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Pension System Collapse Turning Retirement Dreams into Nightmares

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company-addison-qualeThis article was submitted by Addison Quale, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

You know the old saying. “There’s a sucker born every minute.”

Sadly, many Americans have been suckered into thinking their pension was going to provide a stable and comfortable retirement. But government mismanagement and central bank monetary policy are quickly turning that retirement dream into a nightmare.

Pensions have been a major contributor to the Greek financial crisis, and the American system is looking increasingly Greek.

Just last week, Central States Pension Fund, one of the largest pension funds in the nation, filed an application to cut participant benefits. Central States handles retirement benefits for current and former Teamster union truck drivers across various states including Texas, Michigan, Wisconsin, Missouri, New York, and Minnesota. And in Illinois, pensions are underfunded to the tune of $111 billion.

This is not just an American phenomenon. A UK pension fund is also having serious issues and is slashing benefits.

For years, many large companies, and especially government employers, have promised their workers generous pension plans. They were told that with modest annual contributions coming out of their paychecks and employer matching funds (not to mention some taxpayer money thrown in) they were guaranteed to retire with a steady stream of passive income.

How can employers afford this? They traditionally have accomplished it by taking all of the contributions and investing them in various stocks, bonds and alternative assets which promise to offer an annual yield. Given enough time, the funds grow to be large enough to pay out a nice steady income to retirees—oftentimes at 100% of their former salary. It seems pretty straightforward, if not a bit too good to be true.

As such, pension funds have been touted as strong and stable fortresses of retirement security. Employers lured prospective workers with the promise of these payouts. And employees have bought the sales pitch hook line and sinker. In other words, millions of people now blindly count on these pension funds to come through on their guarantees and cover a significant portion of their retirement costs.

The question, of course, is will these pensions actually keep their promises? The answer is almost certainly, no.

The investments these pension funds depend on to perform well and grow assets under management are just not panning out. It’s not really their fault. It’s just the economic environment of 2016. It is simply impossible for the funds to attain anything close to the yield needed to pay out on all of the promises. To offer the bluntest explanation, it’s happening because interest rates are just too low, and the stock market isn’t rocketing upward fast enough to cover up that fact.

It’s pretty simple math. Back when these pensions were originally set up, interest rates were much higher. When rates were 5%, it was easy for the fund to attain the, say, 7% annual average yield needed to cover all the pension payouts in the future. They’d just invest in some steady government bonds and mix in some more risky but higher yielding equities.

But now we are in a ZIRP (zero-interest rate policy) world. Investing in government bonds yields just around 2%. How will the fund achieve the 7% average annual return? It’ll either just have to settle for a lower return given the same mix of fixed income to equities, or it’ll have to change the basket and take on riskier more volatile investments in order to get to that 7%. Of course, that could be a recipe for disaster should some of those risky investments blow up.

Either way, 7% is unattainable now, and as such, something has to give. Either benefits must be cut, contributions must be raised, or some other patch must be found.

These chickens are now coming home to roost, as the recent benefit cuts by Central State Pension Fund demonstrates. As ZeroHedge points out, these cuts impact real people.

In 2015, the fund returned -0.81%, underperforming the 0.37% return of its benchmark. Over a quarter of a million people depend on their pension being handled by the CSPF; for most it is their only source of fixed income.”

Indeed, dark times are ahead for these pensions and their beneficiaries. Millions upon millions who have trusted in this system for retirement will be affected – not just in this country but across the world. This means that many will be faced with massive decreases in life standards and possibly even poverty.

It’s all in large part thanks to this debt-ridden US dollar monetary system that forces us to use a manipulated and irredeemable currency. It encourages runaway stock market bubbles, massive volatility, and keeps interest rates in pathological free-fall.

Sadly, the truth is those who have trusted in the promises offered by this system have been suckered. They are waking up from their retirement dream only to discover a retirement nightmare.


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4 thoughts on “Pension System Collapse Turning Retirement Dreams into Nightmares

  1. Nils Hruch says:

    Another key factor that will drive the baby boomers rebellion is the lost buying power of pensions. Most are fixed and as such over the past 20 years have lost considerable buying power. If your pension gave you $1000 in 1997 it would have to give you $1480 now to have the save buying power according to one calculator. That is a significant pay cut. Few pensions provide cost of living adjustments so while your pension is taking a hit from mismanagement of the economy it also has taken a hit from inflation. Even if inflation is low it accumulates. Those, like myself, who started drawing after 30 years, will experience a huge loss of their expected lifetimes.

  2. James says:

    I continue to hear allocating just 5-10% to gold because it doesn’t pay a dividend. Well, considering that those stockmarket gains or lack of gains in pension funds, I feel good about sitting on a pile of gold. Gold has been under manipulated pressure for 2-3 years and yet it is coming back strong this year. It is becoming obvious that depending on the US dollar denominated returns is becoming a fools life jacket, especially since the FED is pushing for 2% inflation. Why is 2% acceptable at all. It is clearly theft by the government or banks. Considering that our money has lost purchasing power of 4-7% for several years, why is John Q Public failing in math so bad. Our money is now going down the tubes bad and at risk of a 75% decline. Nope I don’t feel bad at all that I missed those fools gains…sitting on my increasing in value gold. If gold reaches a rediculous high, I will trade it for something else of real value…any thing but a fiat currency that is declining in purchasing power yearly.

  3. Addison Quale says:

    Yes – great point!

  4. Casey says:

    This problem will be compounded when retirees find out that the dept. of labor is getting ready to tax ira’s. It’s already passed congress. (Probably about 1% per year.)

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