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That’s the gap in unfunded liabilities that face U.S. public pension funds that still have utterly unrealistic assumptions of 8% annual growth. The gap in the private sector is about $500 billion.
To paraphrase the great Senator Dirksen, “A trillion here and a trillion there and pretty soon you are talking real money.” It would be funny if it weren’t so tragic. The problem with pensions in the advanced industrialized world is simple: They’re effectively irreparable.
The Financial Times ran a story on this subject this week noting the following: “It’s existential. That’s the one-word summary of the scale of the challenges,” says Alasdair Macdonald of Willis Towers Watson, an actuarial consultancy. “You can pull different levers, but the declines in rates is an existential problem for the entire pensions system.”
The pension problem is exacerbated by the fact that we are all living much longer.
Under normal circumstances, that would be cause for celebration. But actuarially and economically, it’s a nightmare. As the 21st century progresses, advanced industrialized societies will have a larger portion of their population draining their resources for much longer than anyone has ever imagined. The toll on productivity could be enormous, unless we make massive advances in robotics and rethink the nature and compensation of work.
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| Pensions are in big trouble. |
In the meantime, however, the pension crisis has exposed the fatal flaw of quantitative easing (QE) monetary programs. As the Financial Times so perceptively notes: “Any solution to the (pension) problem involves individuals saving more and companies investing less — a result that blunts the primary goal of easy monetary policy: stimulating spending.”
Indeed, the irony of this is that no matter how much money you print — no matter how low the rates are — individuals and corporations will simply hoard more for fear of their future income demands.
That’s why the next policy shift in the world is going to be fiscal.
| The problem with pensions in the advanced industrialized world is simple: They’re effectively irreparable. |
Regardless of whether Hillary Clinton or Donald Trump come to power, government spending is going to skyrocket. And that’s actually not a bad thing. With rates near zero, governments can borrow trillions of dollars at virtually no cost. And as long as they invest that money into assets like roads, bridges, and fiber optic lines, the productivity boost from such a move could be massive. That’s especially true in the U.S., where crumbling infrastructure is on the verge of sending us into third world status.
So while non-conventional monetary policy has been virtually useless in jump-starting the economies in the G-7 universe, it may eventually push policymakers into the right direction as the era of austerity comes to an end.
Happy trading,
Boris Schlossberg
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For all you Starbucks fans out there, the news keeps getting better: In addition to a nice move higher since mid-August to a recent price of $57 and change, a California judge dismissed a case that accused the coffee-store titan of under-filling its iced drinks. According to U.S. District Judge Percy Anderson: “If children have figured out that including ice in a cold beverage decreases the amount of liquid they will receive, the Court has no difficulty concluding that a reasonable consumer would not be deceived into thinking that when they order an iced tea, that the drink they receive will include both ice and tea and that for a given size cup, some portion of the drink will be ice rather than whatever liquid beverage the consumer ordered.” Couldn’t agree more.
There’s no doubt about it: Summer 2016 has turned out to be a nice fling for investors: The rally off the June 23 Brexit vote — and the ensuing somewhat unstoppable euphoria — has made for a quaint summer dalliance. Certainly, anxieties over valuations, mixed economic data, and a fluctuating dollar have weighed on investors. And even though the slow grind higher — which has driven the markets deeper into record territory — has been somewhat orderly, the not-uncommon low August volumes may be hiding a potential downturn. So, once fall gets up on its legs, beware: There could be more downside action just around the corner.
It’s no surprise that — without much more to chew on — the markets are pretty much fixated on Fed Chair Janet Yellen’s speech on Friday from Jackson Hole, Wyoming. With the symposium’s rather uninspired title of “Designing Resilient Monetary Policy Frameworks for the Future,” everyone will be waiting to see where rates are headed.
And according to Robert Tipp, head of global bonds and foreign exchange at Prudential Fixed Income: “The market is only pricing a 50/50 chance of a hike this year. If they want to get this done, and they don’t want to shock the market and create a whole repeat of last year’s market volatility from not going [last September] … they have to inject the expectations of another rate hike. The best defense is a good offense.” We’ll just have to wait and see.
The Money and Markets team
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The question is; are they going to spend the money wisely. I have some doubts.
Carter, Clinton., GW Bush,Obama–and those i Congress, were too lazy or incompetent to address the nations financial problems and licked the can down the road. During these presidencies the US citizens became ignorant to the need to elect competent people. Now we are in a death spiral where many will see their standard of living vanish.
To most of us pensioners the investing world is at a standstill. It is a humbling experience. The only benefit we are receiving comes as a cost to the millennials. Our costs in general have not risen. Most of us cannot accept high risk and there is no money to be made from reasonable risk. The one bright spot I have found is rental property but even that has above average risk unless you have been in it for awhile. If anyone has any ideas I an all ears.
To Ray F, think outside the box of investing money. Invest time to learn something new about a new idea that could make you some serious income right there from your computer on less than a $30 investment. A technology company has created a new product and it is poised to go viral and explode across the Internet. I doubt I can leave a link so won’t, I’m an sdcowboy59 if you can find the right g-mail to ask for more info. Someday soon this company may be a stock to buy.
Anytime government spends massively more than it’s revenues, and prints/digitizes money backed by nothing, the result has always been a financial depression.
If printing/digitizing money backed by nothing brings prosperity name a country where it has done so.
BANG ON! Wealth can not be artificially created by simply printing numbers on pretty pieces of paper. Only a FOOL would trust what PHD educated politicians SAY, (i.e. their hot air in respect to a supposedly recovering economy). when what it stands for is “PILED HIGHER & DEEPER” referring to the un-payable DEBT PYRAMID they have created with their asinine monetary policies is what they ACTUALLY DO to run the country into the ground. More of the same will only dig the grave deeper, we need some serious monetary reform that restores sound and honest constitutional money that is not created by more DEBT.
Yes but unfortunately we risk them using the only tool they always fall back on to stimulate the economy and that’s wars, wars and more wars. Hilary definitely and Trump maybe because he is a loose canon. I can’t believe that corporations and managers have so mismanaged their responsibilities on pensions and that they are basically getting away with it. Bringing up the we live longer argument is just an excuse as we are also working longer because most of us don’t have pensions anymore and the lousy Wall St invested 401Ks just don’t cut it. What will the Millennials do for retirement. Maybe it’s time for a new economy model, one with sharing and cooperation as in Worker owned Cooperative Corporations. We need to follow the Mondragon model. We need Medicare for all and a more robust Retirement for all revamped Social Security system. This burden should not be on corporations that we obviously can’t trust.
The nation had trillions in the CAFR.
Yet NO ONE ever mentions the two book accounting schemes of all local governments.
The CAFR monies can fund all state pensions without further draining the taxpayers.
When financial advisors start speaking the whole truth then may sit up and take notice.
Also ICE has quadrillion in derivatives and since no one ever speaks of the fox hounds guarding the hen house, I do not act on anything financial talking write about. Since the entire market is rigged and no one calls them out.
So good luck all and get educated on CAFR and ICE.
Please explain CAFR!! All political problems are local and nobody pays attention to STATE & LOCAL GOVERNMENT…that’s 50 States, thousands of counties, tens of thousands of cities & towns and thousands of Multi-Juridictional Agencies, Groups, etc. There is WAY TOO MUCH GOVERNMENT STATE & LOCAL…forget the Federal Gov….Fix the 3 to 4 State & Local Gov. Levels FIRST!!! We cannot compete if the best jobs & benefits are in State & Local Governments…do all you smart money people get it…I doubt it! By the way, normally it would not matter Rep. or Dem. But Trump is so intellectually Lazy & just Unfit. The crap is going to hit the fan…we are not doomed but are challenged…so don’t drop the dam ball.
C’mon Janet, surprise us with a .25% rate hike you data driven diva… when we least expect one, like right now! We can use the fallout.
Any solution to the productivity problem, requires lower-cost energy. If doing chores, requires hiring muscular people to make the work happen, those muscular people age and contribute to the pool of retirees with needs. Only by shifting work away from human muscles and onto energy-consuming machines, do people gain more comfort and less drudgery.
This obvious fact is one we ignore at our peril.
If there is a vault with 50 million dollars in it, and we spend the $50 million on a wind turbine that propels 100 Tesla autos, that privilege of running a Tesla on wind, costs $500,000 per Tesla. Over and above the price of the Tesla.
If we use the same 50 million dollars to develop an oil field and keep 10,000 cars running for a decade, we’ve helped 10,000 people be mobile, instead of only 100.
A lot of people who are smart enough to comprehend this fact, refuse to think about why oil is cheaper than wind turbines. They so badly want to believe that the turbines serve some heroic purposse, that they refuse to make the comparison.
Stupidly spending vastly more money where it does the least good for most people, will not cause an economic recovery.
BoB
I believe you are correct ! Oil is a safe dense form of energy that packs a punch while wind power just doesn’t generate enough . Ditto for coal our president said ” You can build a Coal fired plant but it would Bankrupt you ! ” . They set the regulations so high that our scrubbers could not meet the regulations and so we are left with high electricity prices and another Quote from our President ” Energy Prices Must Necessarily SKY Rocket ! ”
As for the Green Energy economy we all saw how that worked out for Spain with unemployment #’s North of 20 % before they scrapped that idea . I wonder what would happen if Trump got in and enacted the plan of lowering the regulations for Coal Fired plants ????? I believe all the alternative energy sources may be in Trouble ????
Nixon mandated coal-fired generating plants in response to the 1st oil embargo, because the U.S. has enough coal to supply needs for several hundred years. the Eco-Gestapo(EPA) would not allow most of the units built to be bi-fuel–trying to convert them after the fact is the cost of replacement. Nixon issued his mandate with logical intentions at the time: Obama issued his with punitive, selfish idealistic goals. Obie shows no perspective; no respect for the companies, or the citizen/customers who ultimately have to foot the bill.
Well put but over-dependence on fracking has created all kinds of messes…so we need cheap energy in the next revolution…be a radical capitalist ok!
Just saw a chart showing how an individual pension plan funded with $100.000, and invested with a yield of 7.5%, can pay $7500/year indefinitely, but if yield drops to 4%, it will be over $4200 in debt by year 20. A person retiring at 65, might die before 85, the again he/she might live to 95, and end their life on the streets because of central bank policies.
ERA of Austerity ????? How did we borrow almost $10 Trillion Dollars in the last Eight years and our infrastructure is still crumbling ?????
Vinman, I had exactly the same reaction to the “era of austerity” remark! What era of austerity??? The government minions have been spending like drunken sailors using borrowed “money” (okay, essentially worthless pieces of paper), and corporations have selfishly been buying back their own stock (enriching the top echelon) to jack up the stock price, rather than investing in job-creating expansion.
EZ, it went to tax cuts and “security”.
The only $s of the $10T that supposedly went to ‘infrastructure’ was the $800B that Obama pee’d away in his first term. Remember the ‘shovel ready jobs’ that he laughed about not being there? Remember how ‘scrappy Joe’ Biden was going to be in charge of that Dem slush fund to make sure it wasn’t wasted. Remember the crony capitalism corrupt loans to companies like Solyndra? Remember the clown from the IRS in the bathtub with 2 glasses of champagne? All the Dem cronies got their palms greased… that’s where the $800B and the rest of the $10T went.
Oh, yes, and the ‘ERA of austerity’ is like the Greeks wailing like babies when even the slightest bit of their gravy train was removed. Give me a break.
JD
Excellent post !
I think you reached the right conclusion: an effort to save our way out of this makes no sense. But that makes the Financial Times’ conclusion pretty much dead wrong. It’s easy to draw an analogy between individual and collective behavior but it doesn’t work in this case. Trying to “save” more fiat money indeed is self-defeating. The ability to satisfy future pension obligations will rest on how well we increase the stocks of human and physical capital, making sure that the younger generation is well educated and all employed, and ensuring that the retired population has adequate assets to be willing to spend its income and adequate spending power to help employ that younger generation. (If a large part of the older population is helpless, the first effects are likely to be that their younger relatives will wind up spending more of their time and money just trying to cope with that.)
This is not like putting corn in the silo and letting it sit for 15 years until it’s needed. It may indeed be the case that continued easy monetary policy has less and less power to stimulate investment. (Probably so.) And indeed, a more active fiscal policy with focus on infrastructure and work force development would be the remedy. That will not necessarily save every pension fund from problems. But it would be far the best way to positively influence the outlook–not higher taxes or cuts in pensions.
“And as long as they invest that money into assets like roads, bridges, and fiber optic lines, the productivity boost from such a move could be massive.”
Spoken like a true Utopian believer. Yeah, and if Unicorn’s shat rainbows. First of all, why would you give more money to the same bureaucrats that mismanaged the assets UNDER THEIR CONTROL? Secondly, it is not sustainable. Most importantly, it does not prevent the same wasteful cronism that gives money to undeserving donors.
Drastically cut taxes, regulations, and the size of govt; couple with the restructuring and swapping of debt, along with the adoption of short term limits to eliminate the career politician, then you can begin to talk about turning the economy around.
Per capita taxes vs GDP are at their lowest rate in over 60 years. The National Debt has increased 1950% since the advent of Reaganomics and the last time regulations were cut we got the Savings and Loan debacle and the 2008 financial collapse. Speaking of short term limits how’d that Contract for America work out on that?
Surely, you are not trying to say that increasing taxes and regulations are beneficial to an economy. Looking at taxes as a percentage of GDP is misleading, as it makes one believe we can increase tax revenue more than is possible. When you look at actual taxes paid per person, we are right up there with France, Germany, and the UK, which are on the verge of collapse. Higher taxes depress growth and jobs, which is countries countries like Singapore and HK, with half the tax vs GDP as the US, will become the new financial capitals of the world over the next decade.
It has also been proven that increased regulations in a world of career politicians means absolutely nothing, accept more difficulty in new business formations that might compete against big corporate donors. If you have no equal enforcement of the rule of law, what good is a regulation, other than a tool for big donors to stomp out competition?
If the market was truly aloud to be free, then bad decisions and fraud would go bankrupt, versus the current process of govt bailouts that rewards bad behaviour, which must be replicated in order to compete. The root cause is career politicians, which is why short term limits are necessary if any real reform is to be realized.
Finally, sighting examples from the Republican establishment is no different than talking about the Democratic establishment. They both have the same objective – protect the lifestyle of the establishment, which is the exact reason we are seeing anti-establishment movements around the world. The broker govt’s get, the more agressively they try to confiscate wealth from their citizens, which sends more money underground, further shrinking the economy and tax receipts, which ultimately leads to civil unrest and wars.
So True
In a world that is aging by day and by night, how do we collectively store goods and services that need to be consumed today and for the next 20 – 30 years? An individual can accumulate large monetary wealth and spend out of it ( something like reverse mortgage) and leave much less when he passes away thirty years after ceasing working. But how do we do this as a society? A society may store land but it cannot store grains, clothes, electronic items etc for future use. As the society ages, a smaller percentage of population will be working.
I’m tired of people calling Trump a loose cannon… Trump is one of the World’s greatest success stories. He understands finance, and is our best chance of fixing our problems. We keep going down the same path with the same results. Why not give Trump a chance? It certainly can’t turnout any worse than the past few administrations.
I agree Trump has been laying out a plan for economic Growth ! People need to pay more attention to his speeches and not the talking points the mainstream media shows them !!!!
You are so wrong. He’s a good businessman…that’s like saying the Greek city states gave us democracy as in the “cradle of democracy” with 20,000 Slaves…that’s called an analogy…not a great one mind you…But Trump declared Bankruptcy 4 Times…thousands lost their jobs, etc. Are you kidding?
I too am extremely worried about my children’s future if things continue as they are!
I believe Trump has a once in a lifetime opportunity now. But he must remain calm, and put a group of extremely knowledgeable people together to enact a plan to right the ship.
He must promise to enact that plan, if elected. He must then put together a group of business savvy individuals to run for all the offices up for election now. They too must agree to enact the plan. In that plan, they must promise to enact legislation to limit how many terms Pollutions can serve! It would be a great idea if they would also limit the amount of money that could be spent on running for office! I can dream can’t I?
Trump…are you kidding? Clinton is no bargain…but Trump(Chump) is such an intellectual zero & a bad businessman. He’s great Public Relations…all show & NO tell! But you go ahead and make a lousy situation Worse!
Peter Put business aside for a minute they want to let 100,000 Syrian refugees in our country . Looking at whats going on in Europe are you willing to take that chance . Which candidate will keep them out ????
I believe Everett Dirkson said a billion here & a billion there, & pretty soon your talking about real money. Not a trillion. Besides it’s not real money anyway, just a printed piece of paper, not even an IOU.
LOGIC IF YOU WALK TO WORK YOU GET A TAX BREAK/CREDIT
THE EXCERISE IS FREE THEREFORE NO POLUTION, GAS, TIRES, INSURANCE WRECKS, AND BIGGER A BETTER HIGHWAYS
THE US DESIGNED MANY YEARS AGO BY GM (WHICH IS NO MORE)
THEY GAVE LA BUSES CHEAP TO REPLACE RAIL LINES, NOW WE ARE PUTTING THEM BACK.
$3.5 trillion–peanuts and grossly understated. The unfunded liability per http://www.usdebtclock.org shows federal (only) debt liability of $103.264 trillion with not one penny set aside to meet these federal (in law) promises. Incidentally, that works out to $860,000+ per taxpayer. You can check it out yourself at the cited website. What could possibly go wrong?
OLDFART29
How much money do you think they borrowed from the Pension Funds this year to hide what they really spent ????
It really amazes me how many people engage themselves in “rearranging the deck chairs on the Titanic while totally IGNORING the causes of WHY the ship of state is going under.
The fundamental problem is totally swept under the rug. The downward spiral began with passing of the Federal Reserve Act of 1913 which gave the International Banking Families like the Rothschilds and Rockefellers and their cronies a MONOPOLY on in effect creating COUNTERFEIT money requiring the payment of interest in perpetuity. Banker propaganda has the masses falsely believing that bankers merely act as go-betweens for a small fee’
The fiction is that they make their money on the difference between the paltry interest they pay depositors and the higher interest they charge for loans to borrowers needing capital to build companies and create jobs, plus of course consumer lending that reates in succesive bubbles in real estate, student debt and now sub par car loans to get more people to buy cars they can’t afford on conventional terms.. The outright lie is that they retain 10% of deposits as RESERVES and loan out the other 90% at a higher rate thereby earning a profit.
NOTHING COULD BE FURTHER FROM THE TRUTH, no wonder Henry Ford once stated that if the masses truly understood how fractional reserve banking really works there would be a revolution in the morning with riots in the streets, or words to that effect.
The only politician that has really been willing to stand up against this banker scam is former Congressman Ron Paul and the few who, based on his efforts have supported bills to abolish the FED and return to honest constitutional money with intrinsic value. The U.S. is the king pin here, essentially all nations have followed the U.S. blueprint of debt based Central Banking. As long as our needed currency supply, (essential to facilitate trade) needs to be borrowed into existence as DEBT no amount of tinkering, interest rate manipulation and jaw boning by politicians will save us from drowning in debt.
The facts were well stated by an honest Canadian Central Banker (almost ab oxymoron) when Graham Towers in 1939 stated sworn testimony before a Parliamentary Banking Committee that,’every Bank Loan is a NEW creation of money, and when it is paid back it ceases to exist” so what naturally follows from that, since the interest is never created, (only the principle) there must be a constant increase in total loans contracted that not only replaces old loans paid back, but also the accumulated interest. It should be obvious from this that it is a recipe for PERPETUAL DEBT that grows from generation to generation.
This Ponzi scheme is now in its final stages before a TOTAL COLLAPSE as even at nominal interest rates the debt can not be serviced. We need a RESET, a biblical Jubilee where all debts are wiped out and we have a new beginning with honest constitutional money that holds its value rather than being constantly eroded by inflation. The insane part is that the imbeciles or con artists, take you pick who control this FRAUD are striving for even more inflation and bigger doses of what has already been proven NOT to work with more “extend and pretend” tactics like negative interest rates and “helicopter money” that has reduced our once strong dollar from a defined value of specific grams of gold or silver with intrinsic value to a pitiful 2-3 cents in purchasing power depending on whose statistics you trust.
Bankers and the politicians whose candidacy they finance (the proverbial one percent) are the only ones benefiting from the present crony capitalism practiced to-day which is why Donald Trump is perceived to be such a threat to the entrenched establishment which is why they support Hilary Clinton because they know she can be bought and will cater to special interests if they donate enough to the Clinton Foundation.
Amen, Myron!!
Myron
Excellent post ! I believe there was a good book written by EDWARD Griffin called ” The Creature of Jekyll Island ” . People also do not realize that the IMF , World bank and U.n keep making bigger and bigger loans to governments with cronies in charge . When a loan cannot be paid back they give the country a bigger loan so the first loan can be paid back but the country ends up in the same boat a few years later with yet an even bigger loan and the cycle of perpetual debt goes on and on !
People also do not realize that our government and its perpetual spending is going to eventually eliminate the one advantage we have which is the Reserve World currency which requires countries to do business with one another in Dollars which means they have to hold massive amounts of dollars and that gives our dollar value . Take that advantage away and life as we know it in the States will become very difficult indeed !