Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The World's Biggest Pension Fund Just Made a Huge Bet

Personal_Finance / Pensions & Retirement Apr 28, 2014 - 11:03 AM GMT

By: Money_Morning

Personal_Finance

Peter Krauth writes: On numerous occasions, I've told you to remain on lookout for threats to your savings, including the proposed new MyRA account.

If you've been counting on your pension, whether from work or even Social Security, you may want to revise those plans, as most are way underfunded.


Research by Bridgewater Associates, the world's largest hedge fund, estimates that 85% of public pensions could go bust within 30 years.

Public pension funds currently have about $3 trillion in assets, but will need to pay out nearly $10 trillion over the next several decades.

That would require average annual returns around 9%, but Bridgewater estimates they'll only earn about 4%, leaving pensions severely underfunded as paid benefits exceed contributions and returns.

Here and elsewhere, governments have bought votes by overpromising benefits that will never be honored...

The World's Biggest Pension Fund Just Made a Huge Bet

A recent announcement by the world's largest public pension fund, the $1.26 trillion Japanese Government Pension Investment Fund (GPIF), is very telling.

Prime Minister Abe has made good on his promise to reform the GPIF. The Japanese government just reorganized the pension fund's Investment Committee, with the ultimate goal of taking on riskier investments.

Clearly, Japanese officials recognize the lack of returns from low-yield government bonds, and the growing requirements of paying benefits to the world's second-oldest population.

But that's created a serious dilemma in Japan, and well beyond.

If one of the country's largest sources of demand for its own government bonds dries up, who will buy them?

It's enough to cause one to suspect that Japan's massive $1.4 trillion, two-year QE program to buy government bonds is in large part to compensate for GPIF's decreasing demand.

The World Pensions Council has warned that QE-prompted artificially low government bond yields would hurt pension funds, saying "without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years."

The Problem's Not Just Abroad

I've been studying the struggles and failures of public pensions for years.

And I've long since concluded that these would face serious challenges, with a majority eventually unable to meet their promised commitments. It's not rocket science to realize that, for the most part, contributions + returns will never = obligations.

We all know about Detroit's $3.9 billion pension deficit, and how overly generous promises eventually led to its dubious distinction as the largest public bankruptcy in U.S. history.

What you may not know is that pension benefits to retirees, responsible for half the city's liabilities, aren't sacrosanct like most thought.

And it's starting to play out pretty much as I'd expected...

Detroit bankruptcy judge Steven Rhodes finally ruled: "Pension benefits are a contractual obligation of a municipality and not entitled to any heightened protection in bankruptcy."

Now a mediator has announced that a deal with the association of 6,500 retired policemen and firefighters will see their pension checks frozen at current levels. Along with that, cost of living adjustments were reduced from 2.25% to 1%, and health care payments ended.

That's setting the scene for upcoming negotiations with the remaining 23,500 Detroit municipal retirees. Emergency Manager Kevyn Orr is proposing non-uniformed pensioners prepare for 26% cuts, or accept a 34% slash if they refuse to accept a deal.

Keep in mind that Detroit's bankruptcy may have, at least in part, been precipitated by the 2008-2009 financial crisis. Yet the sweeping reduction in benefits is happening with an anemic economic recovery as backdrop.

I'd hate to think what future negotiations would look like in the wake of an eventual "Greater Recession," which would make the last financial crisis look like a cakewalk. Expect the Detroit debacle to become the rule, rather than the exception.

The marked trend of pension plans moving from defined benefit to defined contributions over the last few decades has been a clear warning sign of what's to come.

But alternatives being promoted, like the new MyRA account, and even long-standing IRAs and 401(k)s are not necessarily the panacea they're touted to be. I warned you about this back in February, when I said:

Eventually, the need to fund a mushrooming debt could lead to compulsory government bond buying in retirement accounts. At first, it might be 10% to 20% of all new contributions, then perhaps 10% to 20% of existing balances. With over $5 trillion in U.S. retirement accounts, it's easy to see how a mandate for 20% (or more) directed into Treasuries will help extend and pretend.

Eventually, retirement accounts could even be at risk of partial or even outright confiscation as debt levels become increasingly unsustainable. A desperate government will look to take desperate actions.

Detroit 9-1-1

Back in Detroit, the few public services still in existence have become, for all practical purposes, useless.

Police now take 58 minutes on average to answer a 911 call, for high-priority crimes. So naturally, citizens have developed their own emergency response strategies, calling instead on friends or relatives.

When it comes to your retirement, I suggest you take your cue from them.

Develop your own "independent retirement plan" by building up holdings in cash, real estate, physical precious metals, and other hard assets outside of retirement accounts.

For subscribers to my service Real Asset Returns, I've recommended a number of hard asset-based investments which run the gamut from natural gas to copper to uranium and even real estate.

Many of these have not only provided attractive capitals gains (and the potential for lots more), but also pay a generous yield to shareholders in the meantime.

Remember, if you're planning to rely on pension benefits, whether from your company and/or Social Security, expect that they could be drastically reduced when it's time to collect.

Those promises are unlikely to be honored.

It's time to take the Boy Scout motto to heart. Be prepared.

Source : http://moneymorning.com/2014/04/28/time-to-act-pension-funds-are-drying-up/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in