Retirement Nightmares: The Woes of Pension Funds

Those of a certain age will know the relevance of three score and 10.

The origin of the saying is Psalm 90:10.

The days of our years are threescore years and ten; and if by reason of strength they be fourscore years…

In days gone by, ‘a score’ was the measurement given to a 20-year period.

When I was growing up, the commonly held belief was lifespans extended to age 70 and if by reason of strength, possibly to 80 (four score).

But that was it. Done and dusted. Time to meet your maker.

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That was then, but not now.

These days we seem to have added another ‘score’…many people are living well into their 80’s and 90’s. And, according to The Financial Times in August 2018 (emphasis is mine), the Japanese have gone even further…

Japan has embraced the idea of the 100-year life as an overarching policy directive. It has long seen the more terrifying implications of that in surging healthcare costs and the emergence of “dementia towns”.

Japan is at the pointy end of ageing in the Western world.

Five score and counting could be what the rest of the West will be experiencing in the coming years.

The miracles of modern science have produced the dynamic of the longer we live, the longer we’ll live.

Every decade we stay above ground seems to add a few more years to our life expectancy.

That’s the good news.

The bad news is that spending the same (or, even more) time in retirement as you did in the workforce just doesn’t add up financially.

In June 2019, The World Economic Forum (WEF) released a white paper titled ‘Investing in (and for) Our Future’.

Here’s an extract from the paper’s Executive Summary (emphasis is mine)…

Pension systems around the world all face a common problem — the strain put on existing promises for retirement because of increases in life expectancy. The retirement savings gap is quite large in some countries already, and on a global scale is projected to grow significantly larger by the year 2050.

How much is the projected gap by year 2050 (only 30 years away)?

…we [WEF] project this gap to grow to [US]$400 trillion by 2050.

That’s trillion with a t. And, a funding shortfall of that magnitude spells trouble with a capital T.

Data sourced by the WEF shows a disturbing trend in global savings deficits…the number of years between your savings expiring before you do…

Data sourced by the WEF shows a disturbing trend in global savings deficits - 8-08-19

Source: SMH

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As we enter a period of prolonged low interest rates and longer life expectancies, the savings deficit is only going to increase…and if you throw into the mix another capital-destroying crash on Wall Street, then a whole lot of people are in for a whole lot of hurt.

Spending the final decade or two of your life in a hand-to-mouth existence was not how your golden years were meant to be.

But that’s the harsh reality facing far too many people.

Between a rock and a hard place

Employees in US State and Local Government pension plans have been promised a regular income cheque in retirement.

The size of the cheque depends primarily on a couple of factors…length of service and final average salary.

Sounds reasonable. But there’s a problem Houston. There’s not enough money in the tin to fund the promised payments in full.

As the following chart shows, the funds have around half the money needed to meet their obligations.

State and local government retirement funds - 8-08-19

Source: CMG Wealth

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In spite of the biggest bull market in US history, the funds — on average — have not been able to earn a return that’s sufficient enough to close the gap between supply (money on hand) and demand (the income the retirees want in the hand).

Rather than take the tough decisions — increase contributions and/or reduce pension payments — the funds are going in search of higher returns…trying to compound their way out of the pickle they’re in.

As reported by Almost Daily Grant’s…

According to analytics firm eVestment, private equity accounted for 27% of U.S. and U.K. pension fund allocations in 2018, up from 25% a year prior. In Japan, corporate pension funds allocated a record 21.3% of assets to so-called alternative investments in March according to J.P. Morgan Asset Management, up from 12.8% in 2014.

When, not if, the next debt crisis hits, highly leveraged private equity funds are going to take a bath…and that will only compound the woes of pension funds.

The shortfalls will become even greater at a time when demand — from boomer retirees — will be on the increase.

The solution?

  1. Increase taxes to enable a higher level of contributions
  2. Decrease pension payments
  3. A combination of a) and b)

Whichever way you look at it, there are going to be a lot of very angry people…taxpayers and retirees. There will be a painful period of adjustment as people trim their lifestyles to their means.

In addition to local and state government funding shortfalls, take a look at the problem confronting the US Federal Government.

This chart is from Ray Dalio’s (founder of Bridgewater & Associates) latest research paper, ‘Paradigm Shifts’…

Total IOUs in the US (%GDP, Discounted by Int Rates) - 8-08-19

Source: Paradigm Shift

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Deduct private debt from the IOU total and the US Government has promised to fund that total around 1000% of GDP…that’s right…one thousand percent of GDP.

This dilemma of so much being promised to so many is not isolated to the US.

All Western economies — including Australia — are facing the same issues.

People are outliving their capital and becoming totally reliant on government funding to meet living expenses and healthcare needs.

Governments are between a rock and a hard place.

But as US economist Herbert Stein famously said ‘If something cannot go on forever, it will stop’.

Promises made in a different era have to be broken

There is no way any government will ever get rid of the age pension safety net.

However, they can make changes to eligibility, accessibility and payment levels.

Increasing the pension age to 70-plus.

Include the family home in asset test calculations.

Encourage (a polite way of saying, force) people to use reverse mortgages…drawing on their own capital before accessing taxpayer funds.

Change the level of indexation…to slow down the rate of pension payment increases.

And finally, if the burden is still too onerous…the RBA can print money to buy government debt to finance the welfare costs.

Age pensions will stay…but if you’re planning on this being your primary source of retirement income, do not expect the future to be anything like the past.

The numbers don’t add up…therefore, something must change.

Living longer than your capital means people will stay in the workforce longer.

That’s certainly been the case in Japan — the trendsetter when it comes to the challenges facing an ageing population.

Elderly Japanese work the most among their G& counterparts - % of workfore - 8-08-19

Source: Financial Times

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For those who are thinking ‘we have a little more than the average, we should be ok’, my advice would be don’t get too complacent.

Wall Street is building to a crash…one with the potential to be far more devastating than 2008/09.

A $1 million retirement pot in a ‘balanced’ fund could be cut in half.

Suddenly that comfortable retirement is not looking so comfortable.

How do you make up the income shortfall? Back to part-time work? Part age pension?

Draw more heavily on your depleted capital balance?

That retirement dream can so easily turn to a nightmare by having your money in the wrong assets at the wrong time in history.

Having been through three major crashes — 1987, 2000/01 and 2008/09 — I can tell you the road back to making a dollar whole again is a long and bumpy one…and not one you want to travel in retirement.

The only way to avoid the fate so many are going to suffer in their later years is to start thinking and acting for yourself.

If you leave your future to the vested interests in the investment industry and government policy, then you just have been given a glimpse of what the future might look for you…a retirement that becomes more and more dependent on the largesse of the government…what a nightmare.


Vern Gowdie,
Editor, The Rum Rebellion

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Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion