-- Published: Thursday, 16 August 2018 | Print | Disqus
My Two Cents
By Andy Sutton & Graham Mehl
It has been quite some time since we last collaborated on an article, opting instead to chase other pursuits and let some of the hysteria going on in the world fade into some type of steady state. It hasn’t happened, but there are pressing matters that need attention regardless. The circus going on all around us makes for great theater and distraction – and that is its intent.
The topic at hand is the failing pension and retirement system. Americans are notorious for spending well in excess of what they make, saving nothing in the process. The only way most save are the deductions from their paychecks for a 401k or IRA. Or perhaps they contribute to an IRA at tax time, when they realize doing so will reduce their tax liability.
Ten years after the ‘great financial crisis’, most pension plans are still in worse shape than they were before despite the recent and most assuredly rigged surge in market indices. According to Reuters, in 2007 the level of funding for public state pensions was 92% and local municipal plans 97%. Move forward to 2016 and the numbers dropped precipitously to 68% and 72% respectively. So obviously the pension system isn’t the big winner here despite all the talk in the mainstream press. That begs another question, but we’ll ask that one in a subsequent article.
Another trend is that the ratio of workers to retirees on the public side has dropped from 2.43 to 1.42 over the same time period. Anyone who has ever received a paycheck and looked at their pension withholding knows that there is no way that 1.42 workers can support 1 retiree. Even the 2007 number of 2.43 was unsustainable in that it is impossible for two workers to support 1 retiree. The Reuters article continues in saying that even since 2016 when the stock market headed straight up along with interest rates, pension plans STILL had a difficult time generating any kind of decent returns.
Due to these realities, US pension plans become some of the biggest risk-takers the financial world has ever seen. They’ve invested in hedge funds, used leverage, dove into the futures markets and other risky propositions. US pension plans have become the riverboat gamblers, wagering their entire existence on very flimsy fundamental analysis. The markets simply don’t behave the way they should because there is so much interference from central bankers and other actors high in the food chain. If you’d like to read the study that examines some of the journeys pension plans have taken to chase down returns, click here.
We don’t think it takes rocket science – or even simple algebra – to figure out that this strategy is not going to work in the long run unless every player has inside info and even then, there have to be counterparties. Put simply, these strategies will fail. Keep in mind that the strategies aren’t even doing that well to begin with. When things sour, they will sour quickly. And here we get to the essence of the article.
Think back to the financial crisis of 2008. What happened to the auto industry? Specifically, GM? Bailed out and effectively nationalized for a period of time. That’s precisely what is going to happen to the massive pension plan and retirement system here in the US. It’s going to be nationalized. This utterance may not prove to be a surprise to most, but we’re willing to bet there are enough folks out there who have never thought such a thing could happen to make it worth writing about.
The Ultimate Prize?
Americans own (for now) almost $26 trillion in retirement assets. IRAs lead the way at $8.2T, Defined contribution plans $7.3T, Defined benefit plans (public sector) $5.5T, Defined benefit plans (private sector) $3.0T, and Annuity reserves $2.1T. These are the numbers as of the end of Q1 2017 and the totals had risen 3.2% from the prior year. There is a caveat though. Unfunded liabilities grew to $4.2 trillion. ‘Unfunded liabilities’ are promises that were made for cash streams for which there is no matching revenue. You’ve heard us mention this term before when discussion Social Insecurity and Mediscare. Both programs have massive unfunded liabilities, which means that – policy changes notwithstanding – promises are going to be broken. People will retire and expect to start receiving checks and there won’t be dollars to give them. Now we all know that America is turning into the biggest welfare state on Earth, even challenging the Europeans. There’s a big difference though – the Europeans have had their reckoning day in many instances. Others are still waiting. As is America.
Think back to the extremely poor performance of pension funds across America during the massive decade long bull market – well, bull something – in stocks. A lot of people and entities have gotten extremely rich off the central bank-fueled run, but the fact remains that the financial markets are a zero-sum game. So, for every winner, there is an equal and opposite loser. People have been wondering for a long time who the losers are. They figured it was all the Americans sitting at home day-trading stocks on the Internet. We present another alternative and this one is big enough to actually be one of the pin cushions for the big banks and funds who have profited so much in the last decade – the American pension funds. There is a lot more behind this too – pension funds aren’t the only investing entities who haven’t been made whole despite the sky-high Dow, but for now, just consider the pension funds. This will be relevant to the majority of Americans.
The Big Grab – WHY will it Happen?
Citing a 2014 article found on ZeroHedge, the stated purpose of nationalizing the retirement system would be to push fresh money into government securities. Federal debt is out of control with foreigners holding much of it. This is a horrible position to be in for the US, considering neither the government nor its citizens have shown much beyond a brief interest in reversing this damning trend. One gimmick used back in 2014 was the MyRA. It will end in the fall of this year with assets being turned over to Roth IRAs at Retirement Clearinghouse, LLC. The whole MyRA idea was only ever half baked. People by and large didn’t use for some of the reasons stated above.
Looking at this from a solvency standpoint, we note that while $26 trillion sounds like a lot of money, when you divide it up among those in the workforce, it averages out to a tad over $168,000 per worker. The average retirement costs $3800/month for a total of $45,000 annually. This represents 27% of the average worker’s retirement assets. This tells us that in less than 4 years, absent growth or substitute income, the retirement assets will be gone. If there happens to be another market correction in there, the timeline shrinks considerably. Even if you assume that SocSec will pay for half the retirement expenses, we’re still looking at less than 8 years before the retirement assets are gone. The chances of a market correction in an 8-year timeframe also increase dramatically. We already know that pension plans have had a hard time recovering despite the meteoric rise of the stock market. Do you really think the average person has done any better?
At the same time, let’s look at the debt side. Just taking the amount of consumer credit outstanding, which includes debt like credit cards and other revolving types of credit we find that the average member of the workforce is almost $24,000 in debt. This does not include mortgages, second mortgages, helping children with student loan debt, etc. The almost universal conclusion among economists and analysts alike is that Americans clearly don’t have enough saved. Social Insecurity is unlikely to be a viable gap filler as it is insolvent as well. Sounds like a situation where yet another pillar of American liberty will soon be under the control of the federal government. All it takes is one crisis and Americans will beg the government to take everything and just make sure not to forget them on the first of every month. Remember; these are people who never really recovered from the 2008 debacle. They can’t afford to take another hit. Not even a small one. And yet we firmly believe that is exactly what is coming.
We’ll save everyone the trouble of asking and admit quite directly that we don’t know when any of this will happen, only that we are 100% certain that it will. We feel it wiser to admit not knowing when than the alternative. There are already too many analysts and writers crying wolf. They’ve been shouting from the mountaintops about the markets crashing causing the nationalization of the retirement systems for so long that the average person pays them no heed. All we ask is that you use some logic, look at the material and come to your own conclusion(s).
Retirement assets are tricky to get at before the age of 59.5. There are penalties involved depending what kind of account you have, etc. This is why it is imperative that you consider these matters for yourself and not just take anyone’s word – ours included. If you choose to vacate the retirement system it’ll cost you. However, if you don’t vacate, it is quite possible it will cost you a lot more. Unfortunately, we cannot provide you with investment advice, but there are some great resources we can point you to; simply feel free to contact us. These resources will aid in helping you make an informed decision.
We’ll warn you up front that most money managers, advisors, and the like are going to strongly recommend you stay in the system. Obviously, they want to keep you as a customer, generating fees. They’ll point to the exit penalties as justification for their position. Many of these folks aren’t bad people or out to rip you off. They simply live in world the way it was before the turn of the century. Things changed; and many people still haven’t caught up. It would have been almost unheard of to write this article or even think about anything like this in the 1990s. Back then Social Insecurity was fine, Mediscare was fine, everything was great. You really had to look deep to see those first signs of trouble, but America was insulated. Now we aren’t.
Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.
Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.
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-- Published: Thursday, 16 August 2018 | E-Mail | Print | Source: GoldSeek.com