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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RaymondKHessel's picture

Shocking! Just shocking!

CPL's picture

Are you agawk with shock?

Ahmeexnal's picture

time to increase the SOMA dose to the plebes

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.)

pelican's picture

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

s2man's picture

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

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.

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.

CPL's picture

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


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.

AngryGerman's picture

"Aaaaaaaaaaand it's gone!"


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

TheFourthStooge-ing's picture

That bit never gets old. It's so funny because it's so true.


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.

The Big Ching-aso's picture 2025 to 2050?

Truly you jest.


TheFourthStooge-ing's picture

He's being a bit of an optimist.


RaymondKHessel's picture

My pension plan

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

Bastiat's picture

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

DollarMenu's picture

Nah, he will sneak up on his Rascal and wave the thing around.

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

LFMayor's picture

if you think a .243 is for "long range" then you're in for a bfs.

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"

Steaming_Wookie_Doo's picture

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).

Manthong's picture

 “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”

Diogenes's picture

Living on Reds, Vitamin C and Cocaine.

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

Diogenes's picture

Living on Reds, Vitamin C and Cocaine.

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

pelican's picture

What are you truckin like the du dah man?

hannah's picture

ALL THE USA NEEDS TO DO IS START TAXING FICA FROM CHINA...! i should get paid for all these genius ideas.

RobotTrader's picture

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.

Astute Investor's picture

Too bad your chart doesn't go back farther.  PCLN back to March 2000 levels after only 11 years.

somethingisrotten's picture

How's that NFLX and FSLR ski slope doing for ya, MoMo ??????????

LouisDega's picture

That and The Duggars are having their 20th child. Its all good i tell ya

ThirdCoastSurfer's picture

How is it that airlines and trains can't tun a profit but Priceline and the like are swimming in cash? 

ThirdCoastSurfer's picture

How is it that airlines and trains can't tun a profit but Priceline and the like are swimming in cash? 

Divided States of America's picture

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

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.

AngryGerman's picture

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.

Hansel's picture

And all the new lawyers and doctors are in debt up to their eyeballs.  They're broke like everyone else.

Temporalist's picture

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...

Bastiat's picture

How about creating a conduit vehicle for investing in pooled crematorium smelter royalties?

NotApplicable's picture

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.

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.

spinone's picture

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