"The Latest Casualty In The Global Pension Catastrophe Is…"
by Simon Black
"In the year 6 AD, the Roman emperor Augustus set up a special trust fund known as the aerarium militare, or military treasury, to fund retirement pensions for Rome’s legionnaires. Now, these military pensions had already existed for several centuries in Rome. But the money to pay them had always been mixed together in the government’s general treasury. So for hundreds of years, mischievous senators could easily grab money that was earmarked for military pensions and redirect it elsewhere.
Augustus wanted to end this practice by setting up a special fund specifically for military pensions. And to make sure there would be no meddling from any government officials, Augustus established a Board of Trustees, consisting of former military commanders, to oversee the fund’s operations. Augustus really wanted this pension fund to last for the ages. And to keep a steady inflow of revenue, he established a 5% inheritance tax in Rome that would go directly to the aerarium militare. He even capitalized the fund with 170,000,000 sesterces of his own money, worth about half a billion dollars in today’s money.
But as you can probably already guess, the money didn’t last. Few subsequent governments and emperors ever bothered themselves with balancing the fund’s long-term fiscal health. And several found creative ways to plunder it for their own purposes. Within a few centuries, the fund was gone.
This is a common theme throughout history… and still today: pension funds are almost invariably mismanaged to the point of catastrophe. We’ve written about this topic frequently in the past. It’s one of the biggest financial catastrophes of our time. Congress has even formed a committee that’s preparing for massive pension failures.
And here’s another, very recent example: the city of Wilkes-Barre, Pennsylvania is deep in the red with its police pension fund. According to the Pennsylvania state auditor, the pension was 65.7% funded in 2011, i.e. the fund had enough assets to pay about two-thirds of its long-term obligations. Now, that alone should have been enough to sound the alarm bells.
But by 2013, two years later, the fund’s solvency rate had dropped to 49.7%. And by 2015, it was just 38.5%. Incredible. 38.5%. At that level, there’s simply no chance the city will ever be able to meet its obligations to retired police officers.
A few years ago, city politicians took notice of this enormous funding gap and tried to take some small steps to patch it up. Specifically, the city proposed excluding an officer’s overtime in the calculation of his/her pension benefit. It was a small change and certainly wouldn’t solve the bigger problem. But it would at least buy the fund a few more years of solvency.
So naturally the union sued. And earlier this month a Pennsylvania court ruled against the city, i.e. Wilkes-Barre must continue calculating pension benefits the old way. This helps no one; it only accelerates the demise of an already insolvent pension.
Oh, and it’s not just their police pension either. Wilkes-Barre’s pension for firefighters is hardly better off, just 46.1% funded. Unfortunately, these pension problems aren’t unique to Wilkes-Barre. City and state pension funds across the country… and the world… are in similar, dire straits.
The city of San Diego has a $6.25 billion shortfall on obligations promised to current and retired employees. The State of New Jersey has $90 billion in unfunded pension liabilities. And of course, Social Security has unfunded liabilities totaling tens of trillions of dollars.
The situation isn’t any different in Europe. Spain’s Social Security Reserve Fund has been heavily invested in Spanish government bonds for several years– bonds that had an average yield of NEGATIVE 0.19%. You read that correctly. Unsurprisingly, Spain’s pension fund is almost fully depleted.
The United Kingdom has trillions of pounds worth of unfunded public pensions. Even conservative Switzerland has a public pension that’s only 69% funded – a seemingly fantastic number by today’s dismal standards. Last year, the Swiss government proposed a plan to save its pensions, asking to increase the retirement age for women by one year (from 64 to 65, the same as men), and increase VAT by 0.3%. But the plan was rejected by Swiss voters in a national referendum– the third time in 20 years that pension reform failed to pass.
And that’s really the key issue here: pension plans are almost universally toast. Most of the time, politicians just ignore the problem and try to kick the can down the road to the next administration. But occasionally they try to do something to help. Yet whenever they do… voters reject the plan. Or the union sues. Or something else happens that prevents much-needed reforms from passing.
This merely accelerates the inevitable: these pensions are going bust. I’m not trying to be sensational– these are mathematical realities echoed by the officials who oversee these funds. For Wilkes-Barre’s police pension, it’s the Pennsylvania State Auditor who says the program is only 38.5% funded.
With Social Security, it’s the United States Secretary of the Treasury who says the program’s trust funds will soon be depleted. Social Security even provides a date, like the expiration on a carton of milk, after which Social Security will go bad.
These warnings are all publicly available information, not some wild conspiracy theory. And that’s really what they are: warnings. At this point, continuing to believe that these pensions will be solvent forever is completely ludicrous. The only rational option is to take matters into your own hands. For example:
– Start saving more. You’d be shocked at what an enormous difference it can make to save an extra $1,000 per year when compounded over several decades.
– Learn to be a better investor. Averaging an additional 1% annual return for your retirement savings can add up to hundreds of thousands of dollars over the course of 20-30 years.
– Consider a more robust retirement structure like a Solo 401(k) or self-directed SEP IRA that allows you a greater breadth of investment options– everything from real estate to crypto to private equity.
– And it may even be possible to stash $50,000+ per year in self-employment “side” income, (selling products on Amazon, driving for Uber, etc.) into that retirement account.
The signs are clear… anyone depending on social security or a pension for their retirement is in trouble. It’s time to take this issue into your own hands."