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Guest Post: Next In Line For Implosion: Pension Plans

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

Next In Line for Implosion: Pension Plans

Pension plans are based on 8% annual growth forever. What happens to these plans in a zero-interest rate world as the global economy and stock markets contract?

I'm afraid it's time for an intervention. I don't enjoy being the bearer of difficult news, but now that Europe has stumbled drunkenly into the pool and been "rescued," it's once again tearfully blubbering that this time it's all going to change, and a new prime minister in each dysfunctional, insolvent EU nation is going to make the pain and the addiction all go away.

It's time we face the reality that Europe and the U.S. are full-blown financial alcoholics, addicted to illusion and debt. And what do they turn to as "solutions"? The very sources of their pain: illusory "fixes" and more debt. Have you ever seen a global market as dependent on rumors of "magical fixes" for its "resilience" as this one?

What's truly remarkable is the psychotic distance between the facts--Europe's debts are impossible to service, its economy is free-falling into recession, the U.S. is already in recession, China's real estate bubble has popped and cannot be reinflated-- and the heady leap of global markets on every trivial rumor of a magic fix.

Since it runs in our family, I do not use the word "alcoholic" lightly. Those of you who have to deal with alcoholics know the drill: the liquor stashed behind the fridge, as if everyone doesn't know it's there; the stumbling into the pool, the humiliating rescue, the tearful promise of change which goes nowhere, and all the rest.

I seriously suspect the entire global economy is alcoholic--not about liquor, but about debt and the impossibility of paying entitlements which expand by 8% a year in an economy which grows by 2% a year at best. In all the millions of words printed about the subprime meltdown, the gutting of the U.S. financial and housing markets and now about Europe's impossible burden of debt, how often have we seen anyone in the MSM or mainstream financial press confess that "borrowing our way of out of trouble" is not just financially bankrupt but morally bankrupt as well?

Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger from debt source to debt source, weaving drunkenly between "stashes" of new debt in the Fed, Treasury and private sector markets. Despite the abject failure of the magical-thinking "fix" of becoming solvent by exponentially expanding debt, we see the same pathetic pattern repeating in Europe, where the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low.

While everyone is focused on the drunk being pulled from the pool--Europe's sovereign debt--another drunk is teetering on the edge: public and private pension plans. Here's the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever.

Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to "spark growth." Unfortunately the only thing being goosed is the future cost of servicing the additional debt.

How do you earn 8% on money which yields at best 3%? You can't. How do you reap a gain on bonds when interest rates have already hit bottom and can't fall any lower? You can't.

Which leaves the stock market as the only hope for pension plans. Since the bottom in March 2009, central banks engineered a "magic solution" that generated fantastic stock market returns: by constantly lowering interest rates and increasing liquidity, central banks force-fed stock markets with demand (there was no other place to get a fat return) and the see-saw of interest rates and "risk-on" equity markets: as rates decline, equities floated ever higher.

Now that rates are near-zero, then the central banks are pushing on a string: there is no "magic" left to juice equity markets.

The equity markets are in effect living on vitamin C and cocaine: rumors of new "magic fixes" and the hit of central bank infusions.

Once rumor is no longer enough to float markets higher, then the consequences of depending on stock market returns will hit pensions with a terminal case of the DTs.

The "magic" of ramping up debt to create the illusion of a healthy economy only works once. The "fix" "worked" from 2009 to 2011, but now the high is wearing off. The next round of rumor and debt expansion won't even create the illusion of growth, as the global economy is already careening back into the contraction that trillions in new debt staved off for three years.

I have covered the disconnect between the promises of 8% yields forever built into public pension plans and a slow-growth/no-growth economy many times:

Yes, There Will Be Armageddon: Government Goes Bankrupt (July 24, 2008)

How the Fed Pushed the Nation's Pension Plans--and Local Government--into Insolvency (May 24, 2010)

Public Pension and Healthcare Costs and Financial Common Sense (February 28, 2011)

Every once in a while an MSM outlet addresses the issue directly, for example:

Pension issue balloons with soaring costs (S.F. Chronicle):

Pension costs are soaring to $800 million, tripling during the last decade, as Los Angeles faces years of projected budget deficits even with deep cuts in services and staff.


The main driver of higher pension costs is the stock market crash. CalPERS (California's primary public pension plan) gets about 75 percent of its revenue from investment earnings. Its portfolio peaked at $260 billion in 2007, fell to $160 billion last year and now is about $204 billion.

Why economic growth isn't enough to fix budgets:

But under the laws now dominating government budgets, many expenditures essentially are or will be growing faster than both revenues and the rest of the economy. In fact, in many areas of the budget, automatic expenditure growth matches or outstrips revenue growth under almost any conceivable rate of economic growth.


Now, so much spending growth is built into permanent or mandatory programs that they essentially absorb much or all revenue growth. Meanwhile, we've also cut taxes, widening the gap between available revenues and growing spending levels.


Consider government retirement programs. Most are effectively "wage-indexed" insofar as a 10 percent higher growth rate of wages doesn't just raise taxes on those wages, it also raises the annual benefits of all future retirees by 10 percent. Meanwhile, in most retirement systems, employees stop working at fixed ages, even though for decades Americans have been living longer.


Today, so much of government spending is devoted to health and retirement programs that their growing costs tend to swamp gains we might achieve in holding down the ever-smaller portion of the budget devoted to discretionary spending. Still other programs add to the problem, such as tax subsidies for employee benefits, the cost of which grows automatically without any new legislation.

In other words, the entire system of state and local government is now based on the same 8% "permanent high growth" of the 1990s speculative market. Funding increases are wired in, regardless of how much tax revenues fall. That is a recipe for insolvency.

Now we get to the heart of the matter. Which institution engineered the heady stock market bubble of the 1990s that created the illusion of "permanent high returns" and growth of tax receipts? The Federal Reserve. Which institution has made the stock market the proxy for the economy? The Federal Reserve. Which institution has engineered a three-year stock market rally to put off the inevitable implosion of pension plans, entitlements and tax revenues that must grow by 8% annually while the real economy is flat-lined? The Federal Reserve.

We can ask the same questions of Europe and get the same answer there, too: the European Central Bank (ECB).

Addiction is a terrible disease, founded on the illusion that the pain of facing reality can be put off forever by dulling the pain of addiction itself with ever-higher doses of self-destruction. We are witnessing the self-destruction of economies and machines of governance that have chosen denial, illusion, rumor and magical thinking over facing reality. The drunk has been pulled from the pool once again, slobbering self-piteously and promising to really, really change tomorrow, and we believe the lie, at least until morning, because hope is so much easier than reality.


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Tue, 11/08/2011 - 13:13 | 1856884 RaymondKHessel
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Shocking! Just shocking!

Tue, 11/08/2011 - 13:14 | 1856889 CPL
CPL's picture

Are you agawk with shock?

Tue, 11/08/2011 - 13:17 | 1856905 Ahmeexnal
Ahmeexnal's picture

time to increase the SOMA dose to the plebes

Tue, 11/08/2011 - 13:30 | 1856958 TruthInSunshine
TruthInSunshine's picture


Tue, 11/08/2011 - 13:36 | 1856986 The Big Ching-aso
The Big Ching-aso's picture

"Solar this, Leo!"

Tue, 11/08/2011 - 14:05 | 1857124 akak
akak's picture

"Chinese solar stocks, bitchez!"


I wonder if little leo is still going out to lunch with various pension managers, who are increasingly sweating as they try to convince him that "all is well, nothing to see here. this isn't the pending financial implosion you're looking for".  (Although personally, I think leo was and is always out to lunch.)

Tue, 11/08/2011 - 15:39 | 1857761 pelican
pelican's picture

You would think they would legalize already so the masses can forget about this shit salad.

Tue, 11/08/2011 - 17:25 | 1858311 s2man
s2man's picture

Give wine to the poor, strong drink to the dying.

Tue, 11/08/2011 - 13:37 | 1856990 SheepHerder
SheepHerder's picture

"Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger..."

For anyone familiar with Bill Wilson's work, the parallels between an alcoholic and American society are numerous.  The solution is also the same.

Tue, 11/08/2011 - 14:44 | 1857418 El Viejo
El Viejo's picture

Is 24:20 The earth will stagger like a drunkard...


Tue, 11/08/2011 - 16:46 | 1858096 G-R-U-N-T
G-R-U-N-T's picture

Indeed SH, Indeed!!!

Tue, 11/08/2011 - 13:59 | 1857112 Ruffcut
Ruffcut's picture

If I had a pension plan, I'd of had it with lehman buttbros or bernie madoff.  Fuck having th returns on investment, but the return of anything.

Tue, 11/08/2011 - 13:13 | 1856885 CPL
CPL's picture

The largest pile of derivatives on the planet ladies and gentlemen that "might" provide 30% of what was promised.


Tue, 11/08/2011 - 13:14 | 1856890 Soda Popinski
Soda Popinski's picture

At this point, I think I'd trust Homer Simpson over CNBC for investment advice.

Lenny: Hey, Homer! How come you've got money to burn? Or singe, anyway?

Carl: Yeah, Homer, what's your secret investment?

Homer: Take a guess.

Barney: Uh, pumpkins?

Homer: [pause] Yeah, that's right, Barney. This year, I invested in pumpkins. They've been going up the whole month of October and I got a feeling they're going to peak right around January. Then, bang! That's when I'll cash in.

Tue, 11/08/2011 - 13:15 | 1856901 AngryGerman
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"Aaaaaaaaaaand it's gone!"


"It's gone, it's all gone!!"

Tue, 11/08/2011 - 15:38 | 1857756 TheFourthStooge-ing
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That bit never gets old. It's so funny because it's so true.


Tue, 11/08/2011 - 13:14 | 1856891 AngryGerman
AngryGerman's picture

All pensions are fucked, that's nothing new. defined contriubution, you don't get anything out anymore. defined benefits, they'll increase further and further.

if you don't take care of yourself, you're fucked.

state pensions will be down to social security by 2025 to 2050.

and you think you have a problem? look at fucking china. yellow rise eaters don't even have something remotely like a pension system. they'll just send all there old into the countryside to starve to death. well, that's also a solution.

Tue, 11/08/2011 - 13:41 | 1857005 The Big Ching-aso
The Big Ching-aso's picture 2025 to 2050?

Truly you jest.


Tue, 11/08/2011 - 15:39 | 1857765 TheFourthStooge-ing
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He's being a bit of an optimist.


Tue, 11/08/2011 - 13:14 | 1856892 RaymondKHessel
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My pension plan

45 acp model 21
243 w scope 3x9 for long range peck off......rugar

Tue, 11/08/2011 - 13:32 | 1856966 gmrpeabody
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Good luck with that.

Tue, 11/08/2011 - 13:56 | 1857091 Bastiat
Bastiat's picture

So you plan to shot people at long range then pick their pockets and take their gold teeth?

Tue, 11/08/2011 - 14:10 | 1857173 DollarMenu
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Nah, he will sneak up on his Rascal and wave the thing around.

His arthritic hands won't let him squeeze the trigger.

Tue, 11/08/2011 - 14:02 | 1857126 LFMayor
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if you think a .243 is for "long range" then you're in for a bfs.

Tue, 11/08/2011 - 13:30 | 1856893 fuu
fuu's picture

We would be grateful if they were dead, instead they just keep on truckin.

"The equity markets are in effect living on vitamin C and cocaine"

Tue, 11/08/2011 - 13:37 | 1856992 Steaming_Wookie_Doo
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Dead indeed. I think that is the unspoken plan-- to have at least 1-2 million Boomers die of austerity over the next decade or so, generally quietly at home or in a hospital where proper care is rationed out in NHS style small amounts. Well, maybe it's 10-20 million, who knows. But the results will be undeniable. I reckon the Feds and States have bean counters who figure out if you kill X amount of folks then the pension funds will go back into balance (and without having to stop skimming for their little vig).

Tue, 11/08/2011 - 13:45 | 1857022 Manthong
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 “Pension plans are based on 8% annual growth forever.”


“Your typical city involved in a typical daydream
Hang it up and see what tomorrow brings”

Tue, 11/08/2011 - 13:58 | 1857108 fuu
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Tue, 11/08/2011 - 14:54 | 1857504 Diogenes
Diogenes's picture

Living on Reds, Vitamin C and Cocaine.

All her friends can say is Ain't it a shame.

Tue, 11/08/2011 - 15:15 | 1857632 Diogenes
Diogenes's picture

Living on Reds, Vitamin C and Cocaine.

All her friends can say is Ain't it a shame.

Tue, 11/08/2011 - 15:42 | 1857781 pelican
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What are you truckin like the du dah man?

Tue, 11/08/2011 - 13:14 | 1856894 hannah
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ALL THE USA NEEDS TO DO IS START TAXING FICA FROM CHINA...! i should get paid for all these genius ideas.

Tue, 11/08/2011 - 13:15 | 1856896 RobotTrader
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Meanwhile, PCLN is up 6%

Shatner is knee deep in booze and hookers again

Stock has gone from $30 to $530 since he's been pitching it.

Hands down the most astounding 10-year chart in history.

Tue, 11/08/2011 - 13:22 | 1856926 Astute Investor
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Too bad your chart doesn't go back farther.  PCLN back to March 2000 levels after only 11 years.

Tue, 11/08/2011 - 13:33 | 1856974 gmrpeabody
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Wouldn't that make it a bubble?

Tue, 11/08/2011 - 13:34 | 1856979 LouisDega
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Whats a chart?

Tue, 11/08/2011 - 13:42 | 1857011 somethingisrotten
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How's that NFLX and FSLR ski slope doing for ya, MoMo ??????????

Tue, 11/08/2011 - 13:44 | 1857013 LouisDega
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That and The Duggars are having their 20th child. Its all good i tell ya

Tue, 11/08/2011 - 14:51 | 1857477 ThirdCoastSurfer
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How is it that airlines and trains can't tun a profit but Priceline and the like are swimming in cash? 

Tue, 11/08/2011 - 14:54 | 1857503 ThirdCoastSurfer
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How is it that airlines and trains can't tun a profit but Priceline and the like are swimming in cash? 

Tue, 11/08/2011 - 13:15 | 1856897 Quintus
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Tue, 11/08/2011 - 13:15 | 1856898 Divided States ...
Divided States of America's picture

Yeah thats the definition of a ponzi. Guess they should just rename it to PONZION Plans.

Tue, 11/08/2011 - 13:16 | 1856900 Hard1
Hard1's picture

The only people who have their retirement number right are non-financial guys like lawyers and destists who said...OK I need 100k a year for 30-35/yrs, that's 3.5 MM, no problem. I'll generate that in the next 5 years.  The pension industry is screwed.  

Go on Bernank, lower rates 4eva.  I wonder if the marginal dollar spent on consuming useless chinese $1 dollar stuff will make up for the extra 10 years that baby boomers need to work and save.

Tue, 11/08/2011 - 13:18 | 1856908 AngryGerman
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but all these lawyers and dentists listened to their friendly neighborhood financial advisor and invested substantial amounts in equities in 1999 and 2007.

and now they are fucked like anyone else.

Tue, 11/08/2011 - 13:26 | 1856940 Hansel
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And all the new lawyers and doctors are in debt up to their eyeballs.  They're broke like everyone else.

Tue, 11/08/2011 - 13:36 | 1856983 Temporalist
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I know a dentist that I told to keep all of the gold fillings he removed if the patients didn't want it.  He didn't listen and now they all want to keep them.

I know a lawyer that I told to buy PMs for his newborn years ago and I think instead it was invested in a couple TBTF banks.


Dentists and lawyers are no investing geniuses...

Tue, 11/08/2011 - 13:59 | 1857109 Bastiat
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How about creating a conduit vehicle for investing in pooled crematorium smelter royalties?

Tue, 11/08/2011 - 14:47 | 1857437 NotApplicable
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My dentist owns several buildings in his office park, which hasn't worked out quite like he planned. "I wish I had bought some gold," he tells me.

Thu, 01/05/2012 - 19:29 | 2037431 Jena
Jena's picture

It's not just the new doctors going broke:

Doctors who operate established independant practices are running into cash crunches all over the nation.  We may see the end of such these small business models within the next couple of years, thanks to shrinking Medicare and insurance reimbursement, increased regulations and other costs.

And if any doctors who now accept Medicare patients decided to stop accepting new patients, or to stop practicing altogether and say, get into teaching who could blame them? 

People who believe that healthcare is a right need to consider who will supply that care and at what cost.

Tue, 11/08/2011 - 13:15 | 1856903 spinone
spinone's picture

There is always magic left to juice the equity markets, until there isn't.

Tue, 11/08/2011 - 13:19 | 1856915 AngryGerman
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that's what i'm saying to the misses when i get home completely drunk... just not with "equity markets"

Tue, 11/08/2011 - 13:18 | 1856911 SwingForce
SwingForce's picture

Absolutely, the exponential payout trajectory cannot be met- there are simply not enough taxpayers to foot the bill, even if 100% of their salaries were confiscated. In the words of Michelle Bachman, "Who'd get out of bed to ggo to work?"

Tue, 11/08/2011 - 13:18 | 1856912 etudiant
etudiant's picture

How is any of this different from the last 20 years experience in Japan?

They have had a zero interest rate policy for the period plus a declining/stagnant equity market, yet the Japanese life insurance companies are not yet gone busted.

It would be useful to know how the Japanese have managed to pull this off this far.

Tue, 11/08/2011 - 13:39 | 1856996 CrashisOptimistic
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I'll tell you how.

Walk into a bank in Tokyo and wander around.  There are 75 year olds who could not retire working there.  They seal off promotions from younger people.

Surf around and look up Japan and "grass eater".  That's what they call 28 yr olds who can't find work and are still at home.

Tue, 11/08/2011 - 14:55 | 1857505 Island_Dweller
Island_Dweller's picture

How is any of this different from the last 20 years experience in Japan?


The Japanese Life Insurance Executives aren't sucking away all of the income as bonus and salary like their American counterparts.  Also, Japan still has an industrial base and they had their zirp while the global ponzi was still expanding. Regardless, Japan will end up in the same debt based fiat hell hole as the US.

Tue, 11/08/2011 - 13:19 | 1856914 tempo
tempo's picture

one of the best indicators of danger/risk is the growing number on food stamps, now 46 million (15% of the population) up 8.4% during last year, up 1.2% last month; with CA up 11% and NJ, Delaware, Maryland up 17% over the past year. How can there be any hope of anything but endless deficits and debt given these food stamp numbers??? The social unrest in Greek and Italy will be nothing compared the US if debt does not increase exponentially.

Tue, 11/08/2011 - 13:42 | 1857010 Temporalist
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Someone just mentioned to me they're considering going on food stamps.  I said "Everyone should do it and crash this fucking dumbass system."  Wouldn't that be rich?  To be honest that is what I expect and same with tax revolt.  Free food, no taxes, and mortgage payments deferred indefinitely until the banks decide to foreclose, then declare bankruptcy on the credit cards that are being used to buy iPads and Louis Vuitton keychains for $600.


What a great system!  How can it fail?



Tue, 11/08/2011 - 13:26 | 1856930 Mercury
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I'm not sure how well the alcoholic analogy holds together here.  Eventually the alcoholic just dies and the support and help from third parties ends.

But when public pensions implode they're coming after your private wealth to make them whole.

Tue, 11/08/2011 - 13:27 | 1856946 spinone
spinone's picture

Pretty much.  They'll raise taxes to make up for shortfalls in the performance of the plans. (8% hahahahaha)


Tue, 11/08/2011 - 13:34 | 1856980 CPL
CPL's picture

They are already doing that via inflation.  No one said the pension had to be worth anything.  Just that it had to be given.

Tue, 11/08/2011 - 13:42 | 1857002 Mercury
Mercury's picture

That's what COLAs are for. 

They have no intention of being the ones left holding the bag.

Tue, 11/08/2011 - 14:07 | 1857151 CPL
CPL's picture

COLA and minimum wage have a couple of things in common. 

It's never enough and it's only ever planned by a committee of people that usually will never have to count on it.

Tue, 11/08/2011 - 13:33 | 1856972 CPL
CPL's picture



My suspicion is they've already been spent it all, if it was ever contributed to.  The illusions people hold over the untouchable black box of funds is funny.  Like they had never raided their own piggy bank to spend on useless junk

Tue, 11/08/2011 - 20:29 | 1858939 Mediocritas
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In Australia, they just jacked the compulsory superannuation contribution (made by the employer) from 9% to 12% (soon to be 15%). The left are celebrating of course: "Yeah, stick it to those greedy corporations!", never mind the fact that the 3% boost will either be subtracted from take home pay, or, if that is not permitted, eats into the bottom line leading to less hiring / higher unemployment.

It's being sold as something to help the little people, to make their retirement more secure. Just about everyone loves it except me it seems. What I see is a wave of baby-boomers entering retirement at the same time and a wave of redemption requests. Assets that went up from a steady flow of money to super funds when boomers were working, will come crashing back down as redemptions require assets -> cash. Anyone with half a brain understands why the downside exceeds the upside, so the FIRE lobby pushes the government to find a fresh injection of funds to plug the gap (a gap that feeds the FIRE sector of course).

Lo and behold, the compulsory contribution is jacked up. So now, the current generations of workers are being slugged to keep the funds whole as boomers redeem.

It's a Ponzi scheme, plain and simple. Biggest one yet. The only thing that keeps it going is exponential population growth assuming all those people can find meaningful, well paid employment. Not gonna happen.

Tue, 11/08/2011 - 13:25 | 1856933 Jean
Jean's picture

Related article from deRugy:


The baseline GNP numbers have significant future-confirmation bias, then the salesman for the various funds pump things up ...

Tue, 11/08/2011 - 13:26 | 1856935 gun4A
gun4A's picture

1800 goud mzfkrs

Tue, 11/08/2011 - 13:26 | 1856938 Shizzmoney
Shizzmoney's picture

Just stop paying taxes, guys.  "No taxation without representation".

401Ks and Pensions are the biggest ponzi scheme ever assemled.  The Fed knew the whole time.

Tue, 11/08/2011 - 13:38 | 1856994 SilverDOG
SilverDOG's picture


As Your Financial Power is the Last Power You HAVE.

Tue, 11/08/2011 - 13:26 | 1856941 SwingForce
SwingForce's picture

Speaking of which, has G-Pap quit yet? They never do what they say, do they.

Tue, 11/08/2011 - 13:26 | 1856943 blindman
Tue, 11/08/2011 - 13:26 | 1856944 Subprime JD
Subprime JD's picture


Tue, 11/08/2011 - 13:28 | 1856950 realitybiter
realitybiter's picture

It is so difficult to understand why the accompanying headline today is:


"Wealth Gap between old and young never wider"


The pensions are just another ponzi scheme, like every government program which over burdens new workers to the benefit of old workers.  


Defined benefit is fraud.  Period.  Do the full tard math.  It don't add up.  If you participate, benefit, manage, whatever you are no different than Madoff.


Young people, offer some space to the old and some food...that's it!!  Just like my folks did 80 years ago..speaking of some time ago.....


Then again, a dollar collapse fixes all this shit, nice and neat.  1921: "....and decorated WW1 German General's pensions had been inflated away to nothing, were now panhandling....."

Tue, 11/08/2011 - 13:28 | 1856951 DogSlime
DogSlime's picture

This is precisely why I stopped contributing to my work's pension plan.  Fucking ponzi -my contributions are just going to pay those who are already drawing a pension now.  By the time I am old enough to retire, they will have raised the pension age by at least 10 years and the pot will be empty anyway.

I am now £200 per month better off.  I am using it to buy Gold.

Fuck pension.  I am supposed to TRUST these fuckers with my money?  Money that I get my hands on until I retire?

I still get National Insurance deducted from my wages (UK), so theoretically I will be entitled to a tiny state pension when I am 65... except that pension age by then will most likely be 80.

What a con.

Piss on them all.  Buy Gold.

Tue, 11/08/2011 - 14:07 | 1857156 Temporalist
Temporalist's picture

Don't forget silver.

Tue, 11/08/2011 - 14:18 | 1857241 DogSlime
DogSlime's picture

Unfortunately Silver is subject to 20% VAT in the UK - otherwise I would be 50/50 Gold/Silver.

Tue, 11/08/2011 - 13:29 | 1856955 JustObserving
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Gold $1800 now.    That should have been your pension plan.  With US unfunded liabilities $116 trillion plus and growing at $6 trillion a year, there will be massive inflation.

Precious metals are your pensions.

Tue, 11/08/2011 - 13:30 | 1856961 Temporalist
Temporalist's picture

Was just going to post the same thing...

Tue, 11/08/2011 - 13:43 | 1857016 Steaming_Wookie_Doo
Steaming_Wookie_Doo's picture

Yes, good point. The problem is that pensions can only make "upside" bets, and only with certain instruments. I don't know of any pensions who hold lots of physical gold, miners, heck even wheat would be better than Bear Stearns or TBills. The 8% figure is pure fantasy to keep up over the long run if you are inflexible in your tactics.

Tue, 11/08/2011 - 13:31 | 1856959 ivars
ivars's picture

The more I look at US debt crash correction and future gold/silver charts,

Something does not fit with end of 2013 or beginning of 2014 being the date of US debt crash correction. So the anwer could be:

that defaults of USA Treasury to FED will happen in discrete (DISCRETE as in DISCRETE scale, not as in discrete presence) way starting from November 2012,->and that is the reason of Gold price connection with this election cycle, then FED buys more, then Treasury defaults again etc. It will be kind of a new "permanent"  way of handling country debt and monetary issues combined.

I just wander what other consequences it will bring to USD value  ( vs. commodities, other currencies), will it become fashionable way to handle part of debt in every country (except Europe where partial debt corrections happens as  country by country defaults as there are no local central banks). Than of course every countries currency will devaluate in a similar manner to the USD except that USD will still be sitting on bank balance sheets even if they will receive a default in JPY ( e.g. Japan). So despite US correcting its debt to FED , USD still will have the longest (one of the longest ) lifetimes among currencies. The currencies that can outdo USD will be those where total government debt and other debt in the economy is small relative to GDP, and where USD etc is not too prominent on the balance sheet of central bank.

Also, does it MEAN Ron Paul can make it to president with coming recession etc and consequently exploding debt? Or his idea will be stolen by Obama?

"Congressmen and Presidential hopeful Ron Paul, who chairs the House sub-committee on monetary affairs says the Fed should not be holding this “ficitious” debt any longer against US tax payers."

Tue, 11/08/2011 - 13:31 | 1856963 Whoa Dammit
Whoa Dammit's picture

"How do you earn 8% on money which yields at best 3%? "

Lie. Cheat. Steal. Take your customers' money. 

Tue, 11/08/2011 - 13:36 | 1856975 mt paul
mt paul's picture

gold 1800. $

and change..


Alaska pension fund

underfunded by 11 bil...

Tue, 11/08/2011 - 13:41 | 1857003 fuu
fuu's picture

Alaska's fate is sealed.

Tue, 11/08/2011 - 13:46 | 1857029 CrashisOptimistic
CrashisOptimistic's picture

Gold is irrelevant to these matters.  There is not enough of it to fill any significant allocation % to global pensions.

As for Alaska, their problem is oil.  The erosion of production from Prudhoe is terminal decline.  Oil royalties have funded Alaska for about 35 yrs and that party is over.

Tue, 11/08/2011 - 13:44 | 1857017 oddjob
oddjob's picture

Pebble Deposit has about 70 million ozs. of Gold, dont cry for Alaska.

Tue, 11/08/2011 - 13:35 | 1856981 Greyzone
Greyzone's picture

"Here's the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever.

Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to "spark growth." Unfortunately the only thing being goosed is the future cost of servicing the additional debt.

How do you earn 8% on money which yields at best 3%? You can't. How do you reap a gain on bonds when interest rates have already hit bottom and can't fall any lower? You can't."

You have to ask yourself if the majority of the world is incapable of simple math. Exponential functions can not run forever in a finite world. Damned innumerate people.

There's a stunning inability of folks to even grasp exponential functions. What is even more amazing is this mental handicap is most pronounced in bankers and politicians.



Tue, 11/08/2011 - 13:37 | 1856989 gwar5
gwar5's picture

Pension Plans... Sovereign bonds, State debts, Munis, Student loans, commercial real estate.....looks like rain for sure. If you haven't already started building your ark then it might be too late. The MF Global looter types are busy grabbing the silver off the Titantic as it is going down. That's a big poker tell.




Tue, 11/08/2011 - 13:42 | 1857006 TradingJoe
TradingJoe's picture

Told anyone I know to max out borrowing on any of their credit cards, 401Ks and all pension funds out there and buy GOLD! Physical that is! Let them eat shit, lots of it, and they will, soon!

Tue, 11/08/2011 - 13:48 | 1857048 monopoly
monopoly's picture

I have known about this 8% needed for returns for a long time. There is absolutely no way that can happen unless you take risks that are unacceptable. So much needs to be cleansed in this country, but not until Europe blows up.

Not our turn yet. And the sheeples party on. I watch good people in Costco, obviously hard working, buying more TVs and toys they do not need. They have on idea what is coming down, none. It is really sad.

But that is for another day.

Tue, 11/08/2011 - 13:49 | 1857053 j0nx
j0nx's picture

Can't wait till they tell the cops and firefighters that their pensions are gone. Once the old guard loses hope then it's all over for the oligarchs pulling their scams. Something tells me public pensions will be the VERY last thing to go right before the crooked pols and banksters board their G5's for destinations unknown.

Tue, 11/08/2011 - 13:51 | 1857068 jcaz
jcaz's picture

Eh, I say the annuity scam comes to a head before the pensions-  gonna love seeing how those insurance companies are gonna cover the minimum contract pay outs....

Tue, 11/08/2011 - 13:55 | 1857090 BennyBoy
BennyBoy's picture

Bow down to your Financial Masters.

Blame the FED with the truth will you?!

I'll show you punks:


Now I copy and paste the above number into our balance sheet and KAZAAM!

I've inflated the currency.

Your money is now worth less. Soon to be worthless.


Tue, 11/08/2011 - 13:57 | 1857097 Archimedes
Archimedes's picture

Nice article but you are late Charles. Karl Denninger has been pounding this drum for months now.....

Tue, 11/08/2011 - 14:03 | 1857127 NEOSERF
NEOSERF's picture

Central banking and governments implicitly know that growth would have been sub 2% over the last 20 years had it not been for credit card growth, faux home equity growth and the extraction of that for more spending...without this "engine" of growth, the CBO needs to put out some better papers on how likely entitlements would be paid in 0%, 1%, 2% and 3% GDP growth scenarios

Tue, 11/08/2011 - 14:14 | 1857210 ItsDanger
ItsDanger's picture

A lot of plans had their mandates adjusted to increase equity exposure.  But once you fall behind the curve, its near impossible to make up for the annual expected rate of return.  I firmly believe that rates should never be allowed to go this low and this one of the reasons.  Plans were set up yrs ago without the foresight of Greenspan & co. destroying future retirees.

Tue, 11/08/2011 - 14:16 | 1857223 Reptil
Reptil's picture


IMF involvement in Italy 'reassuring', says Dutch pensions giant PMT

1 hour ago

NETHERLANDS – The €39bn metal scheme PMT has applauded the announcement that the International Monetary Fund (IMF) is getting involved in solving Italy's financial problems.

Earlier this week, Italy agreed to allow the IMF to monitor its progress in reducing its sovereign debt.

Guus Wouters, chief executive at the industry-wide pension fund for metalworking and mechanical engineering, said: "Such a dyke guard is a reassuring measure against the potential domino effect from Italy defaulting."

According to Wouters, PMT has been offloading government bonds for the PIGS countries since early 2010.

He also stressed that his scheme had emergency plans in place in the event that the euro crisis escalated.

But he declined, however, to provide further details, adding that he "did not want to speculate about what might happen".

He also added that PMT did not yet have a clear view on the European Financial Stability Facility (EFSF), "as we still don't know all details".

He said: "Only if we know the conditions can we assess whether investing in the EFSF fits within our risk profile."

The metal scheme's director said he had mixed feelings on the direction of German government bonds, highlighted recently by Mercer.

"Investors are flocking to the safe havens of German and Dutch government bonds, causing the interest rates to decrease," he said.

"However, in such a strained situation, rates can go up as well, and therefore it is very difficult to draw sensible conclusions."

Wouters said he did not know whether euro bonds would be an alternative for US Treasuries or provide a "deep and liquid euro bond market" as Angelien Kemna, CIO at APG, recently suggested.

"We can only have an informed opinion on the issue, once all euro countries are sticking to the recent EU agreement on budget discipline, and have their house in order," he said.

Author: Leen Preesman



Tue, 11/08/2011 - 14:29 | 1857325 Tic tock
Tic tock's picture

Maybe that's where the 'one-time' FED infusion could go - via the Treasury - into half-owning all the Pension Co.s' : with a concommittant dismantling of HFT. Sure, why not.

Tue, 11/08/2011 - 14:37 | 1857378 Fix It Again Timmy
Fix It Again Timmy's picture

Pension funds -Wall St.'s version of low-hanging fruit, shooting fish in a barrel, shooting deer at a salt lick.  They were almost embarassed to hit these "suckas" because they were such easy prey...

Tue, 11/08/2011 - 15:23 | 1857659 mayhem_korner
mayhem_korner's picture



Default = cold turkey.  Prepare for the shakes accordingly.

Tue, 11/08/2011 - 15:58 | 1857873 hooligan2009
hooligan2009's picture

I think laying the blame at the smelly feet of the Fed is only addressing partof the issue. The analagoy is to the scorpion and the frog crossing the river. The Fed is doing what, in the past, has been the sop that restores confidence as society actually believes that printing money out of thin air is somehow more than simply that; printing money out of thin air. The reason the economy is not and pension funds investments are not performing is because, quite simply, there are more people taking out the ability to create wealth than putting in. We have re-engineered the economy so that it is service oriented. So far, food, shelter and housing are still abundant. But there are only so many hairdressers, painters and bankers who can cut each others hair, redecorate and shuffle worthless paper, before it occurs to everyone that no-one is growing any food, or catering for shifting demographics and population growth. The key reason that the economy is not performing are the fees and taxes, taken by those who contribute very little and which stymie economic growth. Economic activity does not equal service activity and never did. Fees taken by middle men within bid/offer spreads of securities on investment plans, investment managers, custodians, lawyers, settlement banks would typically amount to around 1.5% to 2.5% per anum of capital invested for well run schemes all the way up to 5% for joe blow in his 401k. Taxes take another 2-3% of capital per annum of capital, in the form of corporation tax on corporations and city taxes. This reduces capital available for the economy directly and is a signficant headwind. Total amount to get over 3.5% to 5.5% per annum for well run schemes all the way up to 8% per annum for joe blow. Note that the gross return earned by pension plans has already had tax deducted and is then subject to further (small) taxes but large expenses. Just saying, the whole model is wrong. Taxes are already being taken twice and three times over and not being disclosed or even calculated. We are taxing and expensing ourselves out of the future already. Europe and Scandinavia doesn't mind paying 60% in taxes. I personally find it repulsive and would rather give the money to those I chose to give it to, rather than give it to corrupt polticians and an inefficient economic structure, rife with friction.

Wed, 11/09/2011 - 04:50 | 1859881 Seer
Seer's picture

Sigh, you seem like a fairly bright person, yet...


Go ahead, remove everything that you see fit.  If you still carry on (from that point) with "interest" and "growth" then you're expanding without limit (until, that is, the physical world stops you).

Tue, 11/08/2011 - 16:05 | 1857912 yellowsub
yellowsub's picture

Why is it the public unions are only blaming the banks?  Even if there was no risky bets there wouldn't be the returns necessary to pay out the new waves of retirees...  You should see these high 5 to low 6 figures pensions of teachers just in my town and the health benefits to match that htey don't ever pay into?  When did hte civil servants become the ones in control and make these demands?!

It's not the taxpayers fault or responsibility that their pension manager decide to invest and lost a good portion of it in the market in 2008 and near to soon future. 

Wed, 11/09/2011 - 01:49 | 1859732 MisterMousePotato
MisterMousePotato's picture

When did hte civil servants become the ones in control and make these demands?!

Since Ohio, election day, November 8, 2011.

Although some have proffered explanations offering hope, I see only societal suicide. Which, actually, I wouldn't mind, but the old saying that people get the kind of government they deserve overlooks the part where I get the kind of government that THEY deserve.

Wed, 11/09/2011 - 04:53 | 1859882 Seer
Seer's picture

And yet, if you promote "growth" YOU are responsible for the eventual collapse, public pension plans or no public pension plans, Fed or no Fed, government or NO government.

Wed, 11/09/2011 - 07:40 | 1860011 AE911Truth
AE911Truth's picture

Dear MisterMousePotato
in reference to: "the part where I get the kind of government that THEY deserve"

... so start your own country!

Wed, 11/09/2011 - 17:24 | 1863069 MisterMousePotato
MisterMousePotato's picture

I already have one. Actually, there are times when I feel like it is more a matter that I had one. Certainly when I was born half a century ago, the country looked familiar. Now? Not so much. Have been mulling getting French citizenship, which I think I am entitled to by virtue of French parents. But, really, why should I leave? Or have to start another country? All I want is my birthright as an American; to wit: That which was originally set up and intended. Which did not, for example, include a central bank, as you all know. And about a dozen other things that made this country great.

Tue, 11/08/2011 - 18:13 | 1858486 Steve in Greensboro
Steve in Greensboro's picture

Tyler: Would you mind giving us on the home page the name of the author of the guest post?  That way I don't have to waste my time clicking through on posts like these.

Quote from Chuckles: "...Here's the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever..."

The BS-meter pegs out with this one.  If you have a fully funded pension plan and match the interest rate on the Treasuries you buy to the promises you make in the pension program, then you do not have a problem.  This is the European private sector approach to pension management and it is an emerging private sector best practice.  It takes the risk out of pension management.

Now of course on the government side, we have delusional rate of return assumptions, combined with massive underfunding, unrealizable promises made to pensioners and absurdly aggressive portfolio management.  All the sorts of things that if the private markets did them would land the pension trustees in jail. 

But nobody is surprised anymore that governments have ethics worse that Al Capone and Carlo Ponzi.

But to lump together kleptocratic governments (just as criminal in the  U.S. as in Greece) together with a private sector which has a sense of ethics as Chuckles does is a typical Leftist trope.  We aren't buying it anymore.  As Reagan said, "government is not the solution; government is the problem."


Wed, 11/09/2011 - 05:00 | 1859884 Seer
Seer's picture

What don't you understand about the exponential function?

All you I-HATE-BIG-GOVERNMENT people STILL fail in your analysis of the REAL issue: failure will ALWAYS come when predicating your society on a perpetual growth model (on a finite planet)!  BTW - I'm a proponent of ZERO-GOVT.

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