Global Pension Gap Expected to Hit $400 Trillion: US Leads the Way

Mike Mish Shedlock

The global pension gap of 8 nations is $70 trillion. The US alone is $38 trillion. By 2050 the total gap will hit $400T.

The Visual Capitalist reports The Pension Time Bomb: $400 Trillion by 2050. The above image is a small section of a huge pension infographic.

  • According to an analysis by the World Economic Forum (WEF), there was a combined retirement savings gap in excess of $70 trillion in 2015, spread between eight major economies: Canada, Australia, Netherlands, Japan, India, China, the United Kingdom, and the United States.
  • The WEF says the deficit is growing by $28 billion every 24 hours – and if nothing is done to slow the growth rate, the deficit will reach $400 trillion by 2050, or about five times the size of the global economy today.
  • In the United States, it is expected that the Social Security trust fund will run out by 2034. At that point, there will only be enough revenue coming in to pay out approximately 77% of benefits.

Worse Than You Think

Lance Roberts at Real Investment Advice added to the report in his take The Pension Crisis Is Worse Than You Think.

What follows are excerpts of Roberts' excellent presentation, without blockquotes. His name will mark the end of his report.

Problem 1: Demographics

With pension funds already wrestling with largely underfunded liabilities, the shifting demographics are further complicating funding problems. One of the primary problems continues to be the decline in the ratio of workers per retiree as retirees are living longer (increasing the relative number of retirees), and lower birth rates (decreasing the relative number of workers.) However, this “support ratio” is not only declining in the U.S. but also in much of the developed world. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate.​

In 1950, there were 7.2 people aged 20–64 for every person of 65 or over in the OECD countries. By 1980, the support ratio dropped to 5.1 and by 2010 it was 4.1. It is projected to reach just 2.1 by 2050.

Problem 2: Markets Don’t Compound

The biggest problem, however, is the continually perpetrated “lie” that markets compound over time. Pension computations are performed by actuaries using assumptions regarding current and future demographics, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries, among other variables. The biggest problem, following two major bear markets, and sub-par annualized returns since the turn of the century, is the expected investment return rate.

Using faulty assumptions is the linchpin to the inability to meet future obligations. By over-estimating returns, it has artificially inflated future pension values and reduced the required contribution amounts by individuals and governments paying into the pension system.

As shown in the long-term, total return, inflation-adjusted chart of the S&P 5oo below, the difference between actual and compounded (7% average annual rate) returns are two very different things. The market does NOT return an AVERAGE rate each year and one negative return compounds the future shortfall.

This is the problem that pension funds have run into and refuse to understand.

Pensions STILL have annual investment return assumptions ranging between 7–8% even after years of underperformance.

However, the reason assumptions remain high is simple. If these rates were lowered 1–2 percentage points, the required pension contributions from salaries, or via taxation, would increase dramatically. For each point reduction in the assumed rate of return would require roughly a 10% increase in contributions.

The chart below is the S&P 500 TOTAL return from 1995 to present. I have then projected for using variable rates of market returns with cycling bull and bear markets, out to 2060. I have then run projections of 8%, 7%, 6%, 5% and 4% average rates of return from 1995 out to 2060. (I have made some estimates for slightly lower forward returns due to demographic issues.)

Given real-world return assumptions, pension funds SHOULD lower their return estimates to roughly 3-4% in order to potentially meet future obligations and maintain some solvency.

They won’t make such reforms because “plan participants” won’t let them. Why? Because:

  1. It would require a 40% increase in contributions by plan participants which they simply can not afford.
  2. Given that many plan participants will retire LONG before 2060 there simply isn’t enough time to solve the issues, and;
  3. The next bear market, as shown, will devastate the plans abilities to meet future obligations without massive reforms immediately.

We Are Out Of Time

Currently, 75.4 million Baby Boomers in America—about 26% of the U.S. population—have reached or will reach retirement age between 2011 and 2030. And many of them are public-sector employees. In a 2015 study of public-sector organizations, nearly half of the responding organizations stated that they could lose 20% or more of their employees to retirement within the next five years. Local governments are particularly vulnerable: a full 37% of local-government employees were at least 50 years of age in 2015.

It is no surprise that public pension funds are completely overwhelmed, but they still have not come to the realization that markets do not compound at an annual return of 8% annually. This has led to a continued degradation of funding levels as liabilities continue to pile up.

The next crisis won’t be secluded to just sub-prime auto loans, student loans, and commercial real estate. It will be fueled by the “run on pensions” when “fear” prevails benefits will be lost entirely.

It’s an unsolvable problem. It will happen. And it will devastate many Americans. It is just a function of time.

Lance Roberts

2050 Gap Will Never Happen

We will never hit a pension gap of $400 trillion. Instead, one of the following will happen.

Pick Your Poison

  1. Plans will have long ago defaulted or gone bankrupt with benefits slashed. Michigan paved the way for this option.
  2. Millennials, who will undoubtedly be fed up with boomer benefits will vote for massive changes. For some states, this will require constitutional changes.
  3. At the national level, we may see revised bankruptcy laws superseding state provisions.

Some may suggest a pension bailout by the Fed. I doubt that because the numbers involved would destroy the dollar. The Fed exists to bail out banks, not pensioners.

Congress could bail out the pensions, but once millennials and younger generations are firmly in control, they will not vote to screw themselves even more.

By one means or another, baby boomers counting on public pensions will not get what they mistakenly believe they have coming.

Mike "Mish" Shedlock.

Comments (24)
No. 1-24
JONZDOG
JONZDOG

Millennial's, who will undoubtedly be fed up with boomer benefits will vote for massive changes. For some states, this will require constitutional changes.

JONZDOG
JONZDOG

. I do not agree with this…..I think the Millennials will agree to heavier levels of taxation……because cutting pension promises “is hurtful”

Grumblenose
Grumblenose

"Millennials, who will undoubtedly be fed up with boomer benefits will vote for massive changes." But the Boomers also vote, and there are a heck of a lot of them.

Grumblenose
Grumblenose

There are roughly 80m millenials, and 76m boomers... pretty even match.

JonSellers
JonSellers

The end result is catastrophe for everyone not just boomer retirees. As we begin making massive reductions in retiree income, that will translate into massive reduction in net economic demand in the economy. Businesses will sell less, and workers will lose their jobs. Which will be a self-reinforcing process that leads to poverty for boomers and millennials. If there were some way for working people to increase their productivity enough to provide the goods retirees want/need, and could turn that productivity into income, then the increase in tax revenues might offset some of the income reductions for retirees. Unfortunately, our economic system isn't designed to increase productivity and wage income.

Dagny
Dagny

I think some kind of government debt "jubilee" will be perpetrated on bond holders and dollar holders. It has happened before, in the 1930's when the dollar was devalued from $20/ oz of gold to $35/oz of gold. It will take some other form the next time of course, some kind of USFed trick. Maybe create some kind of zero coupon instrument with no fixed redemption date?

TheLege
TheLege

That retirees will be getting a massive haircut is not in doubt -- you can imagine the impact that will have on the housing market (mass asset sale alert!). The pension haircut may well come via a monetary system reset rather than a traditional restructuring. I can't see the fiat money system surviving beyond the next crisis. Money will be printed (and borrowed) to bail everything and anything out, until the system breaks .

Snow_Dog
Snow_Dog

“Millennials, who will undoubtedly be fed up with boomer benefits will vote for massive changes. ”

One recalls former Citi CEO Chuck Prince extorting all to “keep dancing while the music is still playing.” Wait until the music stops and all the Millenials look around and see are chairs occupied by Boomers and government employees. With no place to sit, what happens next?

TheLege
TheLege

I'm surprised Realist hasn't turned up to say this is all a fuss about nothing and that it'll all work out in the end. After all, what's $400 trillion between friends ..

Realist
Realist

Hi Lege. Sorry, but I was busy with my charitable work today. Anyway, as I have stated many times, I am surprised by the large number of poorly run US pensions. I have also stated many times that US pensioners will have to settle for less than they expected over the coming decades. Rather than claiming that everyone is going to starve to death in retirement, as some imply, I have said that I expect a steady series of cuts to future benefits over many decades, which will result is a steady, slow drop in living standards for many US retirees.
I have also stated many times, that many countries do a much better job of managing pensions. Take a look for example at the Mercer Pension Health Index, in particular, Mercer.ca and their April 2, 2018 report for 604 defined benefit pension plans in Canada. These funds are 98% funded, on average, with many being 120+% funded. Unlike many US funds that are poorly funded and which expect returns of 8%, most of these Canadian funds project with 4-5% returns, even while they have earned 9-10% returns over the last few decades. I think the US could learn a few things from Canada, or from countries that do even better with their pensions.
I have also argued with others on this site, that there is nothing inherently wrong with defined benefit pension plans. There are large numbers of well run DBP plans, though very few of these exist in the US.

TheLege
TheLege

Realist, while I don't deny there exist many better-run pension funds, the issue with them all is that their funding situation is flattered by asset prices that are currently grossly over-inflated. When the next market crisis arrives the funding situation for most (if not all) funds will deteriorate substantially. The inevitable response to the next crisis will be more money-printing (but this time on a scarily big scale). This may boost asset prices again (including bonds) but the purchasing power of the currency in which they are denominated will be seriously diminished. The bottom line is: our current standard of living, house prices, financial asset prices etc are all where they are courtesy of a huge loan from the future. This kind of jig can only go on for so long. At some point the piper must be paid -- the requisite adjustment will happen, like it or not.

Realist
Realist

Hey Lege. Well run pension funds are prepared for market crashes. They are well diversified with investments in many countries and many asset classes. They have built up surpluses for when a rainy day arrives. They have policies which allow them to reduce benefits and raise contributions as needed to help them if bad times last longer than average. They also project for 75 years using conservative numbers, not pie-in-the-sky numbers. I also respectfully disagree that the next market downturn will be a significant crash or catastrophe. Historically, most corrections are brief and shallow. But even after severe crashes, the economy bounces back. I am fortunate to live in a country with well run pensions, so I feel relatively good about my countries future. If I lived in the US, I might be a little more nervous. But I am still not as pessimistic as you are about the US.

stillCJ
stillCJ

Editor

"The Fed exists to bail out banks, not pensioners." Of course! Anyone who knows that the Fed was created by bankers for bankers knows that. For more information read "The Creature from Jekyll Island". The title sounds like fiction, and I wish it was.

leicestersq
leicestersq

The ratio of retirees to workers impacts the returns that pension funds can get. As everyone retires and wants a stream of income paid for by fewer workers, interest rates and return on investments must fall. If those wishing to retire save harder, the returns on those savings must fall in step.

Stuki
Stuki

There are no sustainable, systemic, magical “investment returns,” over and above stuffing dollars into mattresses. Economically, investment is simply savings. As in, withholding from consumption. It has exactly not one iota to do with wasting one’s life serially falling for cheesy hucksters peddling, unverified because unverifiable, expertise at predicting random sequences.

All the latter does, is allow what Mr. Mooch thought he was withholding from consumption, aka saved for retirement; to be at least partially consumed by Mr. Huckster. As in, the pension you thought you put aside, have been spent on hookers and blow. By someone closer to the Fed and Government than you. And is hence, by now, gone. Forever. Irreversibly.

Some people, for some time, can indeed obtain “investment returns.” Simply because pumping up asset prices steals from those with less assets. Transferring the loot to those with more. But systemically, for every dollar “assets” are returning above simple savings, more than one dollar is being taken out of the productive output of someone else. Hence, systemic returns are capped at nothing. In practice, due to friction, they are negative. After all, it’s not as if simply printing money to pump up assets, somehow creates new economic value. And if nothing new is created, yet some are getting more……

And neither does an army of clueless pensioners with no particular, detailed and specific, knowledge of what they “invest” in, magically happen to direct systemic investment allocation into anything more productive, than if they just stuffed the cash into a mattress (or if you wish, locked it into an unbreakable timed lock bank vault to really make sure it wouldn’t be spent until retirement, to get around the possible objection of trading liquidity for additional returns.…). So, again, systemically the “investment action” of an entire society of clueless saps wasting their life serially falling for tulips, bitcoins and houses magically going up and down, does not generate value over and above savings. Hence cannot give rise to any magical “returns.”

IOW, there is no systemic value added by any of the childish rituals undertaken by dumbdom to “prepare for retirement”, over and above simply not consuming a share of their income. All the rest are simply ways to take from some, in order to hand to others. Suffering great frictional losses in the process. In the short term, dancing to the childish music can definitely be individually lucrative (Just ask Chuck Prince and some current public pensioners…) But like any scheme built 100% on theft and redistribution, there are no systemic gains. Hence, it is not a sustainable system. And not because it is somehow not “well run.” But rather, because it can never be.

KidHorn
KidHorn

I suspect, going forward, most large employers will use 401ks instead of defined benefits programs. And some pensions will switch from defined to 401k. Instead of giving defined benefits, they'll just hand over a lump sum of money and wish them the best of luck with it.

KidHorn
KidHorn

I think there's a limit to how much you can increase taxes to cover shortfalls. It might work in the short term, but long term, people and businesses will flee and people will find tax loopholes.

Realist
Realist

Stuki. You seem to believe that investing is a zero sum process. That is simply incorrect. I would normally spend some time to try to convince you otherwise, but I don’t have the time right now.

Stuki
Stuki

@Realist
Investing is allocating resources withheld from consumption, aka saved. That can be done more or less efficiently, hence affecting returns. Hence is not, in and of itself, a zero-sum process. However, belief that the some Joe pensioner, picking amongst 40,000 index funds, some bitcoins, houses and other nonsense he has no specific knowledge about, in any meaningful way improves said allocation, hence contributing to making it a process summing to more than simple savings, has got to be up there with belief in Santa Claus as sheer folly goes.

It’s the saving that is being done by the pensioner, that contributes to further growth. By abstaining from consuming a portion of what he has earned, he makes the resources he would otherwise have consumed, available to others. Or himself. To invest in greater future productivity. If he himself has specific and unique insight into a prospect, him doing the allocation himself can well improve efficiency, hence affect returns.

But if not, as is the case for the vast, vast majority of pensioners, the entire stilted ritual of making him pretend he does, is nothing more than smoke and mirrors to scam him out of a management fee for the benefit of the usual suspects, and making him a reliable lackey pumping his fist and cheering on Government and the Fed in their continued encroachment and shakedown of current and future others, so that he and said institutions can continue to pretend that the obvious and idiotic disaster they have stupidly made a cornerstone of their existence, is somehow not so.

Realist
Realist

Stuki. We agree on some things, yet differ in others. The process is 1. work/earn, 2. save a portion of what you earn, 3. invest the savings to grow a better future. An analogy: 1. work hard and grow your corn and harvest it, 2. save some of your seed corn, 3. plant your seed corn to grow larger future crops. If you eat your seed corn instead of saving, you have no future. If you simply save your seed corn, but never plant it (invest it), you will also have no future. It is not the "saving" that contributes to future growth (as you say), it is the investing that contributes to future growth.

stillCJ
stillCJ

Editor

Criticism from Martin Armstrong? The guy with the $3 billion ponzi scheme, who spent 11 years in jail for fraud and contempt? The guy with the magic forecasting system based on the magic of pi? Are you serious, Pete?

Stuki
Stuki

@Realst
Your analogy only demonstrates why perishables are a poor choice for a currency. Try a rerun, but this time with a gold miner instead of a grain farmer….

All income saved, not consumed, is invested. In something. Investable income only represents CLAIMS to real resources. Not resources themselves. Abstaining from actively “investing,” does not entail choosing to leave factories non running, and farm land stale, just out of spite.

Instead, all it entails, is accepting the current society-wide default allocation, the one that exists without your active attempt at micromanaging your savings. Or, in investment parlance, leaving the funds in the broadest possible passive index. Which also happen to be the investment with the lowest possible cost. Which, for by far most regular people saving for retirement, is the superior option from a risk/benefit POV.

Some people can, some of the time, beat broad indexes. Due to being privy to asymmetric information not widely shared. But that is hardly the case for the average guy buying public securities. For all those guys, nothing they do at the ETrade site will ever systematically improve society wide capital allocation. Hence none of it will ever improve overall growth. Hence overall returns. Hence the overall sustainability of the pension rackets.

Advancingtime
Advancingtime

No business or government can remain solvent with such rapidly growing obligations as pension funds are currently putting on them. Pension obligations are overwhelming our ability to pay for them. This means something has to give. More on this subject in the article below.

http://brucewilds.blogspot.com/2018/03/pensions-are-financial-time-bomb.html


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