Despite massive stock market gains over the past decade, union pension managers are running out of retirement money.
The graying of the American worker is an arithmetic problem for Farooqi Majid. His job is to invest his way out.
Majeed is the chief investment for an $18 billion school pension in Ohio that provides retirement benefits to more than 80,000 retired librarians, bus drivers, cafeteria workers, and other former employees. The problem is that this fund pays more in pension checks each year than workers and current employers contribute. This gap helps explain why billions are short of what you need to cover future retirement promises.
“The bucket is leaking,” he said.
The solution for Mr. Majeed – as well as other pension managers across the country – is to take on more investment risk. His fund and many other retirement schemes are charged to illiquid assets such as private equity, private corporate loans and real estate.
So-called “alternative” investments now make up 24% of public pension fund portfolios, according to the latest data from the Boston College Center for Retirement Research. This is up from 8% in 2001. During that time, the amount invested in conventional stocks and bonds has fallen to 71% from 89%. In Mr. Majid’s fund, substitutes made up 32% of his portfolio at the end of July, compared to 13% in fiscal 2001.
Understanding the pension crisis
Thanks to the Fed, the 10-year bond yield is 1.5%. The pension plan assumptions are 6.5% or so.
The stock market easily outperforms 6.5% annually, but when plans are underfunded and more money goes into retirement income than it does because of demographics, there is still a shortage.
Demographics, Birth Rate, and Covid Baby Bust
The truth is that demographics, birth rate, and the Covid baby bust are completely deflationary
deflationary and inflationary effects
- Inflationary: a shortage of workers increases wage pressures
- Deflation: Few workers support a growing number of retirees
- Deflation: Older workers need more help, buy less stuff, and travel less.
- Deflationary: More government debt and deficits. Government spending has a negative impact on real GDP.
The net effect is deflation, not inflationary.
Add to the above the potential internal collapse of retirement plans due to excessive risk.
I expect a drop of 50% or more in the stock market at some point. But it won’t take that to cause severe cramps.
Market stability or even gains of 2% on average for 10 years would render many pension plans insolvent.
Thanks for tuning in!
Such reports? If so, please sign up for MishTalk email alerts.
Subscribers get an email alert for every post as it happens.
Read what you like and you can unsubscribe at any time. If you have subscribed and are not getting email alerts, please check your spam folder.