In our grandparents’ and even our parents’ time, the old-age pension was part of the American way of life, containing the promise of self-reliance and dignity for the senior years. But these days it’s hard to find jobs that even offer a pension; the norm these days is a meager employer match on your 401(k), if that. Really good workplaces might match as much as three percent, barely enough to cover the exorbitant fees some plans charge. Even companies that still offer pensions mostly limit them to high-level executives. In 1990 forty-two percent of employees were covered by a pension; today that number is closer to twenty percent. For a time it was fashionable for companies to shed their pension obligations by moving them to a subsidiary and letting that company file bankruptcy, gleefully shifting the pension obligation to the taxpayers.
The few pension funds that are left, many belonging to state and local governments, are now finding themselves trapped by the same market forces ironically wiping out our 401(k) plans across the nation. Like any big, responsible saver in today’s financial world, destructive policies by central banks purportedly meant to punish corporations and individuals hoarding cash are blowing back on pension funds.
Nowhere to Run
One of the biggest government pension funds in the world is Japan’s Government Pension Investment Fund. When the Bank of Japan decided to try negative interest rates, because all the cool kids in Europe were doing it, the decision had an unintended casualty in the Government Pension Investment Fund. The move forced the $1.4 trillion dollar fund to shed the safety of government bonds and turn to far riskier domestic stocks. For Japan, which has one of the fastest-aging populations on the planet, this sudden shift to high risk on investments represents a serious threat to the retirement livelihood of millions of Japanese.
Goodbye Frying Pan, Hello Fire
The problem with the strategy of relying on equities is clear with just a quick glance at the state of the stock market. Global equity markets have shed more than $7 trillion dollars just since the beginning of the year. Pension funds that fled into bonds were further aghast to see the bond market melting down right along with the stock market. Past Supreme Court decisions prevent states from reducing pension payments, causing state budget deficits to balloon at a time when state coffers should be healthy.
It’s All Downside
The implications of the pension crisis are far-reaching. In New Jersey, where Governor Chris Christie refused to boost pension funding, the result has been a disastrous credit downgrade for the Garden State. This lowered credit rating, the nation’s second-worst, means New Jersey pays more to borrow money, costing taxpayers millions in extra borrowing costs. Only the Illinois state budget is in worse shape, and Christie’s fifty-five percent disapproval rating at home may be part of the reason the governor was forced to abandon his presidential bid.
Corporate America Gambling Pension Funds
In their fight for gains, many pensions are now shifting money toward hard assets like real estate in order to hedge against shortfalls in the future. But other strategies look far more suspect.
In an effort to increase returns, American companies have been playing fast and loose with pension funds. Corporate America is now running near-record pension deficits, even though their profits have been healthy for the better part of a decade. To a cynic it might appear that many companies, ones that just recently were borrowing money to buy back their own stock, are now using the current crisis as a convenient excuse to let their pension funds become insolvent. Why? Because then they can foist them off on the taxpayer-financed Pension Benefit Guaranty Corporation.
Seniors finding their pensions shifted to the government are in for a rude surprise when they discover the government doesn’t pay the same level of benefits they’d been receiving—and with no cost of living increases. Millions of others may discover the retirement income they thought was a sure thing can suddenly be gone. If the current economic climate drives home anything with absolute clarity, it is that the only thing you can count on to take care of the older you is the younger you. Promises of a pension or Social Security are as empty as fund coffers.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.