Do pension funds rely on a growing population in order to sustain themselves? I wonder whether they'll see a resurgence as the baby boomers die off and the age distribution in the U.S. becomes more uniform, or if these sorts of plans are a thing of the past.
Pension funds (and retirement savings in general) depend on low-risk investments returning significantly above inflation. These no longer exist, for a variety of reasons, demographics being one of many.
People have been assuming that negative interest rates are a temporary thing but people are beginning to think that this may actually be the natural state of affairs.
Historically, protecting your wealth cost real money: banks had to hire guards to protect the gold in their vault. Fractional reserve banking flipped this so that the banks started paying interest.
But now the world is awash in capital so low risk investments now return interest less than the inflation rate. Even the nominal rate is now sometimes below 0. (https://news.ycombinator.com/item?id=20696343)
There is no longer such a thing as a "safe investment". The only way to grow your money is to take risks with it, and the level of risk required to get returns significantly above inflation is growing.
Piketty would claim that wealth accumulation has reached a maxima. Return on investment is, after all, wealth being concentrated into fewer and fewer richer and richer individuals. If wealth can't be concentrated further then return on investment can't happen either. We might have reached such a state in which the rich, relatively speaking, can't get richer and the masses of poor, relatively speaking, can't get poorer. You can't squeeze water out of a stone.
The comment I replied to said "There is no longer such a thing as a "safe investment". The only way to grow your money is to take risks with it".
Bitcoin is seen as a risky investment by most people. To those of us that understand what it actually is and how it works, it's the best kind of money/store of value ever invented.
The only other options I see for storing wealth are things like precious metals, real estate, or stocks and bonds.
I think precious metals are kind of useless as money and over hyped as a store of value. Asteroid mining could flood the market in the future.
Real estate is a lame investment. People need homes. When people buy up real estate to park wealth, it drives up the cost of homes for new home buyers.
Stocks are a maybe, but I would only buy stocks like apple and tesla. I don't really like most corporations.
Bonds are a joke, with negative interest rates.
In the grand scheme of things, Bitcoin looks like the most sane place to store wealth.
> Bitcoin is seen as a risky investment by most people. To those of us that understand what it actually is and how it works, it's the best kind of money/store of value ever invented.
Why? Just because the other options have downsides, what makes Bitcoin good? There was a rush in 2018 - are you assuming it's going to happen again? Bitcoin seems to be super unstable, more so than anything else I'm aware of - why would I want my retirement savings to be able to fluctuate that much every year? What stops a new cypotcoin from coming along and being dubbed superior, removing the value of Bitcoin overnight?
Bitcoin is good because there is a fixed supply. The scarcity of it means basic supply and demand market mechanics are in play. It’s price is volatile because people with a lot of money can move the price easily by simply buying and selling large amounts of it. The value has steadily increased year over year though, and eventually there will be sufficient market depth which will help stabilize prices. It’s also good because banks can easily prevent you from accessing your own money. When your money is in bitcoin, no one can confiscate it, or charge you negative interest rates on it.
Lots of new coins claim to be the next bitcoin, but the truth is, bitcoin is the next bitcoin. Look up the user aantonop on YouTube for why this is the case.
Growing populations help mask the underlying issues with pensions, which are mainly, 1) they are almost always underfunded, and 2) they have unrealistic expectations for growth.
I doubt we will every see pensions come back because they become less appealing the more realistic they have to be. Of course pensions sound awesome if you're a firefighter that receives $97,000 a year for life after 25 years of service. Such a person may have received only $1.7MM in total compensation over 25 years, yet, because of how public pensions are calculated (and a bit of graft), they earn an income that would take investments worth $2.4MM to maintain. This is not including health insurance, which is likely another significant amount.
When I take the same firefighter's wages over the years, and calculate the return of a 12% of earnings contribution annually, and a 12% annual return on investments, that same person has only contributed a little over $1MM.
Meaning their sustainable pension withdraw is roughly $41,000/yr.
\* I made these numbers up in an excel spreadsheet, assuming they made $38k in 95 with a 3% raise each year, and a 10% promotion raise every 10 years, along with the typical inflated wages in the last 3 years to maximize pension benefits. So they ended making $107k/yr.
Edit: After some playing around, I've determined that pension contributions would need to be roughly 30% of wages in order to be properly funded with a 12% annual return. Using S&P500 rates of return, contributions need to be closer to 50% of wages.
Most public (i.e. government) "pension funds" are not pension funds, they are welfare benefits programs for retired people. That is, they are not primarily funded through individual savings or investments but through current taxes. The US Social Security system, for example, works this way. While excesses are "invested" in US government treasuries, this is really just a delayed tax obligation. And while the SSA may provide you with a report about your "account" -- complete with contributions, balances and anticipated payouts -- it's mostly meaningless as your benefits are not contractually tied to past contributions. They are instead only related by regulation, but those regulations can be changed at any time.
The article is about GE's pension fund, which is separate and distinct from the US government "pension fund" (the social security system). It is also not a 401(k) or similar fund, those are tied to individuals and managed by a third party. Many larger and more established companies and organizations in the US have pension funds similar to GE. They are typically defined benefit funds, as opposed to defined contribution funds. Defined benefit means that the amount of the pension is defined up front and does not depend on investment returns during the lifetime of contributions. This obviously creates problems if returns are not as good as projected and provides a temptation for companies to put less into the fund, hoping that future company growth will make up the difference. Many companies have succumbed to this temptation, GE among them it seems.
Without even looking at the details of the GE plan, I strongly suspect there will be multiple lawsuits over this action. On the other hand, it's a bit surprising that GE could unilaterally take this action without the buy-in from various unions, so maybe they pre-negotiated it ahead of time.
In the corporate world, probably not. Pensions obligations just look like debt on the balance sheet... but they have high administrative overhead. Further, there is the risk that life expectancy will continue to grow... thus making those liabilities much larger.
In government... I don't think pensions ever went out of fashion. Why bother when you can always just print more money?
> In government... I don't think pensions ever went out of fashion.
There are a lot of different pension schemes out there as the feds, states, and localities do not use uniform plans. What I've seen, though, is that there are now "two tiers" - one for older employees and another for younger ones. You can guess which plan is more generous...
A lot of localities and states see the writing on the wall - that their perpetual 9% growth rates and population increases won't keep up, and are thus moving new employees into 401K plans, no different than the rest of us in the private sector.
Honestly, I don't think I'd be able to tolerate being a teacher or state employee, and knowing that my manager, 20 years older than me, has a retirement worth 3x as much, and it will be funded by increasingly shorting me on salary and benefits (along with tax increases) as the pension liabilities become harder to pay. Look at certain cities like Chicago and Baltimore and states like New Jersey for a current example.
