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Our Ever Shrinking Pension Payouts?
Becky Barrow of the London Mail reports, Our ever shrinking pension payouts: The millions facing lowest returns on investments since records began:
Millions approaching retirement could be devastated by the worst pension payouts since records began.
Despite
saving the same amount of money into their pensions, they face the
dire prospect of getting about half the income they would have received
15 years ago, research reveals today.
It comes on top of the
collapse in final salary pension schemes, with millions locked out of
the best type of retirement provision.
Experts
said employees who want to retire are facing a nightmare which no
previous generation has had to cope with. The plunge in pension payouts
is because annuity rates have nose-dived. Annuities offer a guaranteed
monthly income to those who have saved into a pension pot.
But
over the last month several major investment firms, such as Aegon, Aviva
and Legal & General, have started to cut their annuity rates.
Their
rivals are almost certain to follow and experts predict that rates will
fall even lower over the coming months. Around 50,000 people a year buy
an annuity, with up to £20billion of their hard-earned cash ploughed
into the investment products.
The
decision about which annuity to buy, when to buy it and which company
to buy it from is one of the biggest financial decisions a person ever
has to make.
Because it dictates how much money a
pensioner will get every month for the rest of his or her life, it can
mean the difference between enjoying a comfortable retirement, and a
retirement surviving at the most basic level.
Today's research, from the financial information firm Moneyfacts, looked at the annuity which a £10,000 pension pot can buy.
In
1995, a 65-year-old man buying an annuity would have received an
average annual payout of £1,111. Today, a man of the same age with the
same pension pot would get just £606 a year, a drop of 5 per cent which
shows how rapidly annuity rates have plummeted.
Just 12 months ago, the same fund would have bought a pension of £647 a year.
The
average pension pot is about £30,000. For a man aged 65, this would
have resulted in an annuity worth around £3,300 a year in 1995,
compared with just £1,800 today.
The report's author, Richard Eagling, said the findings would be 'a rude awakening for many'.
The victims will be 'baby-boomers', born after the end of the Second World War who are now starting to retire.
After
a lifetime of saving into a pension, many will be shocked and
disappointed by the income that they will get from it, and feel that
they are being forced into staying at work.
Dr
Ros Altmann, a pensions expert and former Treasury adviser, said:
'Pension savings are being decimated by these appalling annuity rates.
'These
poor people have saved all their lives, and they are being locked into
these terrible annuity deals for the rest of their lives.'
Tom
McPhail, head of pensions research at the independent financial
advisers Hargreaves Lansdown, predicted that the worrying situation
will get even worse.
He said: 'This is a retirement crisis that is happening now. Annuity rates are likely to fall further in the immediate future.'
He
urged people to shop around when they come to cash in their pension,
rather than take out an annuity with their pension company.
About two-thirds of people fail to look elsewhere, despite the fact that it is almost always possible to find a better deal.
The rates vary according to key issues, such as age, gender and physical health.
The annuity rate crisis highlights the growing pensions apartheid in Britain between public sector workers and everybody else.
State workers get a gold-plated 'defined benefit' pension, which means they do not have to buy an annuity.
The
majority of private sector workers do not even have a pension. If they
do have one, it is likely to be a 'defined contribution' pension,
which means they do have to buy an annuity.
More
than 40 per cent of employers are threatening to slash the amount of
money they pay into their workers' pensions over the next few years.
At
present, bosses are under no legal obligation to pay into a pension
for workers, but from October 2012 they must pay at least three per
cent of salary into a retirement pot for every employee.
A
survey by the Association of Consulting Actuaries of firms employing
more than 1,000 people found that 41 per cent of bosses may cut the
amount they currently pay into their existing pension scheme, or close
existing generous pension schemes and sign everybody up into a new,
less generous pension.
Pension poverty
is a recurring theme on my blog. I saw this coming years ago, but
it's much worse than I envisioned. Oddly enough, some people think we
shouldn't address the retirement crisis, just let these people suffer
and live on a fraction of what they were expecting to retire on
comfortably.
Anything we do now is too late. It's a disaster and what's going on in
the UK is happening across Europe and will soon reach North America.
Historic low rates have decimated savers, forcing them to speculate in
the markets to try to make up for the lost income due to low annuity
rates. But in this wolf market, forcing people to speculate is like herding lambs to their slaughter.
Policymakers
around the world need to first admit there is a retirement crisis and
then have to formulate a comprehensive strategy to reform the financial
system and retirement systems so that they limit the damage as much as
possible. Too many people are slipping through the cracks, and my
biggest fear is that the retirement crisis will get much worse as
demographic pressures swamp us.
Below, listen to an interview with Dr. Ros Altmann which took place last
year. If we ignore this crisis, it will spread and end up costing us a
lot more than if we took measures to address it now. If there was ever a
time for pension reform, now is it. This should serve as a wake-up call
for those politicians and analysts who foolishly believe that everything
is fine. Nothing can be further from the truth.
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Why are you people still playing games with asswipe when you need to be accumulating bullion? If you are playing games with asswipe then at least be a guerrilla and keep converting your FRNs. Stop letting the Boyz dictate your horizon.
You make it sound as if housing is free and home ownership is a suckers bet. Most people don't carry there mortgages to term length and after payoff, including taxes, is cheap housing.
My parents paid off there 30yr in 14 years and have been paying taxes that amount to 1/3 of advertised rent for the past 25 years. They reversed mortgaged at the top of the maket in 2006 and living large.
Leo, I do not understand your entire macroeconomic picture. If you recognize a pension crisis, you also need to recognize the implications. First, under law if private plans are underfunded, companies will have to make pension contributions from their earnings. This will equal lower earnings, which will reduce stock prices which will increase the underfunding. Second, if the plan has a lump sum feature, ZIRP results in higher lump sums, thereby resulting in larger lump sum payments and again greater underfunding. Third, there is now easy way of reducing payments in the private sector short of bankruptcy. If companies go bankrupt then again a drop in equities. Also, in bankruptcy the PBGC guarantees a certain level. From a macro viewpoint the plan beneficiary will have a reduced benefit and less money to spend in the economy.
In the public sector, underfunding will have to be dealt with through increases in taxes. Alternatively, there will be long and uncertain court fights on the ability to reduce public sector benefits (all paid for by the taxpayer).
Your scenario strike me as deflationary - large underfunding, greater contributions reduced corporate earnings, smaller pension checks for pensioners to spend and greater taxes. This is a near perfect negative feedback loop. The Fed is going to inflate what?
Correct, the pension crisis is deflationary, which is why the Fed will fight it using all the tools at their disposal. As for corporations, they are lobbying politicians to extend the amortization period, and being flush with cash, they are going to make payments. Moreover, they are cutting DB plans and shifting employees on DC plans, effectively placing the responsibility on individuals. But in this wolf market, allowing individuals to fend for themselves while public sector workers enjoy gold plated pensions is simply unjust and immoral. It's a disaster, and the article I posted shows how bad things are.
Dude, telling people "Don't worry, we'll take care of you" is even more criminal, be it from Govt or from private industry. And instead of trying to "do right" by the private worker by lifting him up to the level of the public worker is a bit horse-before-the-cart.
Pensions started out as a gratuity for long service (typically life-long service) to those few who lived to achieve them, but they grew over the past century into scams whereby future compensation could be promised with the full knowledge that it would rarely be collected on. It was a fluke that the mass of workers started regularly living long enough to actually start to collecting on these promises that sowed the seeds of their destruction.
Pensions as we know them are less than a few generations old, i.e. hardly a tradition, they were a dumb idea to begin with, and to get all misty-eyed about preserving them is the hallmark of a lunacy focused on debasing human character.
Pensions are a coming crisis of equal magnitude to the mortgage crisis, the sovereign debt crisis, and the entitlement funding crisis. There simply aren't enough assets on the planet to pay for it all.
One of the contributors to this crisis is the Fed's zero interest rate policy, which robs seniors of a reasonable return on their money, while simultaneously forcing them to take inordinate risk which ultimately mounts the losses when those risky investments fail.
We are all soon to be self-reliant, whether we like it or not. The day swiftly approaches when we will all be back to square one. What a crime against the world's seniors! What a crime against humanity!
The pensions will not be paid - overpromised and will be underdelivered. Taxes will not be raised to permit public pension systems to honor their promises. Public employee unions will fail to deliver on their supposed benefits of membership. Say bye bye to defined benefits everywhere.
I slagged a couple of posters that were gratuitously nasty to Leo. I find Mr. Krasting's comment to be civil and topical.
As always, slobs like me that have paid in huge to the gombit tax rackets are going to be stiffed and left to fend for themselves with what I have saved outside of the gooscams. I knew that would be the case ever since I was in high school at the time that all SS was rolled into the goobudget. My loss of all of the SS "contributions" and my loss of purchasing value with the scammy insurance vehicles along the way is my own fault. I knew that the numbers couldn't add up and I knew that all was spent and never would be anything like a retirement plan holding saved capital.
My problem with the whole setup is that I did do some of the avenues that were supposed to have an existence outside of the SS and other gooscams. Well, those savings vehicles are at the mercy of the FED and their corrupt banking system that managed to steal all of the productivity increase that my funds were supposed to provide to productive enterprise.
Not only did the FED banks steal the greatest portion of productivity improvements from the past twenty years, they are going to take the next decades of real capital to save their bankrupt asses. How's that FDIC fund doing?
I have come to hate all goomint after decades of experience with them.
Homeland Security was set up on the backs of those to be opressed in order to provide protection to the smae filth that destroyed what little was left of the US free market economy and the real productive middle class.
Anarcho/paleo-libertarians saw that the Balkan wars of the 1990's were a training ground fo what was in store for the pissed off remains of the productive middle class after the planned gutting.
Sorry, I just don't buy that, "no one saw it coming".
Gee, it turns out that letting generations of people rely on someone else to manage and plan their retirement savings was not such a good idea after all, and these poor "victims" now face what hundreds of generations before the 20th century faced, i.e. save, rely on family, or find another benefactor.
Seriously, you think "fixing this problem" and "saving these poor victims" and further promoting dependency is going be in the best interests of humanity as a whole?
The road to ... ah, you know the old maxim!
Trusting liability remote strangers with your financial future turns out to be not such a great idea. What a surprise.
Leo, there is simply nothing that can be done except to try to get government to glom money out of the taxpayer in the same way that public sector workers have done successfully for decades.
This is not even an "economic crisis": it's a PRODUCTIVITY crisis at root, with too many people producing too little real wealth and being remunerated in increasingly worthless paper. When nearly every 'investment' is a derivative of some other kind of financial derivative and so little real wealth is directly generated from wealth-producing activity, we can only eventually face raging price inflation.
The woman interviewed never once questioned whether 'investment' in the stock market ever produced anything other than more paper money...
+1
And 'productivity' and GDP aren't being measured properly at all.
I use this example: Me and You get together at a restaurant one morning, and make loans to each other. I lend you $1M, and you lend me $1M. We each charge each other $10,000 in fees for arranging the loan.
How much GDP has been created through our coffee date? The modern definition of GDP would suggest $20,000, since $20,000 of fee revenue was generated. But in reality, the net economic output of our transaction is exactly $0 (actually worse, since coffee, transportation, and paper costs money!).
Folks, the entire economy is based upon transactions, such as the sham I just described above, which create absolutely nothing. And until these shames are excised from the economy, and the people who engage in them rendered bankrupt, there won't be a recovery, and pensioners can look forward to being on the receiving end of sweet nothings from their annuities.
Not to mention the additions to GDP caused by tragedies such as Katrina, 9/11, floods and fire. Really not a lot of productive growth but it all adds to the number that CNBC likes to tout.
+1
But that's not all. Pension funds have been forced, by the demands of their competitors and the living standards expected by the recipients themselves, to speculate in the stock markets & elsewhere. They bought loads of CMBS, CDOs, CDSs and bonds. They own large blocks of stock in retailers, in financials, in insurers, in real estate trusts.
Now, suppose a conservative pension fund had stuck to cash in moneymarkets, to miners like Freeport and Anglogold Ashanti, and to dividend-paying basic agriculture/food like General Mills, Cadbury, Monsanto, Mosaic, or ConAgra. Their returns to the recipients would have been more mediocre for a long time, but they would have held up better, and been much more sustainable than the flakey caffeine highs expected today.
Living standards are falling and will continue to do so until equilibrium is reached.
Yeah, some of those firms, over the past decade, could be barely even given away; they traded at such depressed valuations relative to their worth, and relative to other firms in the market.
Of course, because nobody valued those firms, real industrial firms, properly, the undervaluations became a self-fulfilling prophecy. Instead of having high shares,and cheap equity financing for the energy industry, to wean ourselves off of foreign oil, the market collectively bid junk like Google up to insane P/E levels, and bid MBS to the moon.
"...a 65-year-old man buying an annuity would have received an average annual payout of £1,111. Today, a man of the same age with the same pension pot would get just £606 a year, a drop of 5 per cent which shows how rapidly annuity rates have plummeted."
How is 606 only 5% less than 1,111?
Shouldn't the difference be something like 45%?
Leo,
When you say pension reform exactly what are you talking about? Sounds expensive.
It doesn't need to be expensive. You can fund the retirement systems using realistic investment assumptions and appropriate contribution rates. Moreover, by pooling assets together, you can lower investment fees. What will be expensive, however, is the exploding medical and social costs of pension poverty. Hardly anyone has factored this into their budgets.
Sensible pension reform should start by aligning private and public pensions.
As things stand an aristocracy of sixty somethings will scoop the public pension pot over the next ten years or so.
Sorry we can't all have what we feel we have been promised. But let's not pay six figures to some, less than $10K to others.
Pensions and Benefits after stopping your employment died back in the late 80's along with the mantra of being loyal to your employer.
The best you can hope for is to be free and clear of debts before you hit 50. After that? Just do the best you can.
The children entering the workforce now will never see a pension and or a annuity. They will chose to stay liquid at all times.
Leo:
What ever happened to the FASB rule that was suppose to require companies to bring all pensions fund up to fully funded. I thought that rule had past all committees ans was to take affect in 2011. Di it go the way of Mark to market....or am I completely off base on this one???
Thanks
Went the way of Herz the FASB chief and the promise of mark to market. Realism can not be tolerated.
As US corporate pension deficits keep widening, they bought more time and asked that these deficits be amortized over a longer period.
Regardless of whether you are right or wrong, I admit your thick skin.
Leo's primary focus these days (apart from ignoring the entirety of ZH's content, and posting drivel worthy of FOX News) seems to be coinage of a new phrase. Black sloth? Way to ride on the coattails of others Leo.
Umm, a bit late there bud, used that expression back in January when I posted my Outook 2010:
http://pensionpulse.blogspot.com/2010/01/outlook-2010-black-swans-or-black.html
But nice try, always appreciate irrelevant responses from lazy twirps who never blogged a day in their lives and think it's easy.
"lazy twirps who never blogged a day in their lives and think it's easy"
......Classic Kolivakis "Smackarrhea", tough as nails.
"Policymakers around the world need to first admit there is a retirement crisis and then have to formulate a comprehensive strategy to reform the financial system and retirement systems so that they limit the damage as much as possible."
And who will these "policymakers" be? The same bunch of charlatan nitwits who were bribed by contributions from the financial industry? Helping to formulate that comprehensive strategy ought to be thrilling for the banksters...one final picking of the flesh from the bones.
Something tells me the banksters will have much less influence on pension reform. They've been exposed and politicians aren't dumb enough to allow them to run the retirement system into the ground. At least I hope not.
Just what is telling you this? Must be that hopium you are smoking.
Show me one shred of evidence that "politicians aren't dumb enough to allow them to run the retirement system into the ground." On the contrary, everything I have seen in my 6 decades points in the opposite direction.
Logan's Run bitchez !
This is true. How convenient would it be in the Stalinist worldview to have a virus tailored to infect members of a certain age cohort or older, with no immunity?
Dear Leo, if policymakers have not reformed the financial system, a bankrupt Social Security system, a bankrupt public pension system and a bankrupt health care system, why would anyone think that they could possibly care about the plight of people 65 and over? How many election cycles are the 65 and over crowd good for anyway? But the President seems to be having a nice time on his vacations, and that's important.
My point is: who is going to take to the streets on behalf of this issue? Because once you get past the public employee unions protecting their benefits, no one really cares no matter how many Cassandras we have.
Mitchman,
CARP has been leading the battle for pension reform up here in Canada, and I am sure AARP will lead it down south. To ignore these voices is political suicide. More importantly, it's immoral.
Leo, CARP is now a marketing, magazine, radio and TV business. It's a private for-profit enterprise. AARP also seems to exist more to licence the use of their mailing list than anything else - look at what AARP management pay themselves and it will look like any government / finance business.
Government tax policy both in the US and Canada is designed to force the saver into the market to get fleeced. ZIRP destroys the retirement future of anyone that saved for their later years. The real issue is the excessive, wonderful, glorious guaranteed by you and me - public sector pensions. The average public sector employee has a plan worth over a million dollars (annual benefit over 25-years). There are now two classes of retiree - public sector royalty and the rest of us.
Leo, thank you for the reply but my faith in AARP went down the drain with their backing of the health care reform bill. They showed themselves willing to do the politically craven thing rather than what was best for their members. Thus my comment. But I hope that I am wrong and that you are correct.
Fixed income has been, outside of commodities, the best performing asset class over the past decade. How fair is it that the risk takers (equity owners) have received no return, while the coupon clippers (bond owners) have absolutely cleaned up?
Equities really aren't as dangerous as people make them out to be, especially for retired people. For instance, over the past couple years, yes, equities lost half their value (at the worst of it!), but the price of much of the consumption basket of a typical senior dropped severely in price (ie: air travel, petrol, etc.). Despite ZIRP, the average senior has never been better off before in the history of the world, as they have been in the past few years.
The lack of deflationary indexing on Social Security has also been of great assistance to seniors. But I agree with you Leo and your earlier comments, that the gravy train is likely to end for seniors as the bond market and the value of the dollar suffers over the coming years.
The lack of deflationary indexing on Social Security has also been of great assistance to seniors.
Yeah, that deflation is really making us rich. Look at those food prices dropping. Watch that heating oil cost go down. Ooh, my property tax is less than half what it was last year.
Deflation, the one thing that's keeping our day to day prices so affordable, and lowering them every day.
I heard about the CalPers coming disaster five years ago from someone in Schwarzenegger's administration. Source told me the top adminisrtators new about the future collapse of the fund, but with out the support of the people they would have to let it crash as they informed the people of the disaster and not before. Recently CalPers had to request $600 million from the state just to keep from going broke (I know it was already posted on ZH).
What's the name of the French book... "In Praise of Treason"? I can't find a copy anywhere. Was watching a documentarty on the economic collapse of Argentina and one of the Argentinian officials stated that you have to lie to the people, if you tell them the truth you will never get elected. I am no longer suprised about the criminals running the government, I have learend to accept it, to anticipate their moves and prepare for them. I realize now my pension is toast after all these years.
Thanks for the posts Leo.
Leo,
I am constantly confused by your reporting and your views of the world. They are at odds.
This story is about ZIRP killing pensioners. That is an old story. Two years now. As ZIRP is prolonged the impact will be greater. Globally this is transferring billions in wealth every year. It will change everything. It is going to make a mess of things.
But then there is the other Leo, The one that thinks that ZIRP is good because it will force these pensioners into speculative equities so they can try to stay afloat. But that will backfire. They will lose half what they have.
You also write often of the evil spirits on Wall Street. That they are bunch of greedy crooks. Okay. But you're conflicted too. How can you defend ZIRP on the basis that Chinese stocks will go up when you see the destruction right in front of you that it is causing? You have the same conflicts as the guys with the white spats. You are trying to make a buck in a zero sum game. Your win is another's loss.
Bruce nailed it.
Yes, Leo, you're right that pension problems predate Zirp. They have been building ever since the boomers and their public and private pension managers started filling their retirement savings with public debt and low- and no-dividend stocks, both of which are inherently hard to get value from when the next generation is smaller than your own.
Why don't you do some serious analysis of your own on that? Instead you just cut and paste some journalistic article that's all about the affects of Zirp, and then tack on your own commentary in which you pretend today to also be outraged about Zirp, although we all know here that most days you worship at the feet of Zirp.
I'm all for a diversity of views here on ZH. But you're giving us a diversity of views within one person, none of them well thought out or well argued.
Bruce,
Pension problems predate ZIRP. That only exacerbated them, but listen to the interview with Ros Altmann. What you don't understand, or are unwilling to admit, is that there is no choice left for Bubble Ben. The Fed will pull out all the stops to reflate and inflate their way out of this mess. What really worries me is that the wolves know this, and have been scooping up equities, while the scared sheep keep ploughing into bond funds. Another disaster in the making.
How's that reflation thingie working out for them?
The only thing they can reflate that matters is wages. And that can't happen under the globalist model of plantation capitalism.
The wolves have been buying equities for 20 years, when they should have been buying bonds. The pension problem is a direct result of incorrect asset allocation by "experts". Now, after the biggest credit melt down in 70 years, we are experiencing economic deterioration after an oh so modest bounce. And you are still on the equity mantra. Leo, your experise will be tested and found wanting.
GS,
My response to that is it depends on deflation. If you're convinced deflation is coming, and will lead to our lost decade, stick with bonds. I am not convinced:
For the last decade, we haven't had deflation, and yet bonds have outperformed stock by 7%+ annually. So why are pensions in such bad shape? Too much stock, not enough bonds. This is a fact that cannot be disputed. So what caused the poor equity returns? Growth was fueled by debt that has come crumbling down. If this was near resolution, I would agree with you equities would be the place to be. But it's not over. We are about to enter Act 2 of the shitstorm. The evidence in front of you is overwhelming.
Maybe its the other way around; too many bonds, not enough stock. In the past decade, thanks to these moron pension funds, mortgages and LBO's were funded "till the cows come home", but there wasn't any equity funding available to start up new businesses, or rebuild energy infrastructure. Predictably, the system collapsed upon itself because the pension funds' bond investments were financing consumption (in housing, in wasteful financial sector salaries, in consumer credit), and not investment.
Kind of paradoxical, eh? I mean, how else do we end up with the sheer absurdity of the stock market trading at a P/E of 12-15, with the bond market trading at an equivalent of a 50-100 P/E? Never before has there been such a wide spread between the earnings yield implied by stocks, and those of bonds. Someone is seriously on the wrong end of the trade here, and I suspect it won't be where the lemmings are flocking right now (it never is!).
We just had a lost decade, (plus two years) the S&P is at 1998 levels and heading much lower.
Deflation is not coming, it is here... house prices are going down, real wages down, interest rates down, employment down, private spending down, standard of living down.
"there is no choice left for Bubble Ben"
He could choose to tell the truth Leo, no growth here at home as far as the eye can see... We can print more debt, extend and pretend. The truth is we are not going to meet obligations in the future one way or the other.
The truth is that the Fed has the power to reflate & inflate this sucker...wolves are hungry and they're demanding it!