Your pension could be at the center of America's next financial crisis

[Midpack]

This is NOT another thread on whether or not pensions may fail - I hope they don't, but a lot has already been written and discussed on that.

The thread IS to ask IF there are widespread pension failures, how will we ALL be impacted? Or is the issue overblown, e.g. not widespread?

We repeatedly see evidence that too many Americans haven't/aren't saving enough to retire, but people can't work forever, and longevity is far greater now than generations ago. Every time I see the problem raised, I wonder how it will play out, and the articles rarely if ever attempt to explain?

A financial crisis can definitely impact those who have enough saved, but what's the defensive move?

If the potential is overblown, I'd be relieved to hear it.

But the next financial crisis that rocks America won’t be driven by bankers behaving badly. It will in fact be driven by pension funds that cannot pay out what they promised to retirees. According to one pension advocacy organization, nearly 1 million working and retired Americans are covered by pension plans at the risk of collapse.

• Pensioners have no flexibility
• Social Security is in a tight spot
• The guaranty is no solution

Your pension could be at the center of America's next financial crisis | TheHill

 

[Big_Hitter]

If the potential is overblown, I'd be relieved to hear it.

is your pension public, multi or corporate?

 

[Midpack]

is your pension public, multi or corporate?

We don't have pensions, though I do understand the funding shortfall differences. My interest is whether pension failures could (have a cascading effect and) significantly affect markets - and therefore impact us all?

 

[Bir48die]

Every pension is under funded. Every city and state is under water. This is not new information. It's called kicking the can down the road.

 

[Just_Steve]

My state pension is 90%+ funded, I sleep well.

 

[Winemaker]

My mega corp pension is over funded, DW not's so much.

 

[Fedup]

My private pension was underfunded for years and then they did finally fund it properly. But it's not a huge amount so it's not a bulk of our retirement money. It's nice to have kind of money.

 

[ERD50]

But it shouldn't mean that pensions go to zero. If some of us need to take a 10%-20% (or whatever) haircut, it's bad but not the end of the world.

But I think there was a thread a while back about a pension that wanted to reduce some near term payouts, so that they could preserve something for the future retirees. If they kept paying at their current rates, they would go dry and there would be zero sometime in the future. That would be bad.

IIRC, that thread got shut down, I think there were probably some "we were promised it we should get it, and you owe it to us" type posts responsible for that.

-ERD50

 

[Bestwifeever]

Pension funds are invested so it makes sense that most saw a decline in funding when we all saw a decline in our investments. IMO most will recover. Most private pensions seem to be being phased out so in the foreseeable future, no one will have to worry about them anyway.

State constitutions govern whether pension benefits can be cut. Here's an editorial from the Chicago Tribune about Illinois vs Rhode Island, which were in similar straits a few years ago. What struggling Illinois should learn from fellow blue state Rhode Island's success - Chicago Tribune

 

[Dash man]

We don't have pensions, though I do understand the funding shortfall differences. My interest is whether pension failures could (have a cascading effect and) significantly affect markets - and therefore impact us all?

Yes

 

[stepford]

This is probably the one upside in our (IMHO) disgraceful retreat from pension benefits over the past generation. Few enough American's are now covered by pensions that piecemeal plan failures are much less likely to cause a huge systemic problem to our financial system.

 

[2017ish]

I suspect the biggest impact on the population at large will be increased taxation to pay for some or all of the shortfall. It would be prudent to examine such matters when determining where to live in retirement.

 

[Dash man]

Combine the pension shortfalls for many state and local governments with defaults in student loans rising, the looming social security and Medicare shortfalls, government spending out of control, health care costs being paid by the government, our debt to GDP ratio is over 100% and climbing, we're back to 3% down payment mortgages...the next financial crisis will likely happen within a few years if not sooner. You look at our history and they occur fairly regularly. The question is how bad and how long will it last. No one knows what the trigger will be or what the government response will be. Back in 1914 the NYSE was closed for 4 months. Banks were closed in 1933 for a week and gold confiscated. In 1971 we had to be taken off the gold standard to alleviate a crisis. Cyprus and Greece closed banks and limited the amount of ATM withdrawals. Too big to fail banks have gotten bigger and the government can shut down financial markets until it decides how to restructure them, possibly costing depositors some of their funds to recapitalize banks and other financial institutions. Will the people allow the government to take actions without civil unrest? Who knows? I know this sounds doom and gloom, but these things do happen in our history. How to prepare? Your guess is as good as mine.

 

[Clone]

My megacorp pension fund is 92% funded (down from 94% funded).

I am not concerned about it failing.

It it were to fail, we would still be OK with the real estate income and Social Security. Minimal need to touch the investments.

If pension and social security goes away, the real estate income and investments should keep us going just fine.

If we then add on uncontrolled inflation or a history making extended market crash, then it would be pitchforks and torches time, and I would be stocking ammunition. Most likely the masses which would be destitute and starving would be coming for me.

 

[samclem]

To break down the problem: By what mechanisms would pension shortfalls (private, public) cause larger systemic impacts?:
- Pension funds would be net sellers rather than net buyers of assets (stocks, corp bonds government bonds). This would be expected to depress prices somewhat, but it is presumably already happening and will be gradual.
- Retirees have less money to spend, decreasing overall consumption and reducing revenues of companies. Impact: Assuming most retirees take a 10-20% cut in monthly benefits, we'd probably expect a decrease mostly in discretionary spending, not in food, etc. RE prices decline as more oldsters put houses on the market to downsize?
- Government spending goes up for poverty programs/backstopping of PBGC, etc. Maybe taxes go up with them (= reduced consumer spending, see above), or we go farther into debt (= assumes there is demand for government bonds, see below).
- Impact on government bonds: Hmmm. Seems like a wildcard to me. Traditionally, when the markets seem unstable and people get worried,this is where they put their money and the prices of Govt bonds go up (and yields decrease). That could be good for holders of these securities who own them before the rush starts, if they are willing to sell. OTOH, if there's concern about the US govt's finances and willingness/ability to continue servicing this debt (assuming there are other pressures, including the known SS and Medicare shortfalls, etc), then a loss of confidence could ensue that might reduce the attractiveness of US govt bonds and have lots of other very bad impacts (FDIC insurance called into question, etc). Anything that nasty won't be confined to the US alone--there won't be any refuge in buying Swiss bonds, Euro zone bonds, etc. It's Pemmican and ammo time.

 

[bingybear]

We only have SS, no other pension like things.

It really depends on how fast and deep pensions get cut. The shock could add a lot of volatility in the market. Some governments may not be able to raise enough to make complete payments to the pensioners. I think in Detroit pensioners were getting partial payments instead of bond holders being paid. I think this was different than the market had expected.

I think if we (FIRE community) is not careful where we invest, we could see our assets be hit buy some bad investments the way under perform. We could also see taxes rise to cover pensions of governments. Or maybe SS and other pensions get cut resulting in less discretionary spending and the market sags...

 

[Sunset]

I suspect the biggest impact on the population at large will be increased taxation to pay for some or all of the shortfall. It would be prudent to examine such matters when determining where to live in retirement.

Possibly, although politicians will look at the numbers, and how many voters are not on pension vs giving the pensioner's a haircut.

I know I'll vote out any politician that taxes me extra to pay for the pensions that I don't get.

 

[Running_Man]

If I follow the question as presented, a large scale failure of pensions is the hypothesis and what are the expected results: Assuming that I think you would see:

— Drastically reduced spending at restaurants effecting anyone in the restaurant industry
— Older individuals moving in with children and/or combining houses for roommates, a reduction in the demand for housing so rents and housing prices would decline
— Increased spending of existing retirement savings so a decrease in the saving rate, this would lead to a decrease in stock prices.
— Increased spending would also lead to decrease demand for bonds and would normally lead to higher interest rates but Central Banks likely to buy up existing debt to keep economy from declining
— Increased sales of homes needed for retirement income leading to pressure on price of existing homes
—— Increased taxes by local and federal governments to provide whatever aid they could leading to decreasing disposable income for working individuals
— Decreasing economic activity led by reduction in disposable income accelerating the trend of automating tasks to reduce prices
— Likely decline in prices to consumers as cost savings are used to capture market share
— Industries and companies with debt levels requiring higher service will bankrupt eventually leading to a turnover in new smaller companies with less debt.
— Bottom will be hit with high unemployment prices dropping 25-40 percent and from there a trend will again be headed up. How long this process would take would depend on level of government participation in trying to prevent, in a long scale similar to Japan could be 40+ years of steady declines

 

[Midpack]

This is probably the one upside in our (IMHO) disgraceful retreat from pension benefits over the past generation. Few enough American's are now covered by pensions that piecemeal plan failures are much less likely to cause a huge systemic problem to our financial system.

+1, (arguably) sad but true.

I suspect the biggest impact on the population at large will be increased taxation to pay for some or all of the shortfall. It would be prudent to examine such matters when determining where to live in retirement.

+1, there's one state I live near/visit all the time I'd never reside in for that reason.

 

[Midpack]

The question is how bad and how long will it last. No one knows what the trigger will be or what the government response will be. How to prepare? Your guess is as good as mine.

To break down the problem: By what mechanisms would pension shortfalls (private, public) cause larger systemic impacts?

If I follow the question as presented, a large scale failure of pensions is the hypothesis and what are the expected results?

Exactly, thanks for your full replies. I was thinking about some sort of obvious threshold where it impacts everyone, but reading and thinking further, it's probably a continuum. And how each pension in difficulty resolves may vary considerably as well. Hope we all do better than expected, pensioners and/or investors.

 

[Big_Hitter]

definitely an interesting thought - i'll have to think about this

 

[Teacher Terry]

If our pensions were reduced we would have to either reduce our standard of living, move somewhere cheaper or sell our house and buy a small condo. If they were eliminated we would be in big trouble because we will get very little SS due to WEP. I am not worried because our state plan is well funded.

 

[Sunset]

If our pensions were reduced we would have to either reduce our standard of living, move somewhere cheaper or sell our house and buy a small condo. If they were eliminated we would be in big trouble because we will get very little SS due to WEP. I am not worried because our state plan is well funded.

If your pension was reduced, your WEP amount would decrease, so your SS would go up.

 

[Fedup]

I don't think WEP is based on amount of money but rather on the number of years. At least that's the last time I looked.

 

[Sunset]

.....
—— Increased taxes by local and federal governments to provide whatever aid they could leading to decreasing disposable income for working individuals
.....

It would decrease disposable income for all taxpayers, including all retired folks.
Some retired folks could compensate by faster withdrawal (and more taxes), but others doing this would run out of money.
And a faster withdrawal action is similar to a working individual getting a side-job to compensate.

Sort of like the false indexing argument:
When something becomes too expensive, people just switch:
Steak -> hamburger -> chicken -> tofu -> beans -> grass......