The Coming Great Pension Collapse—How, Why, Where

Pension Collapse“Magic Pensions”—Disappearing Right in Front of Your Eyes

“Britain’s Pension System in Crisis” reads the headline in a U.K. daily. But it doesn’t have to be Britain—similar headlines are appearing in countries all over the world. However, before we talk about the coming “Great Pension Collapse”—and, indeed, we will!—we need to develop some context to understand how we got to where we are. (Source: “Pension Crisis!,” Daily Mail, May 28, 2016.)

Let’s Use Our Imaginations…

Perhaps the easiest way to accomplish our task is to collectively put on our “imagination hats” and imagine we have been magically transported about 70 to 80 years into the future, to the end of the current century.

Does everyone have their imaginations in gear? Good.

Now, if you were to look around you (during your trip to the future) and perhaps wander into a college class on economics, chances are you would soon encounter a lecturer talking about the “Great Economic Collapse” of the early 21st century. In other words, talking about where we are right now.


When those lecturers talk about the Great Economic Collapse (in our imaginary future), chances are that the single most critical aspect of their discussion will boil down to this: how is it possible, they will ask, that the people alive at that time did not notice what was taking place all around them?

How is it possible, they will ask their students, that the public of that era (our era) sat back in total stupefaction while…

* Multiple banks, financial agencies and even government regulators not only did nothing to prevent the “bad paper” collapse of 2007—the one immortalized in The Big Short movie—but, in many cases, actually participated in the fraud, and profited handsomely from such participation?

* Faced with overwhelming evidence of the culpability of key banks and conspirators, the democratically elected government of the day not only did nothing but, astonishingly, went one step further and declared most of the bad actors “too big to fail” and then handed them billions of dollars shortly—and appropriately—before Christmas, dollars which had been entrusted to them by the public?

(Wait, it gets even better…)

* Shortly thereafter, the Federal Reserve (an agency no more “federal” than Federal Express)—working in conjunction with other so-called central planners around the globe—in full view of the wide-eyed public, intervened in the interest rate market and basically hijacked it, usurped it, and bent it to their will, which ushered in an era of ultra-low rates that not only failed to generate any obvious benefits for Main Street, but paradoxically, rewarded the corporations, banks, and already-rich to a degree that was literally beyond imagination.

(Wait, it still gets better…)

Faced with overwhelming evidence that their policies were not working for the intended purpose—and, in fact, were creating new and dangerous market distortions—these same central planners not only stubbornly continued the madness and mayhem, but they also actually took it to a new level. (ZIRPs, or zero interest rate policies, morphed into NIRPs, or negative interest rate policies, in most parts of Europe.) Didn’t Einstein once say that the essence of stupidity is repeating the same action over and over and expecting a different result?

During this same period, the only entities jumping for joy under these regimes were the trading houses (borrowing at zero means making a profit on any investment yielding more than zero!) and the corporations, which discovered that by borrowing at low rates to buy back their own stock, they could reduce their “float” (make less stock available) and therefore drive up the price of the remaining stock, making themselves look clever (even though THEY WERE NOT) and earning massive executive bonuses in the process. (It is my often-stated view that historians of the future will look back at quantitative easing as a mechanism to benefit the banks and ultra-rich, and little else.)

Nor can it be said that the public of the era (our era) was not offered objective information with which to make sense of this. During these troubled times, any brave soul who would have googled the term “financial repression” would have learned that all these strange measures, taken as a whole, were simply part of what governments “do” when they get in deep trouble and need to bail themselves out at the expense of the very same electorate who foolishly gave them power in the first place!

Now Disappearing Pensions: The Beginning of the End?

OK, you can turn off your imaginary time travel hat and return to the present.

Now that we finally have context for all this—now that we can see the forest instead of merely the trees—let’s look at the pension issues of today.

Now, we have to face the fact that one of the largest pension outfits in the U.S.—an entity that deals with the teamsters, no less—recently made an application to Washington to inform that they expect to be completely insolvent by no later than 2025 and they would like permission to cut back on benefits for existing pensioners, please sir, thank you very much. (Source: “National Pension Crisis,” Zerohedge, April 20, 2016.)

Next, with all the above information in context, shall we try to respond to this, to make sense of it? Was there something wrong with the management of that fund? No, sir. The evidence suggests there was nothing wrong with the management; the problem entirely lies with the “hijacked” economy we have today, an economy where our “betters” have dropped rates to insane levels, told us this was for our own good, and assured us that any day now, things will be fine again.

Essayist Charles Hugh Smith, who warned about this crisis literally years before it broke, recently updated his work on the pension system and concluded that…

* For many decades, a basic return of about four percent was all that was needed by most plans to maintain their obligations to pensioners. This was usually available in safe, secure, low-risk debt instruments.

* In our new era of “hijacked” markets and financial repression, most pension funds now need a minimum return of at least eight percent—or double the former baseline—just to maintain their payouts. The only way to obtain such a sky-high return (in an era of ZIRPs/NIRPs) is to take risks of such a magnitude that, not only can you fail to get the targeted return, but in many cases, you stand to lose part or all of your capital in a heartbeat if anything goes wrong. And, since these are markets, things usually do go wrong! (Source: “Why Pension Funds Are Doomed,” Of Two Minds, May 26, 2016.)

In his excellent study, Smith is almost apoplectic in his effort to communicate to the reader that the above-noted pension failure is not a one-of-a-kind event but the harbinger of an across-the-board cascading failure of the entire pension system that is starting to unravel before our very eyes.

He notes the following:

“[…] In the good old days, the needed returns could be generated by investing in safe income-producing assets—high-quality corporate bonds, Treasury bonds, etc. The risk of losing any of the fund’s capital was extremely low.

“[…] Now that the expected returns have more than doubled while the yield on safe investments has plummeted, fund managers must take risks (i.e. chase yields) that can easily wipe out major chunks of the fund’s capital if the bubble du jour bursts.

“[…] When (their 2000) bubble burst, decimating everyone still holding equities, the Federal Reserve promptly inflated two new bubbles: one in stocks and another in housing. Once again, everyone who rode these two bubbles up (including pension funds) minted hefty profits year after year.

“[…] The Fed can’t (now) lower interest rates below zero without signaling that the economy is well and truly broken, and it can’t force people who are wary of debt to borrow more, even if it effectively pays borrowers to take on more debt.

“[…] All the Fed can do is extend new debt to unqualified borrowers who will default at the first sneeze. This will trigger the collapse of whatever new credit-fueled bubble the Fed might generate.

“[…] The political winds are also changing. The public’s passive acceptance of central banks’ let’s make the rich richer and everyone else poorer policies may be ending, and demands to put the heads of central bankers on spikes in the town square (figuratively speaking) may increase exponentially.

“[…] It’s looking increasingly likely that third time’s the charm: this set of bubbles is the last one central banks can blow. And when markets free-fall and don’t reflate into new bubbles, pension funds will expire, as they were fated to do the day central banks chose zero interest rates forever as their cure for a broken economic model.” (Source: Ibid.)

Another writer puts it even plainer:

“The upshot is that most Americans and Canadians have no clue how far in debt their countries are. Researchers such as Laurence Kotlikoff , a professor at Boston University, suggest that unfunded pension and other liabilities run into the tens of trillions of dollars in the United States. The Fraser Institute has shown that Canada isn’t much better.” (Source: “The Pension Bubble,” Safehaven, June 10, 2016.)

Can We Possibly Blame Democracy?

Recently, essayist John Rubino penned one of the most significant articles I have encountered. In a fairly subtle manner—so as not to offend readers—he hinted that the core problem with our economic world may not be the Keynesian obsession or the crooked politicians and their crony banks or even the large trading houses who, whenever possible, prefer to operate outside the law.

The problem, he suggested, may be US. Our willingness to sit idly by while these wacky policies are unleashed can only end one way, he suggested. Realizing that the public has no clue what is happening and are happily going along for the ride, governments will ultimately no longer be content to merely tinker with interest rates, he suggested.

They will play their final card and buy back 100% of their debt themselves, retire it, monetize it, and end up owing it to themselves. This is the ultimate extension of QE, he hinted, and it works only so long as the rest of the world—like the crowd in the story of the Emperor’s New Clothes—says nothing and believes everything. (Source: “Japan First to Panic,” Safehaven May 29, 2016.)

So—sci-fi fans will love the irony—the enemy is really…US?

The bizarre and unprecedented upcoming presidential race in the U.S. makes this a tempting place to launch into a discussion of what the so-called democratic process in the modern world has evolved into…?

For now, I will resist the temptation to open that topic and save it for another essay. I do, however, want to leave you with my two favorite quotes on the subject, both of which are ancient and unattributed:

“Democracy, reduced to basics, is a system where every citizen gets exactly and precisely the government they deserve.”

“When historians of the future look back on present-day democracy, they will conclude that we, the people, had the finest representation money could buy.”