Breaking point for underfunded savings plans

As I and others have been warning for a few years now, (here’s a list of just our most recent articles), defined benefit pensions have been planned to fail through years of under-funding by workers and employers alike. Few have been paying attention to math, and when some of us laid it out in plain terms as managers and advisors, we were fired or not hired, discounted and ignored.

As reckless QE policies herded capital into income-paying securities over the past 6 years, yields have plunged and capital risks have soared.  Now with 10,000 baby boomers turning 65 every day for the next 12 years, withdrawals are accelerating and Ponzi-like retirement schemes are coming up shorter by the week.  Evidently an actual cash crunch, that reduces or stops payments, is needed before people are forced to consider reforms. This is starting to happen on the edges in public pensions.  See:  $1.6 mill tests tiny town and “bulletproof” public pension plans.

It is also starting to dawn in the rare world of the few remaining defined pension plans in the private sector.  As Wells Fargo CEO John Stumpf finally retires amid scandal, he is reported to be leaving with a $134 million retirement fund estimated to pay him $3.6 million a year if he bases his planning on living to age 100 before investment income or inflation are taken into account.

Meanwhile banks are making less profit spread in their operations and less returns inside their pension plans. The value of long-term promises these banks have made to plan members—their liabilities— has therefore been increasing as yields fall.  When the liabilities are worth more than the plan assets, the funding deficit is deducted from regulatory capital, hurting bank balance sheets that are already under pressure.  See:  Ultra-low rates hurt banks in more ways than one.

The same math is screaming for attention in individual retirement savings plans. A few people have recognized reality and geared themselves to spend less and save longer in order to amass the greater store of savings that low yields dictate.  Many others though have so far opted to continue believing the propaganda from the investment sales crowd that promises big gains for high fee, high risk products, if they just buy and hold.

Eventually, and especially as over-valued assets fall in price once more, truth will demand mathematical reconciliation.  Unfortunately, by then it may be too late to avert lasting pain for many individuals.  As always, financial genius is before the fall.

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