Maybe this will finally tip the political consensus towards a more redistributive taxation policy. The main thing stopping this from happening seems to be older people who are doing "just fine thank you".
The worlds looming financial woes are entirely of our own making. We're not running out low on resources. We're just distributing them very inefficiently.
you can pretty much take their wealth and still not pay the negative spending in some countries. in the US the tax system is very progressive with a large swath of the population have little to no federal tax.
the truth is the the public employee pension system has been far to generous for far too long and many are counting on a bailout from Washington to keep the largess going. I will post it over and over, Illinois is a prime example of what is wrong in the public employee pension system[1]. When you have twenty three thousand retirees pulling in 100,000 per year there is a problem. Chicago is in dire situation too from both too much largess and simply kicking the debt bomb down the road [2]
There is not enough wealth in the US to tax to support this level of largess and it goes by unnoticed because it was designed to not be see by the public.
If the only way to fix the pension system is for them to implode it is a far better solution than to tax our way out of it because the behavior has to change.
Tens of millions of Americans are counting on their 401k retirements and such and the only true source of wealth that can be taken to fix the pension systems of public employees is to go after those 401k funds. There aren't enough billionaires to take all the money from
you can pretty much take their wealth and still not pay the negative spending in some countries. in the US the tax system is very progressive with a large swath of the population have little to no federal tax.
That’s only true if you believe in the fairy tale that Social Security and Medicare taxes (around 15% between you and your employer) are held in a separate account and the money doesn’t go into the general fund with all other tax revenues.
>There aren't enough billionaires to take all the money from
The top 1% own 40% of all wealth in America. There's not only enough money, this is by far the fairest way to square this circle. The vast majority of that wealth is not earned.
"Taxing the rich" and effective redistribution (and government spending in general) are two different things. In the United States, the top 1 percent of income earners pay a greater share of individual income taxes (37.3%) than the bottom 90 percent combined (30.5%). The bottom 50% of earners pay about 0% in income taxes. I believe this excludes capital gains.
I don't share the same view. Pensions, public and private, were supposed to take care of people after many years of work and contributions. Some now are nothing more than Ponzi schemes. I don't see how this (and the inevitable failures of this), combined with the structural problems in the economy, will inspire faith in the governments ability to properly allocate resources, acquired by people, to people.
I agree with you and I see the main problem with the current US pension system is the lack of clarity. This allows bureaucrats and politicians to spend money collected to support old folks in the future for unrelated pet projects now. Social Security and similar schemes are valuable (even if trust fund is completely spent SS would still provide good benefits from current contributions), but I personally trust my 401k more. My 2c.
Defined benefit pensions have always been Ponzi schemes. When there’s an expanding economy and population that works fine. As soon as it stops the writing’s on the wall. That’s why defined benefit pension schemes have pretty much disappeared in the private sector. In the public sector there’s no one to say “We can’t afford this.” except politicians and regulators appointed by politicians. It’s not their money so they have no real incentive to stop it and promising public servants a great retirement wins votes now whereas the people who’ll have to pay for those pensions mostly can’t vote yet as they’re too young.
This is a disaster that’s been a long time coming but it’s also been clearly signposted the entire time. Actuaries have known this for a long time.
Every economic system and model depends on future expansion of both capital and human resources. There are no theories of at scale planning for a future has less stuff and fewer people and no growth or even shrinkage.
The "can't afford" BS is the mantra of private capital, which does a great job of funding the .1% and an awful job of funding the 99.9%, which is what pensions do.
The fact that expected benefits may not be fully achieved due to, I don't know, inability to predict the future has been used as a straw man to dismantle what have been in historical terms far and away the most successful at scale future funding schemes. The repeated failures of unplanned models get lost down the memory hole.
We need a new term to complement "Ponzi scheme" to capture the mass reality distortion that index funds make everyone their own best investment manager.
I'm curious, what would your objection be to having the government switch to defined contribution plans? as in, take the same amount of money used to fund the pensions, and use it to fund employees retirement accounts instead. if I were the employee, I would greatly prefer the second option. would you prefer the pension?
I agree, but I think this highlights a structural problem with our economic system, specifically when it comes to population growth.
There are plausible reasons to decrease populations in regions or entire countries. With climate change getting more serious, we'll soon start having to move populations away from flood prone areas or areas with increasing desertification. Many of those towns and cities started their own infrastructure projects paid with bonds that assume a certain population, and thus tax base, growth.
Younger generations, for several reasons from despair about ecological future to high costs of living to stagnant wages, are opting to not have children. Other countries, like Japan, have struggled economically because of declining birth rates.
If we (the US) had a more open borders policy with an easier path to citizenship, we could use immigrants to boulster our population and tax base.
With migrating and shrinking populations, I can't think of other economic instruments to pay for local infrastructure projects that have routinely been paid with long-term municipal bonds.
To be honest, your plan sounds similar to a cocaine party where drugs got scarce and everybody tries to call their dealer in despair to keep the party going for a few more hours.
There is zero incentive for younger people to engage in that if not for complete dependence within such a system.
If that is the outlook, no economic instrument can be the solution since the way the economy is driven is the problem itself.
If you generalize your strategy to a global level you will end up in the exact same spot.
> Every economic system and model depends on future expansion of both capital and human resources.
Sustained economic growth is a product of the Industrial Revolution so this is only true if you ignore almost all of human history.
> There are no theories of at scale planning for a future has less stuff and fewer people and no growth or even shrinkage.
On at least one interpretation this is how total war usually works in industrial societies. The Roman Empire abandoned long settled territory full of Roman citizens on more than one occasion, Britain, Dacia, so dealing with economic contraction is also far from unknown historically, even for well developed states with a literate culture and bureaucracy.
> The "can't afford" BS is the mantra of private capital, which does a great job of funding the .1% and an awful job of funding the 99.9%, which is what pensions do.
You radically underestimate the proportion of the population who would be basically ok in a world without defined benefit pensions or one where they don’t exist at all. The professional classes would be just fine if they had to arrange their own retirements instead of having financial intermediaries do it.
> The fact that expected benefits may not be fully achieved due to, I don't know, inability to predict the future has been used as a straw man to dismantle what have been in historical terms far and away the most successful at scale future funding schemes.
Nothing has been dismantled yet. I’m not aware of a single developed country without a non-contributory old age pension. More generally people I respect, like Noel Maurer, have said that the US’ Social Security system can be made sound with quite feasible increases in taxation. This does not apply, to the best of my knowledge to the large public sector pensions though. They were based on assumptions of economic and population growth that just don’t hold and without politically impossible levels of taxation they’re doomed.
> The repeated failures of unplanned models get lost down the memory hole.
Well no one planned those unplanned models. Extremely generous public sector pensions have been known to be actuarially unsound for decades. The planners know very well a reckoning is coming. They just hope it doesn’t happen while they’re in office.
> We need a new term to complement "Ponzi scheme" to capture the mass reality distortion that index funds make everyone their own best investment manager.
At least investment funds don’t saddle the taxpayer with obligations run up by long gone politicians. There are well run government pension systems, or there’s one, Singapore’s.
We are not in disagreement about most of this except for the comment about professional classes being just fine if they have to arrange their own retirements. The overwhelming evidence is that they are not, full stop. Take away social security- a defined benefit model- and real estate and at best the professional class in the US has sufficient investments only to retire to thailand, not the US. Open the conversation to cover professionals who are younger and are subjected to education debt and there is no argument that individual self-funded "retirement" is even an option.
There is a difference between a world where social security is taken away, and one where it never existed. Not having SS means people would have the money that was instead paid into SS. Ignoring that, many people planned based on having SS. If they could retire fully without SS, this would mean that they overcontributed (I say this as someone planning for a retirement with 0 SS).
I am not sure why you discount real estate. You might not think it is a good investment, but it is still the idividual managing their retirement.
Besides, in this context "real estate" mostly means owning your own home. The main benifit here is not the paper value of the house, but the imputed rent. If this value goes down, by definition, cost of living went down a corresponding amount. (There is admitadly the risk that you want to move, and the local market tanked).
That’s kind of the cart leading the horse a little. High birth rates are correlated with poor countries. As countries become more efficient, birth rates go down. When you graph that, you can make it look like the high birth rate was causing the economic sluggishness.
The absence of a pension is a Ponzi scheme, because the only source of funds for people no longer working is that of people currently working.
The "pensions were supposed to" should be reframed- pensions "would have fully taken care of people...." had they been properly defended rather than attacked and dismantled.
That pensions still exist, that they have been funded even to 35%, after the unrelenting assault on them by private capital, is an incredible achievement. The equivalent funding level for alternatives to pensions is something like 10%- taking real estate into consideration. Without real estate, the funding level is probably less than 1%.
It is a difficult, difficult problem to organize humans to fund the future at scale. Pensions were/are an incredible success, even if that success is partial and insufficient.
I'm 46 and I've never worked anywhere that had a pension plan, so I guess they're not all that successful. I have worked at companies where some employees were in a defined benefit plan, but I always came too late and got in the 401K pool. There is a distinct difference in those two groups of employees: One group were lifers who were fiercely loyal to the company, and the second group, my group, was like WTF ever, we don't care. Then what happened is that the corporation merged with another and they fucked all those pension plan people out of their pensions. So you see? It did them no good to be such assholes to everyone, including to me. In the end, they got nothing (or very little) for their loyalty. Thus endeth that lesson. You can't trust corporations, they stab you in the back.
It also happened to my mother at MetLife in the early '90s. MetLife had a pension plan until UnitedHealth took them over and then it got reduced to pennies on the dollar. She still gets like $100 a month from whatever settlement, but it's not what was originally promised, not even close. 20 years of work right there.
My Dad has a union pension which he still collects and it is halfway decent owing to the fact that the union went out of its way to run off as many people as they could before they were eligible to retire. It's hazing--they fuck with anyone getting close to retirement age, trying to force them to leave the union. Unfortunately for them, my Dad is an extremely mean SOB and fought them right back, physically, at times. In fact, so few people collected on that pension that the union was legally required to up the payouts. Think about that.
My whole take on pensions is that they are bullshit. They promised the world and the unwise were far too trusting and then they all got screwed one way or another and someone else raided that pension fund, banksters of a certain ethnic relation, probably.
I don’t know where to begin with this - I guess I’ll say it’s a stretch to say that the ‘only source of funds’ for those not working is certainly not those working, particularly when those not working enjoyed the biggest economic expansion and prosperity in the last several hundred years.
And attributing the failure of pensions to meet their obligations to ‘attacks’ and lack of ‘defense’ isn’t a well formed opinion or argument, yet you dole out plenty of shade on others’.
In simplistic terms a pension relies on the continued growth of the entity that funds it so we can ignore our political biases and just look at the math to test the truthiness of your assertions: an entity with stagnant income simply cannot continue to fund a growing population of retirees. Historically, very few corporations outlive their employees [1], so pensions aren't a good fit for the private sector. Governments rely on growing populations to fund their pensions, and with negative population growth in so many areas of the country these days they seem hard to justify in the public sector too.
Couldn't the pension funds be fully funded and solvent without population growth? Assuming lower yields would mean higher contributions levels for similar benefits, or additional funding from say capital taxes, but seems plausible.
The per capita gross world product was approximately ~$18k/yr in 2017. No matter how efficiently you redistribute resources, you cannot exceed this number.
Instead we really need to invest more in productivity gains for the world's bottom 90%.
The world's wealthy sock away a larger percentage of their wealth than the poor. Virtually every penny the poor obtain winds up back in the economy, and because of the economic multiplier effect, those pennies have a greater impact as they wind their way through the system.
> All those dollars low-wage workers spend create an economic ripple effect. Every extra dollar going into the pockets of low-wage workers, standard economic multiplier models tell us, adds about $1.21 to the national economy. Every extra dollar going into the pockets of a high-income American, by contrast, only adds about 39 cents to the GDP.
That's a false choice. It's not a choice between paying banker bonuses or giving minimum wage workers an increase.
Also, while I agree with the premise that it's better to increase the minimum wage could you explain why folks investing their bonuses in the stock market and therefore directing their capital towards productive companies is worse than consumers spending their money directly?
> It's not a choice between paying banker bonuses or giving minimum wage workers an increase.
Sure it is. When the last round of tax cuts were configured, deliberate choices were made that affected different income brackets in different ways. The levers can be tweaked to direct the benefits to the poor, the wealthy, the middle class, etc.
> could you explain why folks investing their bonuses in the stock market and therefore directing their capital towards productive companies is worse than consumers spending their money directly?
I already did, with a linked source for further details.
We could get into arguments over purchasing power parity, but regardless, 18k is not a large sum even in $YOUR_FAVORITE_POOR_NATION. There's a limit just in terms of purchasing raw material goods which do not vary in price across the globe since they are commodities.
And they live about as well as you would expect on $800/yr. Sure you can get a house for $1000 but it doesn’t have running water or electricity. In countries that poor, basic infrastructure will cost you, at a real rate, more than it would in a rich country.
$18k is a fantastic sum in India. The top 20% of fresh computer science grads are lucky to get that much. I would have no trouble living on that much income (+adjusted for inflation) for the rest of my life if I lived in India.
> The per capita gross world product was approximately ~$18k/yr in 2017. No matter how efficiently you redistribute resources, you cannot exceed this number.
This assumes distribution can have no positive impact on output, which is certainly not an established fact.
If Peter has greater than 90% of the world's wealth and Paul is starving to death then if you take 0.01% of Peter's wealth you can keep Paul alive. I don't know about solving the world's financial problems though, but somehow I didn't think your post actually was concerned with those either.
If Paul parasitically extracted wealth from Peter (e.g. by charging sky high rents on the san francisco flat he inherited) then taking some of it back wouldn't be the worst thing ever.
If your pension doesn’t pay out in dollars (ie, you’re a German pension) then you’re exposed to swings in the dollar-euro exchange rate. If the Euro appreciates relative to the dollar but you’re holding T-bonds, you lose money.
The gist of it is that if you have 1, 10, or even 100 thousand dollars in cash, sure you can sit that in your bank and probably earn ~0% interest, but at least it's not negative.
But if you have 100M in [edit: $your_native_currency], you aren't going to put it in a retail bank account, you're not going to put it in your mattress, and so you have only a few options:
1. Stocks/derivatives: If you were holding cash already, you're probably not comfortable with the risk profile of any of this stuff
2. Bonds - this exposes you to the slight negative interest rate
3. Corporate bank account - you might be able to avoid a negative interest rate here as well, but only because you're passing the buck (literally) to the bank, who then has to pick 1 or 2.
4. Actually use the money yourself, in your business.
The whole point of the NIRP (negative interest rate policy) is to push people to pick 3 or 4, and if 3, then for the banks to pick 1 or 4.
I just reread your question, and realized I didn't fully answer it. Investing in foreign bonds exposes you to exchange rate risk. I was sorta hand-waving it into 1 since it's basically like doing both bonds and forex. Not very appealing if your risk appetite is "preferably cash or govt bonds".
I feel obligated to include a disclaimer that this isn't investment advice and that monetary policy is immensely complicated and this is just the high-level thinking of the point of NIRPs.
That seems like a risky strategy. The gamble would be that the government loses loan "revenue" in the short-term and makes up with business taxes. Is that a good gamble in weak or service-oriented economies? What are all the risk factors there?
To be clear, this is a central bank thing. The part of the government issuing debt doesn't technically have a say in it.
The Federal Reserve bank sets the Federal Funds rate. This is their "target rate" they will try to hit. They accomplish this by using their position as the central bank to "print" (not literally, it's a credit system, I'm hand-waving) money to bid on bonds. In the same way that lots of investors clamoring to lock-in rates on long bonds can bid their yield down, the federal reserve using their funny money to bid on treasuries also bids their yield down. And when the fed wants the rates below zero, they bid them to below zero. These are called "Open Market Operations".
> The part of the government issuing debt doesn't technically have a say in it.
To be fair, there is no economic law that says this has to be true. It is just true, today, in countries like the USA. It's very possible we reach a point where central banks work together with the government to directly purchase and monetize government debt. It seems absurd today, but so did negative interest rates 20 years ago.
I think 1. is not too bad with some kind of index fund. Even during the recessions the value will not vanish - and historically it recovers eventually.
My current worry is the holding company - e.g. what if Merrill Lynch goes bankrupt? There is a very small amount that is FDIC insured but the rest could go poof.
A mattress might work better for this use case, but I figure if it comes down to that we'll have bigger problems.
In general, you don't need to worry about Vanguard or Schwab or whoever provides your particular index fund going bankrupt. The actual assets in the fund don't go anywhere. Whoever buys the remnants of your now-presumably-dead brokerage would probably just carry on maintaining the fund, or it would cash you out if it didn't want to continue to run the fund.
On the brokerage side, SIPC insures securities in much the same way FDIC insures deposits, but the amount insured is significantly higher, though I don't know it off the top of my head. And beyond that, regulations require brokerages to hold client assets separately from the broker's assets, and this is audited. So for the most part, SIPC is mainly overseeing the transfer of securities from a dying brokerage to somewhere else.
So, for the most part, the risk you describe is more about inconvenience than actual material loss.
> Why would they not put it in a safer, positive returning, investment like US bonds?
At a minimum you are exposed to the exchange rate with your domestic currency, and FX can be volatile - developed market currencies can easily move a few percent in one week - compare that to the Treasury yield of c.2%/year. PLus you are exposed to US macro-environment and interest rates which may be totally unrelated or risk-additive with respect to your investment strategy.
Even +ve yielding bonds are losing money in real terms. People buy german bunds and swiss govvies at negative yields as they are a save haven.
I'm no expert but it seems the 'cause' of a lot of problems right now - the one mentioned in this article, but also climbing housing prices - are caused by low and negative bond interest rates. Who sets these interest rates? Why are they being kept low? They seem to have such a big influence on the economy right now, driving it towards riskier investments - I mean my bank's savings account, which IIRC is tied to government bond interest rates and (also historically low interest) mortgages, is pretty much zero so I've moved some of my funds into (riskier) investments.
I mean I don't really want to be doing that but right now, putting money in savings and keeping it is basically costing me 2-3% of its value a year due to inflation.
The question is: in industrialization, everyone and his dog moved to cities. In masses. This might happen again. This will increase demand by a... Ton. It might still be worth it, even if it is a housing bubblem I mean, partly it is happening like back then. Two, three people or even families living in one apartment...
> To understand the current period, I recommend that you understand the workings of the 1935-45 period closely, which is the last time similar forces were at work to produce a similar dynamic.
Christ nobody wants to live in 1935-1945. That period set the All-time record for violent death
> I mean I don't really want to be doing that but right now, putting money in savings and keeping it is basically costing me 2-3% of its value a year due to inflation.
I am not a financial planner, but investing in riskier bonds because safe ones pay little interest has burned many investors over the years. If you do that you need to be ready to move quickly (quicker than many pro houses with billions invested in tech) if those riskier companies start going belly up. Personally, in this climate I keep short term cash in checking and use TIPS or similar if I wanted bonds. Whatever is invested I view as potentially untouchable for 10+ years. Just my 2c.
This isn't exactly correct. The Federal Reserve sets the fed funds rate which has all kinds of effects on the lending rates (aka: bonds) and pricing models throughout the financial system.
While short term interest rates are strongly affected by the operation of the Federal Reserve, which can choose to buy or sell to achieve policy goals, long term interest rates are set by the market. If the government offered bonds with a coupon at 3 times the going rate, it would sell at auction at a price that would cause it to yield the going rate. Essentially, the market is not excited about the prospects for equities and has been bidding up the price (reducing yield) of bonds.
N.B., inflation (CPI-U) averaged 1.5% per year over the last 5 years, if my calculation is correct.
Nobody in their right mind would buy negative yielding debt. Those long term negative rates aren't set by the market. Some pension funds are forced to buy those bonds, as well as quantitative easing.
I was discussing low interest rates, not negative. But usually in the US when we talk about a negative yield we're talking about a negative real yield not a negative nominal yield. There is a "zero lower bound". Perhaps an algorithm would buy a bond at a negative yield but probably not a person. Or, a central bank may purchase back bonds at negative yields to get the cash out there.
Europe is a different story, I don't know entirely how they run their monetary system.
The Fed set interest rates low in 2008 in order to provide a stealth bailout to the banks that had lent too much and were sitting on collateral that was less than the money which was owed.
The low interest rates raised asset values to the point where they weren't sitting on heavy losses any more.
The days of 0% interest in savings accounts has been over for a while, but many banks are assuming most people won’t notice and have not changed their rates. You can get 2% on savings at many online banks, you just need to do some investigation. 2% is better than nothing.
The Cassandra article is both right and wrong, the story is complicated, but the point about lowered interest rates goes like this:
* higher interest rates are disliked by private capital because they a) cause competition for capital b) require higher taxes to fund interest payments c) induce higher "erosion" of large collections of capital
* lower interest rates are liked by private capital for precisely the complementary reasons a) interest is not competition for capital b) require lower taxes c) induce less "erosion"
Higher interest rates in an idealized sense are perhaps better, but in our current environment, it is generally not feasible to raise them, absent a convincing story for growth to match.
Funding the future is hard, and the balance between entitlement and resource governance is hard, but in the US, in the game between individual capital-oriented private interests and generic public interests, public interests generally lose. This is by far the largest contributing factor to pension "decimation."
Finally, small point- for individuals, using macro-reported inflation is, to a first approximation, a mistake. What matters to an individual are changes in actual cost of living, which are historically extremely localized.
I don't think so. The vesting contribution terms can lengthen, the payouts can decrease, and the withdrawal minimum ages can start later. Sure, some funds that are ailing will be in trouble, and there may be a yearning for the good ol days, but "Destroyed"? C'mon: these are govt. jobs with mandated contributions from people who are risk averse and have few better employment options.
Millenials are more likely to be the ones destroyed. The government will bail out the pensions and millenials (current and future workers) will pay the tax. This is the consequence of being underrepresented in government.
Isn’t this by design? When interest rates lower, institutions are forced to find yield elsewhere. Don’t central banks lower interest rates to make saving less attractive?
Pension funds are intended to be large pools of money invested wisely, ensuring that retirees from a certain employer can be paid what they were promised.
Changing interest rates would affect how the fund managers invested the money (in theory). It's unlikely that pension fund managers can recession-proof their investments, partly because recessions by definition are harmful to almost everyone who is holding securities when they begin.
This appears to be complete mismanagement of pension funds.
When people manage their private funds they reduce their exposure to risky investments like stocks as they reach retirement age. Public pension funds should behave identically and eat a small yield loss in exchange for lower risk.
Pension funds aren't trying to make a profit. They need the ~7% yield to cover the cost of paying people's pensions decades in to the future. Without that return the fund would collapse under the forces of inflation, increased pay outs to more people as we live longer, and the fund itself shrinking because it's not covering its costs.
This mismanagement was somewhat inevitable as yields decreased. There's too much cash (because of wealth inequality) chasing too few yield bearing assets.
Assumptions that were made about the level of yield that could be achieved safely before the crisis simply don't apply today.
Except that as an individual you are have shorter time line than pensions: you'll be dead in ~20 years after you retire. Pensions have timelines of >20 years, and so they must have higher returns to handle the needs of those coming after you.
If you do a search you'll find a number of people arguing that having a 60/40 portfolio may not be enough post-retirement, and that if you want to not run out of money, then something like a 60/30 or 80/20 equity-bond mix may be necessary.
In the past bond rates were often >4%: good luck finding that (unless you want to buy Brazil, Mexico, or Russia bonds).
The Dutch Planning Bureau publishes graphs of net-benefits people on average may get out of the pension system, and those numbers as function of your birthdate are quite staggering:
8 months later retirement per year of life expectancy sounds like a lot but this is hard for me the visualize. because life expectancy isn't going up that fast, right?
It's similar to how I see social security in the us not being adequately funded. We only need to increase funding a little bit to make it solvent. We could do some easy things like increase the cap on income that gets taxed (s.s. has max payment amount, and the tax that pays for it is a percentage of income but there's a cap on how much income they tax, so just increase that income tax cap a bit).
Germany has outright said that the public pension (equivalent of US Social Security) will be have to be cut significantly if the contribution rate isn't increased, and the full retirement age has already been raised from 65 to 67, with some discussion about raising it even further to age 69. Germans can elect to start receiving their public pensions as early as 63, with a proportional reduction in monthly benefit.
One of the fundamental problems for all pension funds, public and private, is that with longer life expectancy comes markedly increased length of pension receipt. Germany has seen a doubling from about 10 to 20 years of average pension receipt since WWII.
People have been making these sort of doom and gloom predictions for decades, whether about debt, inflation, or bubbles, and given their poor track record can be safely discarded.
For every event like the 2008 they get right, they get a 50 or more predictions wrong.
Economists have a good grasp of the underlying factors that cause recession, the one thing they can’t model is human economic exuberance, which is why they always predict recessions when they don’t happen. And then when they do happen they’re so much worse than anybody would have thought.
I've been hearing things like this regularly since 2016, some of it on Hacker News. It's caused definite stress in the past and I actually get a bit angry when I see stories like this now - and regard it as clickbait.
Anyone with actual insights into market performance isn't putting those insights in a blog, they're putting those insights in a formula and making money with them.
Short companies that receive much of their revenue from pensioners. Invest in companies likely to get government contracts related to dealing with hordes of destitute old people. Leave Florida before it's too late.
This isn't any sort of wild speculation though. It is a hard mathematical fact that pension funds will be more sensitive to a stock market decline now than they were previously. The math says we'd need a small miracle to NOT have to deal with this problem, although it probably won't be as painful as the emotive language in the title makes it sound.
There will also be a decline in house prices if demographics trends continue. This is also a store of "wealth" that many are counting on. This is more of a macrotrend though.
Does anyone have a read on the rigor and ideological slant of the blog? I've flipped through a couple posts and find the content easy to follow (I have no economics background). However, I haven't found any meta commentary on the blog or information about the author (Joshua Konstantinos).
Pension funds tend to be distributed across local and global risks and should be actively managed and moved around in response to global events. The article speculates that pension funds will be left in high risk pots into the next resession and will then suffer losses. Lot of 'ifs' in that chain of reasoning.
So this triggered me to log into my pension fund website. Which I almost never do.
My fund's 2018 report says the allocation is as follows:
- 37,4% stock
- 50,4% fixed (bonds)
- 10% real estate
- etc.. (derivatives, cash)
The past 2 years the news has also been dominated by the law that governs pension funds in my country. Ever since the ECB cut rates pensions have been cut or been close to it. So it seems we don't allow funds to go riskier, as the article describes. In stead the law forces funds to take their losses now, and not postpone them to a next generation.
And during the '08 crisis I remember a talk from a fund manager that said crises don't matter that much for funds. Since they are all focused on the long term the stock will recover anyway and the best thing to do in a crisis is to buy more stock. What funds automatically do since people can't stop contributing.
So the key point in the article seems to be this:
>"There is one other key reason that public pension funds have transitioned into riskier assets. States have passed laws exempting state government pension plans from the standards that private pension plans are held to. These public pension plans are permitted to use generous assumptions about risk that are not permitted in the private sector. So, while public pensions have moved into objectively riskier assets, they haven’t been forced to account for that risk."
So it seems a lack of regulation is the big problem, not economic downturn every now and then.
Are we talking private European pensions or the public pensions? I know for a fact my private pension is in the market because they send me an annual report. State pensions is simply government recirculating money. They plug you into a formula and tell you what you'll get at age 65. For some countries it isn't whole lot.
Freely competing organizations that cater to the citizens preferences and demands.
The main reason people would choose a public administration of finances is to get the promise that if they fail, some other sucker will pay taxes to cover it.
You mean like happened with the big private finance companies and their massive government bailout, because the private sector loves private profit and some other sucker paying for losses?
Government bailouts are not private actions, it's literally a public intervention, contrary to my suggestion of the government not managing people's money.
>Maybe the problem is that government shouldn't have people's retirement funds to manage.
All pension funds, effectively, have government as, at minimum, the backstop. No way the government would let a large private pension fund fail. (At least, I don't think they would? Maybe I'm being naive?)
Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so. In a world where interest rates are being pushed lower every year, pensions are basically forced to move to riskier assets to deliver the same nominal return. (This is, in fact, one of the main points of lower interest rates.)
Because pensions are not marketable instruments, it's also not possible for these risks to be priced in. (If a bond had, say, a 50% chance of default, its price on the market would also decrease, pushing up its effective yield.
It seems pensions are more of an instrument that is doomed to fail, and expecting them to hold up to their promises is going to lead to a lot of pain for either retirees, or the current and future workers supporting them.
> Hmm. Pensions are obligated to deliver a defined benefit in dollar terms, or try their best to do so.
That is traditionally what most people mean by "pension", but it is DB pensions aren't the only kind. There are also defined contribution (DC) pensions:
In the past, responsibly run pension funds projected a conservative rate of return to account for these risks.
The problem isn't the financial model of pensions, but the politics of it. Lowering the expected rate of return of a pension fund causes a huge increase in the funding requirements that are calculated, and a suddenly appearing budget problem such as this is bad news for people's political careers.
The same problem exists in the private sector. Changing the model to project a lower rate of return hurts profit numbers in the near term and makes a huge liability appear on the balance sheet, so executives will kick the can down the road as much as they can. The problem is only worse with public sector pensions because of regulatory differences.
Another wrinkle is that in the private sector, the entity can go bankrupt and that's that. In the public sector, the government entity is almost certainly on the hook forever.
In the U.S., anyway, part of the motivation for states to allow riskier investing, is that the state governments aren't paying money into the pensions funds as they should. Illinois is one of the states which is worst at this; the state legislature has literally broken its own laws (without changing them) by not paying into the state pension funds as it is required to. This has been going on for years, and is more or less shrugged off.
So, it's not classical "deregulation" that's the issue, because it's more fundamentally about state governments (in at least some cases) not wanting to raise taxes (or cut other spending) now, so they let pension funds invest in riskier assets to try to make up the difference.
Also, the numbers you give show over a third in stocks, which have experienced drops of 50% in living memory. That would seem to be enough to cause a problem even in that case, wouldn't it?
>Also, the numbers you give show over a third in stocks, which have experienced drops of 50% in living memory. That would seem to be enough to cause a problem even in that case, wouldn't it?
I tried to find the 2008 report but the oldest one is 2010. Luckily it has a 5-year-earlier section:
It's Dutch but you can see that they lost 14.5% total in 2008 and then made 14.8% return in 2009 and 10% in 2010.
Since they always have fixed income bonds and cash on hand I don't think it's a problem. And in 2018 the fund had €10bn of assets. Seems to be doing great.
> ...which have experienced drops of 50% in living memory.
And those drops were immediately followed by a return to previous levels. Pension funds are in it for the long term, and has been mentioned elsewhere in the comments a decade of lower stock prices here or there isn't that big of a deal for them. Being underfunded obviously is an issue, however.
Yup, it's the same problem you always get when you have the same people making the rules as are the ones bit by the rules. It's easier to redefine proper than pay what a proper answer costs. In practice it's almost always government that falls victim to this because in any other case the government is likely to write some rules.
50% in bonds during a time of historically low interest rates is risky as fuck. If those bonds are negatively yielding, then it's just pure corruption. If rates go up, the current value of your bonds drops like a brick. Somehow negative yielding bonds are seen as less risky than holding on to just cash.
Well thats because bonds are in many cases less risky than holding cash.. in the EU “cash” in a bankaccount is only guaranteed up to 100.000 euro.. bonds are guaranteed for full value in most cases.
That's interesting. In that case cash in a safe would be the better option. You still have negative carry(insurance, rent, security, etc.), not sure how that would compare to the negative yielding bond.
Hmm, if enough did this and put it together in some vault and perhaps lent some fractional amount of this money if an appropriate opportunity presented itself you might even make money on this. I just described a working banking system.
Makes me wonder how banks could even be solvent in this environment. Are they just regulated into existence.
It all sounds like a house of cards at this point.
There isn't going to be some sort of general rule on this. Some pension funds deal entirely in government issue bonds that won't be harmed. Other funds are operated similar to how Warren Buffet operates; the pension fund literally buys major infrastructure.
So you certainly can't blanket statement this one. Furthermore, every major country passed in exactly the same year(2014) that pension funds can now cut benefits to stay solvent. This was done by Obama, Harper in Canada, and really no political partisanship at all; right wing and left wing did this across the high income countries. http://www.pensionrights.org/issues/legislation/summary-pens...
So fundamentally the author is wrong. Pension funds arent going to be destroyed. The pensioners are the ones who will be taking cuts. Grandpa is going back to work; even though he still has a pension.
So, your argument against the articles claim that boomers will be hurt because of the impact on pensions is that it's wrong because pensions will just cut their benefits?
I'm not sure that qualifies as the article being “wrong” so much as not being completely clear on why it's thesis is correct.
The hyperbolic use of “destroyed” to mean adversely impacted, including in performing a thing’s intended function is so common than it may even exceed literal use of the term. The thesis of the article (as is usually the case) is not the headline, but (as laid out in the last two sentences of the first paragraph) that the impacts of the e next recession won't be limited to Millenials but born heavily by boomers through the impact on pensions.
(Though, I would argue, it would also literally destroy pension funds, but as a more distant effect of causing them to be perceived as not delivering value, but that's entirely outside the focus.)
>The hyperbolic use of “destroyed” to mean adversely impacted,
There was no hyperbole there. It was at best clickbait. I would accept clickbait; but my default understanding on that article is that they are proposing the end of pensions.
>Though, I would argue, it would also literally destroy pension funds, but as a more distant effect of causing them to be perceived as not delivering value, but that's entirely outside the focus.)
Pensions are pyramid schemes. It's a valid argument to be made. The author for sure is going down that route.
Today's billionaires believe they earned their wealth & deserve to keep all of it. All they did is invent shrewd ways to leech from the society artfully without moral responsibility.
In a way they're worse than average kings/queens from history.
The average king of queen thought they have a literal Divine Right from God, and were absolutely willing to enforce that with violence and suppression.
There are a lot of good reasons to hate on the ruthless capitalist business class, but don't pretend that actual monarchs were somehow more benevolent. There were a lot of revolutions and civil wars in history -- for a reason.
How about we just abolish fractional reserve banking? Fractional reserve system causes credit to grow with booming population but causes deflation when population/production declines.
The root cause of all economic problems are man made. Lets fix the root cause because its totally in our control.
Isn't that how it should be essentially given currency is a medium of value exchange? If the production grows shouldn't credit grow with it for reasons similar to why national debt is listed as GDP percentage?
Not when currency is also a medium of wealth storage.
Currently, when deflation happens, the rich don't suffer losses immediately. Instead they fire their works and reduce investments. So the poor are on the streets or have to suffer first. The rich may or may not lose later (they don't lose because by then they get bailed out or the tide turns).
If we're truly going to use currency as a medium of exchange then we have no choice but to let the rich suffer, perhaps they suffer first.
I cant tell if you are naive or just ignoring the conveniently that cash is also an asset. In deflation, it is a better asset than stocks. In negative interest rate environment, it is a better asset than bonds.
Deflation is an economic failure. NIRP is, in my opinion, an economic failure. If cash is only a good asset class when shit is hitting the fan, that probably implies it’s not a very good store of wealth!
Then why is my employer paying me with it? Why do savings accounts exist at the bank? Are we supposed to go out and buy bonds and gamble on stocks when we receive a paycheck? Maybe the stuff we use for currency shouldn't be printed out of thin air and have no inherent value
Not all of it, but sitting on cash is not smart. Cash is for very short term spending. It’s not a long term store of wealth. It never has been. Currencies that become a store of wealth inevitably fail.
I don’t know what you define as very short term, but emergency funds should be in cash, so should money set aside that is meant to be spent in a few months.
Are most people able to take the money out of their pension early by just accepting some penalties? That could mean a sort of run on pension funds if people get spooked and pensions are under funded.
> Are most people able to take the money out of their pension early by just accepting some penalties?
Not really. I think a fairly typical pension plan you can withdraw funds from only if you leave employment covered by it, and the refund is typically of your contributions plus interest (not employer contributions made on your behalf.)
Note that this (and the article) uses “pension” narrowly to mean “defined benefit retirement plan”, not broadly to mean “retirement plan, including defined contribution plans as well as defined benefit”. Defined contribution plans can usually be withdrawn from at a penalty more freely.
I had a whole thing written up, but in the interest of brevity, maybe covering my ass a little, but balancing some public interest for people who read these articles:
1. Cassandra Capital is "somehow" getting to the top on HN quite frequently (this is not true of other communities I participate in)
3. I'm no longer clicking through on Cassandra Capital articles and maybe some people here who care about how what they read influences financial decisions should also do some background research
Hi, I’m Joshua Konstantinos the author of this post.
I’m sorry if you don’t like the quality of my article. But I felt I should respond to the insinuation that I’m doing something underhanded to “somehow” get to the top of hacker news.
I did absolutely nothing to get to the top other than submit the post this morning.
I have been working on my book as a passion project for two years. It is very unlikely that I will ever recoup the money I spent writing it, printing copies, researching etc.
Now that I’ve finished my book I’ve been posting articles on economics and geopolitics because it’s a topic I enjoy. I don’t have ads on my site, and honestly I probably lose money on hosting costs. I have had some success on hacker news and Reddit which has been a pleasant surprise - but Cassandra Capital is just me writing about what I enjoy writing about.
I will say that people get hell-banned for seemingly self-promoting on HN. Might be good to mix up your submissions with other articles you find interesting, so it doesn't appear as though you are only posting your own writings.
I have submitted a few news article that I've found interesting (from Bloomberg etc) that have also done well on here lately. But you're right. I will make an effort to mix up my submissions! Thanks!
Er I don't know the right etiquette as far as original post, but I shouldn't have quoted/included "somehow", that's entirely fair. I think you've had great success to my eyeballs for placement on HN, but did not need to insinuate that it wasn't on the up-and-up.
No hard feelings! No one has been more surprised than me by the response I’ve gotten - I can see why you might be suspicious. I will make an effort to post from other sources more frequently moving forward.
Given that HN doesn't have any secret vote buying mechanism I'm aware of, I suspect this is since the Cassandra Capital articles are pretty technical, and HN tends to like brief, technical write-ups.
So, less secret cabal, and more just writing to an audience. Remember, any given subreddit is just a community and not representative of the internet or reality at large.
I expect inflation to destroy pensions and retirement savings. We're heading towards a time when there are going to be only 2 workers for every retiree. We're going to need a lot of people to take care of retirees, and that's a crappy job that most won't want to do. Currently such jobs pay poorly but I expect them to have to crank those salaries a lot to fill them.
This is the situation in Japan, and they have lower inflation than we do. Younger people are just told to suck it up, and they do, as their standard of living drops.
USA is much more freindly to low skill immigration too, which would reduce the need for raising wages for these jobs.
1. interest rates on government bonds, perceived as the safest asset class, have fallen to historic lows, even below zero in many countries
2. pension funds' expected rate of returns have barely budged since the 1970s (7-8%) despite the fact that interest rates have dropped from double digits to below zero in many cases
3. to make up the loss of yield, pension funds have turned to riskier assets such as stocks
4. fueling the fire, state regulations have been relaxed to allow these public pension funds to invest in risky assets
5. since the 2008 crisis pension funds have been underfunded - they take in too little money to be self-sustaining
6. it's becoming increasingly clear that pensions can't "grow out of" their underfunded positions
7. having loaded up on risky assets, pensions will face large declines in the next recession as stock markets deflate
The joker in the deck is how the pension funds will react to a declining stock market.
Their only viable option would appear to be government bonds. A collective flight into bonds would further depress interest rates. Falling interest rates produces capital gains on bonds, which attracts still more investors, driving rates further down. And so on. Flight to bonds on a large scale driven by pensions would also accelerate stock market declines, making bonds that much more attractive.
Having broken the zero interest barrier, there appears to be no bottom to interest rates anymore. The lack of a bottom opens up some very bizarre scenarios.
How will negative interest rates work in practice? Will they always be confined to bonds, or will they spill over into interbank lending or even retail debt?
Generally speaking, we don't know. The financial sector has never had been in this situation before.
> While the ECB wants to spur people to invest, there’s concern that the banks will face mass withdrawals if they introduce negative interest rates for retail clients.
> Jyske Bank A/S this week said it will charge Danish depositors with 7.5 million kroner ($1.1 million) or more in their accounts; earlier this month, UBS Group AG halved the level at which its annual 0.6% fee kicks in to 500,000 euros ($560,000).
Smaller pension funds should be doing the same thing us 'retail' investors are doing: using passive index funds. Perhaps a 60/40 equities-bond balance.
A part of the fixed-income ("bond") component should be in money market account or term deposits to meet short-term needs.
During/after the Great Recession it took markets about five years to claw back to the same level they were at their peak, but that is an extreme case. Most recessions and bear markets last less than two years before they're back to the same level. Trying 'advanced' techniques generally does not work out well:
Unless you're a fairly large pension, and are able to throw a decent about of money around to buy "real" assets (pipelines, utilities, airports, marine ports, toll highways), then it's best to stick with passive indexing AFAICT:
getting to 5-6% returns isn't super difficult for a pension, getting that extra 1-2% is bloody hard and requires some risk given that you can't just put cash in treasuries and get a 8% payout like you could in the 70s and 80s.
You really can't have the whole market go into passive investments - it'll just cause a large amount of volatility given that market movements will be based on a shrinking number of fund managers.
>Having broken the zero interest barrier, there appears to be no bottom to interest rates anymore. The lack of a bottom opens up some very bizarre scenarios.
The flaw in that argument is that it seems to assume individual bonds are perpetuities (actual perpetual bonds are extremely rare). At some point, the bonds you have purchased will actually mature, and you will be paid face value. If it is less than the price at which you purchased the bond, this means you take a capital loss at that point. This decrements your overall rate of return. Therefore, you cannot just drive the price of bonds up forever by ignoring the yield becoming increasingly negative and just focusing on market price appreciation.
> A collective flight into bonds would further depress interest rates. Falling interest rates produces capital gains on bonds, which attracts still more investors, driving rates further down.
What do you mean by this? That increased demand causes higher prices causes increased demand under the expectation of the trend continuing?
Not OP, but it makes sense. A lot of investors hear about an asset going up and they want to join the party. A lot of the other investors try to predict where the emotional investors will go and buy the asset in anticipation.
Yes, that certainly can happen. But when that kind of speculation has a significant effect it's called a bubble, and is an exception to the usual rule that increased demand causes prices to increase up to a new equilibrium point and no further. Is there any reason to think that a bubble would occur in this particular situation?
Negative interest rates and cash-hoarding companies signal that there is not enough investment opportunities in the world anymore, so it became impossible to secure a retirement income through savings alone. That's it. The source of retirees' income will have to change.
Not enough investment opportunities or not enough willingness/creativity to invest? I can’t believe that these billionaire companies and individuals literally searched the entire globe and concluded there is not a single investment opportunity that would produce a risk-adjusted return greater than 0%!
Pension funds have been allowed to decay so far in such an unseen manner that there is now a universal aversion to peering behind the curtain because the naked truth is too terrible for anyone to process. That there are only a handful of small, independent journalists/bloggers willing to touch the subject, as is the case with this article, is a sign that there is fear at the highest levels of a national conversation on the issue which would be born from honest reporting by mainstream sources. The ramifications that stem from exposing the pension system as utterly broken beyond repair would threaten to topple the whole house of cards propping up modern society.
CalPERS in particular has become subject to multiple mini-scandals recently. The first of which is the competency of their latest CEO and the thoroughness of their hiring practices (1). Even the most charitable interpretation of her resume and skillset would arrive at the conclusion that Marcie Frost is a figurehead/cheerleader type CEO at best. Combine that with the recent announcement of Yu Ben Meng's return to CalPERS as CIO and there is certainly room for concern (2). Meng left CalPERS in 2015 to serve as deputy chief investment officer of China's $3.2 trillion State Administration of Foreign Exchange. We are now facing a situation where the nation's largest public pension is managed by a man considered so trustworthy by the country we are currently waging a trade war against that they placed him in charge of their largest capital fund. Even if everything is financially and legally above board, this kind of tone-deafanagemeny by the CalPERS board does not induce great confidence in their leadership or stewardship abilities.
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[ 2.6 ms ] story [ 257 ms ] threadThe worlds looming financial woes are entirely of our own making. We're not running out low on resources. We're just distributing them very inefficiently.
the truth is the the public employee pension system has been far to generous for far too long and many are counting on a bailout from Washington to keep the largess going. I will post it over and over, Illinois is a prime example of what is wrong in the public employee pension system[1]. When you have twenty three thousand retirees pulling in 100,000 per year there is a problem. Chicago is in dire situation too from both too much largess and simply kicking the debt bomb down the road [2]
There is not enough wealth in the US to tax to support this level of largess and it goes by unnoticed because it was designed to not be see by the public.
If the only way to fix the pension system is for them to implode it is a far better solution than to tax our way out of it because the behavior has to change.
Tens of millions of Americans are counting on their 401k retirements and such and the only true source of wealth that can be taken to fix the pension systems of public employees is to go after those 401k funds. There aren't enough billionaires to take all the money from
[1] https://www.forbes.com/sites/adamandrzejewski/2018/10/26/ill...
[2] https://www.forbes.com/sites/ebauer/2019/01/10/the-problem-w...
That’s only true if you believe in the fairy tale that Social Security and Medicare taxes (around 15% between you and your employer) are held in a separate account and the money doesn’t go into the general fund with all other tax revenues.
The top 1% own 40% of all wealth in America. There's not only enough money, this is by far the fairest way to square this circle. The vast majority of that wealth is not earned.
I favor large inflation, which bankrupts the trillionaire while the working Joe keeps earning 'new money' and does ok.
Well that's hilarious. If the tax system in the US was truly progressive then it wouldn't have so many billionaires.
Does it include yourself?
source: https://www.bloomberg.com/news/articles/2018-10-14/top-3-of-...
This is a disaster that’s been a long time coming but it’s also been clearly signposted the entire time. Actuaries have known this for a long time.
Every economic system and model depends on future expansion of both capital and human resources. There are no theories of at scale planning for a future has less stuff and fewer people and no growth or even shrinkage.
The "can't afford" BS is the mantra of private capital, which does a great job of funding the .1% and an awful job of funding the 99.9%, which is what pensions do.
The fact that expected benefits may not be fully achieved due to, I don't know, inability to predict the future has been used as a straw man to dismantle what have been in historical terms far and away the most successful at scale future funding schemes. The repeated failures of unplanned models get lost down the memory hole.
We need a new term to complement "Ponzi scheme" to capture the mass reality distortion that index funds make everyone their own best investment manager.
There are plausible reasons to decrease populations in regions or entire countries. With climate change getting more serious, we'll soon start having to move populations away from flood prone areas or areas with increasing desertification. Many of those towns and cities started their own infrastructure projects paid with bonds that assume a certain population, and thus tax base, growth.
Younger generations, for several reasons from despair about ecological future to high costs of living to stagnant wages, are opting to not have children. Other countries, like Japan, have struggled economically because of declining birth rates.
If we (the US) had a more open borders policy with an easier path to citizenship, we could use immigrants to boulster our population and tax base.
With migrating and shrinking populations, I can't think of other economic instruments to pay for local infrastructure projects that have routinely been paid with long-term municipal bonds.
There is zero incentive for younger people to engage in that if not for complete dependence within such a system.
If that is the outlook, no economic instrument can be the solution since the way the economy is driven is the problem itself.
If you generalize your strategy to a global level you will end up in the exact same spot.
Sustained economic growth is a product of the Industrial Revolution so this is only true if you ignore almost all of human history.
> There are no theories of at scale planning for a future has less stuff and fewer people and no growth or even shrinkage.
On at least one interpretation this is how total war usually works in industrial societies. The Roman Empire abandoned long settled territory full of Roman citizens on more than one occasion, Britain, Dacia, so dealing with economic contraction is also far from unknown historically, even for well developed states with a literate culture and bureaucracy.
> The "can't afford" BS is the mantra of private capital, which does a great job of funding the .1% and an awful job of funding the 99.9%, which is what pensions do.
You radically underestimate the proportion of the population who would be basically ok in a world without defined benefit pensions or one where they don’t exist at all. The professional classes would be just fine if they had to arrange their own retirements instead of having financial intermediaries do it.
> The fact that expected benefits may not be fully achieved due to, I don't know, inability to predict the future has been used as a straw man to dismantle what have been in historical terms far and away the most successful at scale future funding schemes.
Nothing has been dismantled yet. I’m not aware of a single developed country without a non-contributory old age pension. More generally people I respect, like Noel Maurer, have said that the US’ Social Security system can be made sound with quite feasible increases in taxation. This does not apply, to the best of my knowledge to the large public sector pensions though. They were based on assumptions of economic and population growth that just don’t hold and without politically impossible levels of taxation they’re doomed.
> The repeated failures of unplanned models get lost down the memory hole.
Well no one planned those unplanned models. Extremely generous public sector pensions have been known to be actuarially unsound for decades. The planners know very well a reckoning is coming. They just hope it doesn’t happen while they’re in office.
> We need a new term to complement "Ponzi scheme" to capture the mass reality distortion that index funds make everyone their own best investment manager.
At least investment funds don’t saddle the taxpayer with obligations run up by long gone politicians. There are well run government pension systems, or there’s one, Singapore’s.
I am not sure why you discount real estate. You might not think it is a good investment, but it is still the idividual managing their retirement. Besides, in this context "real estate" mostly means owning your own home. The main benifit here is not the paper value of the house, but the imputed rent. If this value goes down, by definition, cost of living went down a corresponding amount. (There is admitadly the risk that you want to move, and the local market tanked).
This is not true. There is a negative correlation between economic growth and population growth, e.g. economic growth slows as population grows.
https://www.theigc.org/blog/is-population-growth-good-or-bad...
The absence of a pension is a Ponzi scheme, because the only source of funds for people no longer working is that of people currently working.
The "pensions were supposed to" should be reframed- pensions "would have fully taken care of people...." had they been properly defended rather than attacked and dismantled.
That pensions still exist, that they have been funded even to 35%, after the unrelenting assault on them by private capital, is an incredible achievement. The equivalent funding level for alternatives to pensions is something like 10%- taking real estate into consideration. Without real estate, the funding level is probably less than 1%.
It is a difficult, difficult problem to organize humans to fund the future at scale. Pensions were/are an incredible success, even if that success is partial and insufficient.
It also happened to my mother at MetLife in the early '90s. MetLife had a pension plan until UnitedHealth took them over and then it got reduced to pennies on the dollar. She still gets like $100 a month from whatever settlement, but it's not what was originally promised, not even close. 20 years of work right there.
My Dad has a union pension which he still collects and it is halfway decent owing to the fact that the union went out of its way to run off as many people as they could before they were eligible to retire. It's hazing--they fuck with anyone getting close to retirement age, trying to force them to leave the union. Unfortunately for them, my Dad is an extremely mean SOB and fought them right back, physically, at times. In fact, so few people collected on that pension that the union was legally required to up the payouts. Think about that.
My whole take on pensions is that they are bullshit. They promised the world and the unwise were far too trusting and then they all got screwed one way or another and someone else raided that pension fund, banksters of a certain ethnic relation, probably.
And attributing the failure of pensions to meet their obligations to ‘attacks’ and lack of ‘defense’ isn’t a well formed opinion or argument, yet you dole out plenty of shade on others’.
[1] https://www.weforum.org/agenda/2015/01/what-is-the-life-expe...
Instead we really need to invest more in productivity gains for the world's bottom 90%.
We know this isn’t the case.
https://ips-dc.org/wall_street_bonuses_and_the_minimum_wage/
> All those dollars low-wage workers spend create an economic ripple effect. Every extra dollar going into the pockets of low-wage workers, standard economic multiplier models tell us, adds about $1.21 to the national economy. Every extra dollar going into the pockets of a high-income American, by contrast, only adds about 39 cents to the GDP.
Also, while I agree with the premise that it's better to increase the minimum wage could you explain why folks investing their bonuses in the stock market and therefore directing their capital towards productive companies is worse than consumers spending their money directly?
Sure it is. When the last round of tax cuts were configured, deliberate choices were made that affected different income brackets in different ways. The levers can be tweaked to direct the benefits to the poor, the wealthy, the middle class, etc.
> could you explain why folks investing their bonuses in the stock market and therefore directing their capital towards productive companies is worse than consumers spending their money directly?
I already did, with a linked source for further details.
This assumes distribution can have no positive impact on output, which is certainly not an established fact.
Do people actually invest in these bonds? Why would they not put it in a safer, positive returning, investment like US bonds?
But if you have 100M in [edit: $your_native_currency], you aren't going to put it in a retail bank account, you're not going to put it in your mattress, and so you have only a few options:
1. Stocks/derivatives: If you were holding cash already, you're probably not comfortable with the risk profile of any of this stuff
2. Bonds - this exposes you to the slight negative interest rate
3. Corporate bank account - you might be able to avoid a negative interest rate here as well, but only because you're passing the buck (literally) to the bank, who then has to pick 1 or 2.
4. Actually use the money yourself, in your business.
The whole point of the NIRP (negative interest rate policy) is to push people to pick 3 or 4, and if 3, then for the banks to pick 1 or 4.
I just reread your question, and realized I didn't fully answer it. Investing in foreign bonds exposes you to exchange rate risk. I was sorta hand-waving it into 1 since it's basically like doing both bonds and forex. Not very appealing if your risk appetite is "preferably cash or govt bonds".
I feel obligated to include a disclaimer that this isn't investment advice and that monetary policy is immensely complicated and this is just the high-level thinking of the point of NIRPs.
on edit: punctuation
The Federal Reserve bank sets the Federal Funds rate. This is their "target rate" they will try to hit. They accomplish this by using their position as the central bank to "print" (not literally, it's a credit system, I'm hand-waving) money to bid on bonds. In the same way that lots of investors clamoring to lock-in rates on long bonds can bid their yield down, the federal reserve using their funny money to bid on treasuries also bids their yield down. And when the fed wants the rates below zero, they bid them to below zero. These are called "Open Market Operations".
To be fair, there is no economic law that says this has to be true. It is just true, today, in countries like the USA. It's very possible we reach a point where central banks work together with the government to directly purchase and monetize government debt. It seems absurd today, but so did negative interest rates 20 years ago.
My current worry is the holding company - e.g. what if Merrill Lynch goes bankrupt? There is a very small amount that is FDIC insured but the rest could go poof.
A mattress might work better for this use case, but I figure if it comes down to that we'll have bigger problems.
On the brokerage side, SIPC insures securities in much the same way FDIC insures deposits, but the amount insured is significantly higher, though I don't know it off the top of my head. And beyond that, regulations require brokerages to hold client assets separately from the broker's assets, and this is audited. So for the most part, SIPC is mainly overseeing the transfer of securities from a dying brokerage to somewhere else.
So, for the most part, the risk you describe is more about inconvenience than actual material loss.
Absolutely
> Why would they not put it in a safer, positive returning, investment like US bonds?
At a minimum you are exposed to the exchange rate with your domestic currency, and FX can be volatile - developed market currencies can easily move a few percent in one week - compare that to the Treasury yield of c.2%/year. PLus you are exposed to US macro-environment and interest rates which may be totally unrelated or risk-additive with respect to your investment strategy.
Even +ve yielding bonds are losing money in real terms. People buy german bunds and swiss govvies at negative yields as they are a save haven.
I mean I don't really want to be doing that but right now, putting money in savings and keeping it is basically costing me 2-3% of its value a year due to inflation.
It feels very weird.
Houses can go down, but interest can't go down a lot at 0%. In a slump without credit houses can go up, and interests can go down.
One of his latest ones: https://www.linkedin.com/pulse/three-big-issues-1930s-analog...
* https://en.wikipedia.org/wiki/Ray_Dalio
Christ nobody wants to live in 1935-1945. That period set the All-time record for violent death
https://www.vox.com/2015/6/23/8832311/war-casualties-600-yea...
I am not a financial planner, but investing in riskier bonds because safe ones pay little interest has burned many investors over the years. If you do that you need to be ready to move quickly (quicker than many pro houses with billions invested in tech) if those riskier companies start going belly up. Personally, in this climate I keep short term cash in checking and use TIPS or similar if I wanted bonds. Whatever is invested I view as potentially untouchable for 10+ years. Just my 2c.
N.B., inflation (CPI-U) averaged 1.5% per year over the last 5 years, if my calculation is correct.
Europe is a different story, I don't know entirely how they run their monetary system.
The low interest rates raised asset values to the point where they weren't sitting on heavy losses any more.
* higher interest rates are disliked by private capital because they a) cause competition for capital b) require higher taxes to fund interest payments c) induce higher "erosion" of large collections of capital
* lower interest rates are liked by private capital for precisely the complementary reasons a) interest is not competition for capital b) require lower taxes c) induce less "erosion"
Higher interest rates in an idealized sense are perhaps better, but in our current environment, it is generally not feasible to raise them, absent a convincing story for growth to match.
Funding the future is hard, and the balance between entitlement and resource governance is hard, but in the US, in the game between individual capital-oriented private interests and generic public interests, public interests generally lose. This is by far the largest contributing factor to pension "decimation."
Finally, small point- for individuals, using macro-reported inflation is, to a first approximation, a mistake. What matters to an individual are changes in actual cost of living, which are historically extremely localized.
There are a lot of machinists and truckers out there who are already feeling this pinch.
I find this language and the agenda of fear to be concerning.
Pension funds are intended to be large pools of money invested wisely, ensuring that retirees from a certain employer can be paid what they were promised.
Changing interest rates would affect how the fund managers invested the money (in theory). It's unlikely that pension fund managers can recession-proof their investments, partly because recessions by definition are harmful to almost everyone who is holding securities when they begin.
When people manage their private funds they reduce their exposure to risky investments like stocks as they reach retirement age. Public pension funds should behave identically and eat a small yield loss in exchange for lower risk.
Assumptions that were made about the level of yield that could be achieved safely before the crisis simply don't apply today.
If you do a search you'll find a number of people arguing that having a 60/40 portfolio may not be enough post-retirement, and that if you want to not run out of money, then something like a 60/30 or 80/20 equity-bond mix may be necessary.
In the past bond rates were often >4%: good luck finding that (unless you want to buy Brazil, Mexico, or Russia bonds).
* https://tradingeconomics.com/bonds
* https://www.bloomberg.com/markets/rates-bonds
- Pensions are already "squeezed" (people get less pension than they originally were told they would)
- The age you can retire was alway 65, now it's 67 and growing with life expectancy (every year of life expectancy = 8 months later retirement)
- Pension funds want/lobby for more lenient rules so they need to have less cash on hand...not sure if they'll get it
https://tweakers.net/ext/f/YflHE563fficH8f0MAv7zIFj/full.jpg
It's similar to how I see social security in the us not being adequately funded. We only need to increase funding a little bit to make it solvent. We could do some easy things like increase the cap on income that gets taxed (s.s. has max payment amount, and the tax that pays for it is a percentage of income but there's a cap on how much income they tax, so just increase that income tax cap a bit).
One of the fundamental problems for all pension funds, public and private, is that with longer life expectancy comes markedly increased length of pension receipt. Germany has seen a doubling from about 10 to 20 years of average pension receipt since WWII.
For every event like the 2008 they get right, they get a 50 or more predictions wrong.
Unless, of course, you are referring to the macrotrend in which we are all swallowed up by the sun.
My fund's 2018 report says the allocation is as follows:
- 37,4% stock
- 50,4% fixed (bonds)
- 10% real estate
- etc.. (derivatives, cash)
The past 2 years the news has also been dominated by the law that governs pension funds in my country. Ever since the ECB cut rates pensions have been cut or been close to it. So it seems we don't allow funds to go riskier, as the article describes. In stead the law forces funds to take their losses now, and not postpone them to a next generation.
And during the '08 crisis I remember a talk from a fund manager that said crises don't matter that much for funds. Since they are all focused on the long term the stock will recover anyway and the best thing to do in a crisis is to buy more stock. What funds automatically do since people can't stop contributing.
So the key point in the article seems to be this:
>"There is one other key reason that public pension funds have transitioned into riskier assets. States have passed laws exempting state government pension plans from the standards that private pension plans are held to. These public pension plans are permitted to use generous assumptions about risk that are not permitted in the private sector. So, while public pensions have moved into objectively riskier assets, they haven’t been forced to account for that risk."
So it seems a lack of regulation is the big problem, not economic downturn every now and then.
Lack of regulation of itself. Maybe the problem is that government shouldn't have people's retirement funds to manage.
The main reason people would choose a public administration of finances is to get the promise that if they fail, some other sucker will pay taxes to cover it.
They do some due diligence, but it isn’t debatable how good the asset liability management is.
True, we shoukd leave it to private industries.
https://en.wikipedia.org/wiki/Robert_Maxwell#Aftermath:_Thef...
I guess you're american as they seem to doubt government all the time, despite it working in other countries.
All pension funds, effectively, have government as, at minimum, the backstop. No way the government would let a large private pension fund fail. (At least, I don't think they would? Maybe I'm being naive?)
If its a chunk big enough like the 2008 crisis, then they swoop in.
Remember to bet in things that fail big time!
Because pensions are not marketable instruments, it's also not possible for these risks to be priced in. (If a bond had, say, a 50% chance of default, its price on the market would also decrease, pushing up its effective yield.
It seems pensions are more of an instrument that is doomed to fail, and expecting them to hold up to their promises is going to lead to a lot of pain for either retirees, or the current and future workers supporting them.
That is traditionally what most people mean by "pension", but it is DB pensions aren't the only kind. There are also defined contribution (DC) pensions:
* https://en.wikipedia.org/wiki/Defined_contribution_plan
The problem isn't the financial model of pensions, but the politics of it. Lowering the expected rate of return of a pension fund causes a huge increase in the funding requirements that are calculated, and a suddenly appearing budget problem such as this is bad news for people's political careers.
The same problem exists in the private sector. Changing the model to project a lower rate of return hurts profit numbers in the near term and makes a huge liability appear on the balance sheet, so executives will kick the can down the road as much as they can. The problem is only worse with public sector pensions because of regulatory differences.
So, it's not classical "deregulation" that's the issue, because it's more fundamentally about state governments (in at least some cases) not wanting to raise taxes (or cut other spending) now, so they let pension funds invest in riskier assets to try to make up the difference.
Also, the numbers you give show over a third in stocks, which have experienced drops of 50% in living memory. That would seem to be enough to cause a problem even in that case, wouldn't it?
I tried to find the 2008 report but the oldest one is 2010. Luckily it has a 5-year-earlier section:
https://imgur.com/a/jFUs8bV
It's Dutch but you can see that they lost 14.5% total in 2008 and then made 14.8% return in 2009 and 10% in 2010.
Since they always have fixed income bonds and cash on hand I don't think it's a problem. And in 2018 the fund had €10bn of assets. Seems to be doing great.
And those drops were immediately followed by a return to previous levels. Pension funds are in it for the long term, and has been mentioned elsewhere in the comments a decade of lower stock prices here or there isn't that big of a deal for them. Being underfunded obviously is an issue, however.
Hmm, if enough did this and put it together in some vault and perhaps lent some fractional amount of this money if an appropriate opportunity presented itself you might even make money on this. I just described a working banking system.
Makes me wonder how banks could even be solvent in this environment. Are they just regulated into existence.
It all sounds like a house of cards at this point.
So you certainly can't blanket statement this one. Furthermore, every major country passed in exactly the same year(2014) that pension funds can now cut benefits to stay solvent. This was done by Obama, Harper in Canada, and really no political partisanship at all; right wing and left wing did this across the high income countries. http://www.pensionrights.org/issues/legislation/summary-pens...
So fundamentally the author is wrong. Pension funds arent going to be destroyed. The pensioners are the ones who will be taking cuts. Grandpa is going back to work; even though he still has a pension.
I'm not sure that qualifies as the article being “wrong” so much as not being completely clear on why it's thesis is correct.
https://www.dictionary.com/browse/destroyed
The article I read is arguing that Pension funds will no longer exist. Pension funds wont be going anywhere.
(Though, I would argue, it would also literally destroy pension funds, but as a more distant effect of causing them to be perceived as not delivering value, but that's entirely outside the focus.)
There was no hyperbole there. It was at best clickbait. I would accept clickbait; but my default understanding on that article is that they are proposing the end of pensions.
>Though, I would argue, it would also literally destroy pension funds, but as a more distant effect of causing them to be perceived as not delivering value, but that's entirely outside the focus.)
Pensions are pyramid schemes. It's a valid argument to be made. The author for sure is going down that route.
In a way they're worse than average kings/queens from history.
https://assets.weforum.org/editor/large_P5jdSz3P6OAUa75Orq2L...
There are a lot of good reasons to hate on the ruthless capitalist business class, but don't pretend that actual monarchs were somehow more benevolent. There were a lot of revolutions and civil wars in history -- for a reason.
The root cause of all economic problems are man made. Lets fix the root cause because its totally in our control.
Currently, when deflation happens, the rich don't suffer losses immediately. Instead they fire their works and reduce investments. So the poor are on the streets or have to suffer first. The rich may or may not lose later (they don't lose because by then they get bailed out or the tide turns).
If we're truly going to use currency as a medium of exchange then we have no choice but to let the rich suffer, perhaps they suffer first.
Think saving cash(or putting in bonds) for a down payment.
Please end this discussion
Why do you think the same about any other asset that relies on inflationary monetary system?
Source: actual real life economist.
I don’t know what you define as very short term, but emergency funds should be in cash, so should money set aside that is meant to be spent in a few months.
Not really. I think a fairly typical pension plan you can withdraw funds from only if you leave employment covered by it, and the refund is typically of your contributions plus interest (not employer contributions made on your behalf.)
Note that this (and the article) uses “pension” narrowly to mean “defined benefit retirement plan”, not broadly to mean “retirement plan, including defined contribution plans as well as defined benefit”. Defined contribution plans can usually be withdrawn from at a penalty more freely.
1. Cassandra Capital is "somehow" getting to the top on HN quite frequently (this is not true of other communities I participate in)
2. Pretty much everything in this comment chain lines up with my experience https://www.reddit.com/r/investing/comments/cz3w52/pension_f...
3. I'm no longer clicking through on Cassandra Capital articles and maybe some people here who care about how what they read influences financial decisions should also do some background research
I’m sorry if you don’t like the quality of my article. But I felt I should respond to the insinuation that I’m doing something underhanded to “somehow” get to the top of hacker news.
I did absolutely nothing to get to the top other than submit the post this morning.
I have been working on my book as a passion project for two years. It is very unlikely that I will ever recoup the money I spent writing it, printing copies, researching etc.
Now that I’ve finished my book I’ve been posting articles on economics and geopolitics because it’s a topic I enjoy. I don’t have ads on my site, and honestly I probably lose money on hosting costs. I have had some success on hacker news and Reddit which has been a pleasant surprise - but Cassandra Capital is just me writing about what I enjoy writing about.
https://www.amazon.com/dp/1793927758/ref=cm_sw_r_cp_awdb_t1_...
e.g. I'd buy it in audiobook form, my wife and I enjoy this topic. Have you considered it, and if so, what's involved?
So, less secret cabal, and more just writing to an audience. Remember, any given subreddit is just a community and not representative of the internet or reality at large.
USA is much more freindly to low skill immigration too, which would reduce the need for raising wages for these jobs.
I misunderstood
1. interest rates on government bonds, perceived as the safest asset class, have fallen to historic lows, even below zero in many countries
2. pension funds' expected rate of returns have barely budged since the 1970s (7-8%) despite the fact that interest rates have dropped from double digits to below zero in many cases
3. to make up the loss of yield, pension funds have turned to riskier assets such as stocks
4. fueling the fire, state regulations have been relaxed to allow these public pension funds to invest in risky assets
5. since the 2008 crisis pension funds have been underfunded - they take in too little money to be self-sustaining
6. it's becoming increasingly clear that pensions can't "grow out of" their underfunded positions
7. having loaded up on risky assets, pensions will face large declines in the next recession as stock markets deflate
The joker in the deck is how the pension funds will react to a declining stock market.
Their only viable option would appear to be government bonds. A collective flight into bonds would further depress interest rates. Falling interest rates produces capital gains on bonds, which attracts still more investors, driving rates further down. And so on. Flight to bonds on a large scale driven by pensions would also accelerate stock market declines, making bonds that much more attractive.
Having broken the zero interest barrier, there appears to be no bottom to interest rates anymore. The lack of a bottom opens up some very bizarre scenarios.
> While the ECB wants to spur people to invest, there’s concern that the banks will face mass withdrawals if they introduce negative interest rates for retail clients.
* https://www.bloomberg.com/news/articles/2019-08-25/germany-i...
> Jyske Bank A/S this week said it will charge Danish depositors with 7.5 million kroner ($1.1 million) or more in their accounts; earlier this month, UBS Group AG halved the level at which its annual 0.6% fee kicks in to 500,000 euros ($560,000).
* https://ca.finance.yahoo.com/news/negative-rates-coming-savi...
* https://en.wikipedia.org/wiki/Index_fund#Pension_investment_...
A part of the fixed-income ("bond") component should be in money market account or term deposits to meet short-term needs.
During/after the Great Recession it took markets about five years to claw back to the same level they were at their peak, but that is an extreme case. Most recessions and bear markets last less than two years before they're back to the same level. Trying 'advanced' techniques generally does not work out well:
* https://awealthofcommonsense.com/2019/02/how-to-wreck-a-pens...
Unless you're a fairly large pension, and are able to throw a decent about of money around to buy "real" assets (pipelines, utilities, airports, marine ports, toll highways), then it's best to stick with passive indexing AFAICT:
* https://en.wikipedia.org/wiki/Ontario_Teachers%27_Pension_Pl...
* https://en.wikipedia.org/wiki/CPP_Investment_Board#Investmen...
If they lower risk, they are not going to get close to their presumed 7-8% growth. Expected stock market growth rates is around 5%(https://www.cnbc.com/2019/02/11/vanguard-cuts-expected-retur...) Rate of return on bonds is even worse.
Assuming this is correct, the choice is either increase contributions, or decrease payouts.
You really can't have the whole market go into passive investments - it'll just cause a large amount of volatility given that market movements will be based on a shrinking number of fund managers.
The flaw in that argument is that it seems to assume individual bonds are perpetuities (actual perpetual bonds are extremely rare). At some point, the bonds you have purchased will actually mature, and you will be paid face value. If it is less than the price at which you purchased the bond, this means you take a capital loss at that point. This decrements your overall rate of return. Therefore, you cannot just drive the price of bonds up forever by ignoring the yield becoming increasingly negative and just focusing on market price appreciation.
What do you mean by this? That increased demand causes higher prices causes increased demand under the expectation of the trend continuing?
CalPERS in particular has become subject to multiple mini-scandals recently. The first of which is the competency of their latest CEO and the thoroughness of their hiring practices (1). Even the most charitable interpretation of her resume and skillset would arrive at the conclusion that Marcie Frost is a figurehead/cheerleader type CEO at best. Combine that with the recent announcement of Yu Ben Meng's return to CalPERS as CIO and there is certainly room for concern (2). Meng left CalPERS in 2015 to serve as deputy chief investment officer of China's $3.2 trillion State Administration of Foreign Exchange. We are now facing a situation where the nation's largest public pension is managed by a man considered so trustworthy by the country we are currently waging a trade war against that they placed him in charge of their largest capital fund. Even if everything is financially and legally above board, this kind of tone-deafanagemeny by the CalPERS board does not induce great confidence in their leadership or stewardship abilities.
(1): https://www.nakedcapitalism.com/2018/08/marcie-frosts-shoddy...
(2): https://www.pionline.com/article/20190204/PRINT/190209951/ne...