the government to spent $113 billion during the past 12 years urging people to have more children. This is a clear example that the pension problem is not only much bigger and more severe than most people are willing to acknowledge but it is global in scope and slashing retirement payments or increasing current contributions will result in political backlash.

In addition to bad economies and investment that blow up in their face, there is also the issue of corruption, those who run the pension funds and have been designated with the power to invest pension funds cannot be totally isolated from their greed or be monitored every second of the day. Where there is money corruption tends to be close by and the last decade has been a bonanza of financial malfeasance and the lack of accountability has extended into the management of pension funds. Prosecutors and regulators have failed miserably in crafting the kind of penalties that could meaningfully deter wrongdoing leaving Americans in the lurch. More than one pension fund manager has been caught with their hand in the cookie jar and this is not expected to change.

Pensions are giant pools of capital responsible for paying out retirement benefits to workers. And right now many pension funds around the world simply don’t have enough assets to cover the retirement obligations they owe to millions of workers. Governments have lulled their populations into a false sense of security based on financial promises they are not going to be able to keep and most likely will exacerbate generational conflict going forward. This is not simply a political problem, it’s an arithmetic problem, for which no real answer exists.

A Very Simplistic View Of Who Saves (click to enlarge)

In the U.S., we have two massive national programs designed to care for the elderly and a slew of other overlapping programs such as Supplemental Security Income, a "means-tested welfare program" also known as SSI and the Supplemental Nutrition Assistance Program aka SNAP which was formerly known as the Food Stamp Program. While Social Security is geared at providing all Americans with a small pension, and Medicare covers medical expenses with all workers paying taxes to fund the benefits we may someday receive many people look towards their pension to make life more comfortable. The chart to the right does a poor job of detailing just how much people have saved.

Unfortunately, the bottom-line is millions of people have been planning their futures based on promises made over decades that have no basis in economic reality. Sadly, those who find themselves living on Social Security benefits alone often find it to be a rather meager existence. While many people move towards retirement thinking it is free, Medicare has deductibles and co-payments that can add up quickly. Both programs were formed hoping that people would have their own savings and other resources to supplement their expenses, unfortunately, the reality is that many Americans work well past 65 just to make ends meet.


Footnote; The PBGC, America's safety net for failed pensions has total assets of about $88 billion and liabilities of $164 billion, this is an indication of how dire the situation is. The article below delves into why in the future many pension payouts will be cut.
 http://brucewilds.blogspot.com/2016/05/pension-benefits-will-be-cut.html
Also, a great deal of the crazy ideas we hear should be considered not real solutions but desperate attempts to render the laws of economics moot moving us further into the false state of modern voodoo economics. The article below delves into how these help to perpetuate the false illusion all is well.
http://brucewilds.blogspot.com/2016/05/belief-in-false-illusion-of-stability.html