
Pension funds may be wrecked in a future recession - joshuafkon
https://www.cassandracapital.net/post/pension-funds-are-going-to-be-destroyed-in-the-next-recession
======
aazaa
In a nutshell:

1\. interest rates on government bonds, perceived as the safest asset class,
have fallen to historic lows, even below zero in many countries

2\. pension funds' expected rate of returns have barely budged since the 1970s
(7-8%) despite the fact that interest rates have dropped from double digits to
below zero in many cases

3\. to make up the loss of yield, pension funds have turned to riskier assets
such as stocks

4\. fueling the fire, state regulations have been relaxed to allow these
public pension funds to invest in risky assets

5\. since the 2008 crisis pension funds have been underfunded - they take in
too little money to be self-sustaining

6\. it's becoming increasingly clear that pensions can't "grow out of" their
underfunded positions

7\. having loaded up on risky assets, pensions will face large declines in the
next recession as stock markets deflate

The joker in the deck is how the pension funds will react to a declining stock
market.

Their only viable option would appear to be government bonds. A collective
flight into bonds would further depress interest rates. Falling interest rates
produces capital gains on bonds, which attracts still more investors, driving
rates further down. And so on. Flight to bonds on a large scale driven by
pensions would also accelerate stock market declines, making bonds that much
more attractive.

Having broken the zero interest barrier, there appears to be no bottom to
interest rates anymore. The lack of a bottom opens up some very bizarre
scenarios.

~~~
throw0101a
Smaller pension funds should be doing the same thing us 'retail' investors are
doing: using passive index funds. Perhaps a 60/40 equities-bond balance.

* [https://en.wikipedia.org/wiki/Index_fund#Pension_investment_...](https://en.wikipedia.org/wiki/Index_fund#Pension_investment_in_index_funds)

A part of the fixed-income ("bond") component should be in money market
account or term deposits to meet short-term needs.

During/after the Great Recession it took markets about five years to claw back
to the same level they were at their peak, but that is an extreme case. Most
recessions and bear markets last less than two years before they're back to
the same level. Trying 'advanced' techniques generally does not work out well:

* [https://awealthofcommonsense.com/2019/02/how-to-wreck-a-pens...](https://awealthofcommonsense.com/2019/02/how-to-wreck-a-pension-plan-in-3-easy-steps/)

Unless you're a fairly large pension, and are able to throw a decent about of
money around to buy "real" assets (pipelines, utilities, airports, marine
ports, toll highways), then it's best to stick with passive indexing AFAICT:

* [https://en.wikipedia.org/wiki/Ontario_Teachers%27_Pension_Pl...](https://en.wikipedia.org/wiki/Ontario_Teachers%27_Pension_Plan#Investments)

* [https://en.wikipedia.org/wiki/CPP_Investment_Board#Investmen...](https://en.wikipedia.org/wiki/CPP_Investment_Board#Investments)

~~~
nzealand
I presume by 60/40 you mean the pension funds should lower risk.

If they lower risk, they are not going to get close to their presumed 7-8%
growth. Expected stock market growth rates is around
5%([https://www.cnbc.com/2019/02/11/vanguard-cuts-expected-
retur...](https://www.cnbc.com/2019/02/11/vanguard-cuts-expected-return-for-
stock-market-over-the-next-decade.html)) Rate of return on bonds is even
worse.

Assuming this is correct, the choice is either increase contributions, or
decrease payouts.

------
apexalpha
So this triggered me to log into my pension fund website. Which I almost never
do.

My fund's 2018 report says the allocation is as follows:

\- 37,4% stock

\- 50,4% fixed (bonds)

\- 10% real estate

\- etc.. (derivatives, cash)

The past 2 years the news has also been dominated by the law that governs
pension funds in my country. Ever since the ECB cut rates pensions have been
cut or been close to it. So it seems we don't allow funds to go riskier, as
the article describes. In stead the law forces funds to take their losses now,
and not postpone them to a next generation.

And during the '08 crisis I remember a talk from a fund manager that said
crises don't matter that much for funds. Since they are all focused on the
long term the stock will recover anyway and the best thing to do in a crisis
is to buy more stock. What funds automatically do since people can't stop
contributing.

So the key point in the article seems to be this:

>"There is one other key reason that public pension funds have transitioned
into riskier assets. States have passed laws exempting state government
pension plans from the standards that private pension plans are held to. These
public pension plans are permitted to use generous assumptions about risk that
are not permitted in the private sector. So, while public pensions have moved
into objectively riskier assets, they haven’t been forced to account for that
risk."

So it seems a lack of regulation is the big problem, not economic downturn
every now and then.

~~~
conanbatt
> So it seems a lack of regulation is the big problem, not economic downturn
> every now and then.

Lack of regulation of itself. Maybe the problem is that government shouldn't
have people's retirement funds to manage.

~~~
mkr-hn
Who should manage them?

~~~
kome
they shouldn't invest in the market in the first place. that's what still
happens in europe in most of the countries.

~~~
yardie
Are we talking private European pensions or the public pensions? I know for a
fact my private pension is in the market because they send me an annual
report. State pensions is simply government recirculating money. They plug you
into a formula and tell you what you'll get at age 65. For some countries it
isn't whole lot.

------
Cthulhu_
I'm no expert but it seems the 'cause' of a lot of problems right now - the
one mentioned in this article, but also climbing housing prices - are caused
by low and negative bond interest rates. Who sets these interest rates? Why
are they being kept low? They seem to have such a big influence on the economy
right now, driving it towards riskier investments - I mean my bank's savings
account, which IIRC is tied to government bond interest rates and (also
historically low interest) mortgages, is pretty much zero so I've moved some
of my funds into (riskier) investments.

I mean I don't really want to be doing that but right now, putting money in
savings and keeping it is basically costing me 2-3% of its value a year due to
inflation.

~~~
Bombthecat
In germany we will enter soon zero interest for house credits... Where that
will lead to...

~~~
Ididntdothis
It will accelerate the housing price bubble even more. This doesn’t seem a
very desirable outcome.

~~~
Bombthecat
The question is: in industrialization, everyone and his dog moved to cities.
In masses. This might happen again. This will increase demand by a... Ton. It
might still be worth it, even if it is a housing bubblem I mean, partly it is
happening like back then. Two, three people or even families living in one
apartment...

------
paulpauper
People have been making these sort of doom and gloom predictions for decades,
whether about debt, inflation, or bubbles, and given their poor track record
can be safely discarded.

For every event like the 2008 they get right, they get a 50 or more
predictions wrong.

~~~
bregma
Economists have predicted 8 of the last 3 recessions.

~~~
selectodude
Economists have a good grasp of the underlying factors that cause recession,
the one thing they can’t model is human economic exuberance, which is why they
always predict recessions when they don’t happen. And then when they do happen
they’re so much worse than anybody would have thought.

------
awinder
I had a whole thing written up, but in the interest of brevity, maybe covering
my ass a little, but balancing some public interest for people who read these
articles:

1\. Cassandra Capital is "somehow" getting to the top on HN quite frequently
(this is not true of other communities I participate in)

2\. Pretty much everything in this comment chain lines up with my experience
[https://www.reddit.com/r/investing/comments/cz3w52/pension_f...](https://www.reddit.com/r/investing/comments/cz3w52/pension_funds_are_going_to_be_destroyed_in_the/eyvweep/)

3\. I'm no longer clicking through on Cassandra Capital articles and maybe
some people here who care about how what they read influences financial
decisions should also do some background research

~~~
joshuafkon
Hi, I’m Joshua Konstantinos the author of this post.

I’m sorry if you don’t like the quality of my article. But I felt I should
respond to the insinuation that I’m doing something underhanded to “somehow”
get to the top of hacker news.

I did absolutely nothing to get to the top other than submit the post this
morning.

I have been working on my book as a passion project for two years. It is very
unlikely that I will ever recoup the money I spent writing it, printing
copies, researching etc.

Now that I’ve finished my book I’ve been posting articles on economics and
geopolitics because it’s a topic I enjoy. I don’t have ads on my site, and
honestly I probably lose money on hosting costs. I have had some success on
hacker news and Reddit which has been a pleasant surprise - but Cassandra
Capital is just me writing about what I enjoy writing about.

~~~
dev1n
I will say that people get hell-banned for seemingly self-promoting on HN.
Might be good to mix up your submissions with other articles you find
interesting, so it doesn't appear as though you are only posting your own
writings.

~~~
joshuafkon
I have submitted a few news article that I've found interesting (from
Bloomberg etc) that have also done well on here lately. But you're right. I
will make an effort to mix up my submissions! Thanks!

~~~
dev1n
Just a warning as, speaking from experience, it happened unbeknownst to me.
Congrats on the book btw!

------
imtringued
This appears to be complete mismanagement of pension funds.

When people manage their private funds they reduce their exposure to risky
investments like stocks as they reach retirement age. Public pension funds
should behave identically and eat a small yield loss in exchange for lower
risk.

~~~
onion2k
Pension funds aren't trying to make a profit. They _need_ the ~7% yield to
cover the cost of paying people's pensions decades in to the future. Without
that return the fund would collapse under the forces of inflation, increased
pay outs to more people as we live longer, and the fund itself shrinking
because it's not covering its costs.

------
bhouston
There will also be a decline in house prices if demographics trends continue.
This is also a store of "wealth" that many are counting on. This is more of a
macrotrend though.

~~~
somebodythere
There is a bullish macrotrend in housing. Married 35+ year olds are the main
demographic buying single-family homes.

Unless, of course, you are referring to the macrotrend in which we are all
swallowed up by the sun.

~~~
thfuran
That just makes my house a more attractive location for solar energy
generation.

------
lr4444lr
I don't think so. The vesting contribution terms can lengthen, the payouts can
decrease, and the withdrawal minimum ages can start later. Sure, some funds
that are ailing will be in trouble, and there may be a yearning for the good
ol days, but "Destroyed"? C'mon: these are govt. jobs with mandated
contributions from people who are risk averse and have few better employment
options.

~~~
CinchWrench
Not all pensions are public employee pensions!

There are a lot of machinists and truckers out there who are already feeling
this pinch.

------
nicoburns
Maybe this will finally tip the political consensus towards a more
redistributive taxation policy. The main thing stopping this from happening
seems to be older people who are doing "just fine thank you".

The worlds looming financial woes are entirely of our own making. We're not
running out low on resources. We're just distributing them very inefficiently.

~~~
krapht
The per capita gross world product was approximately ~$18k/yr in 2017. No
matter how efficiently you redistribute resources, you cannot exceed this
number.

Instead we really need to invest more in productivity gains for the world's
bottom 90%.

~~~
bem94
Doesn't that assume that $18K will get you as far in one place as it does in
another?

~~~
krapht
We could get into arguments over purchasing power parity, but regardless, 18k
is not a large sum even in $YOUR_FAVORITE_POOR_NATION. There's a limit just in
terms of purchasing raw material goods which do not vary in price across the
globe since they are commodities.

~~~
ceejayoz
Come on. The per-capita GDP in Congo is somewhere between $700 and $800.

~~~
selectodude
And they live about as well as you would expect on $800/yr. Sure you can get a
house for $1000 but it doesn’t have running water or electricity. In countries
that poor, basic infrastructure will cost you, at a real rate, more than it
would in a rich country.

~~~
adrianN
Maybe they would have the money to invest in infrastructure if everybody got
18k per year.

------
patio11
If this subject interests you, the Pension Tsunami blog has 15 years of posts
about the details.

------
frankbreetz
"The bonds of many other countries have actually gone negative, with lenders
paying for the privilege of lending to governments for years."

Do people actually invest in these bonds? Why would they not put it in a
safer, positive returning, investment like US bonds?

~~~
onaraft
The gist of it is that if you have 1, 10, or even 100 thousand dollars in
cash, sure you can sit that in your bank and probably earn ~0% interest, but
at least it's not negative.

But if you have 100M in [edit: $your_native_currency], you aren't going to put
it in a retail bank account, you're not going to put it in your mattress, and
so you have only a few options:

1\. Stocks/derivatives: If you were holding cash already, you're probably not
comfortable with the risk profile of any of this stuff

2\. Bonds - this exposes you to the slight negative interest rate

3\. Corporate bank account - you might be able to avoid a negative interest
rate here as well, but only because you're passing the buck (literally) to the
bank, who then has to pick 1 or 2.

4\. Actually use the money yourself, in your business.

The whole point of the NIRP (negative interest rate policy) is to push people
to pick 3 or 4, and if 3, then for the banks to pick 1 or 4.

I just reread your question, and realized I didn't fully answer it. Investing
in foreign bonds exposes you to exchange rate risk. I was sorta hand-waving it
into 1 since it's basically like doing both bonds and forex. Not very
appealing if your risk appetite is "preferably cash or govt bonds".

I feel obligated to include a disclaimer that this isn't investment advice and
that monetary policy is immensely complicated and this is just the high-level
thinking of the point of NIRPs.

~~~
foobarian
I think 1. is not too bad with some kind of index fund. Even during the
recessions the value will not vanish - and historically it recovers
eventually.

My current worry is the holding company - e.g. what if Merrill Lynch goes
bankrupt? There is a very small amount that is FDIC insured but the rest could
go poof.

A mattress might work better for this use case, but I figure if it comes down
to that we'll have bigger problems.

~~~
onaraft
In general, you don't need to worry about Vanguard or Schwab or whoever
provides your particular index fund going bankrupt. The actual assets in the
fund don't go anywhere. Whoever buys the remnants of your now-presumably-dead
brokerage would probably just carry on maintaining the fund, or it would cash
you out if it didn't want to continue to run the fund.

On the brokerage side, SIPC insures securities in much the same way FDIC
insures deposits, but the amount insured is significantly higher, though I
don't know it off the top of my head. And beyond that, regulations require
brokerages to hold client assets separately from the broker's assets, and this
is audited. So for the most part, SIPC is mainly overseeing the transfer of
securities from a dying brokerage to somewhere else.

So, for the most part, the risk you describe is more about inconvenience than
actual material loss.

------
Neil44
Pension funds tend to be distributed across local and global risks and should
be actively managed and moved around in response to global events. The article
speculates that pension funds will be left in high risk pots into the next
resession and will then suffer losses. Lot of 'ifs' in that chain of
reasoning.

------
lexpar
Does anyone have a read on the rigor and ideological slant of the blog? I've
flipped through a couple posts and find the content easy to follow (I have no
economics background). However, I haven't found any meta commentary on the
blog or information about the author (Joshua Konstantinos).

~~~
dougweltman
Looks like the author posted it here.

------
NTDF9
How about we just abolish fractional reserve banking? Fractional reserve
system causes credit to grow with booming population but causes deflation when
population/production declines.

The root cause of all economic problems are man made. Lets fix the root cause
because its totally in our control.

~~~
Nasrudith
Isn't that how it should be essentially given currency is a medium of value
exchange? If the production grows shouldn't credit grow with it for reasons
similar to why national debt is listed as GDP percentage?

~~~
NTDF9
Not when currency is also a medium of wealth storage.

Currently, when deflation happens, the rich don't suffer losses immediately.
Instead they fire their works and reduce investments. So the poor are on the
streets or have to suffer first. The rich may or may not lose later (they
don't lose because by then they get bailed out or the tide turns).

If we're truly going to use currency as a medium of exchange then we have no
choice but to let the rich suffer, perhaps they suffer first.

~~~
selectodude
that assumes that currency was ever intended on being a store of wealth, which
it really wasn’t.

~~~
cheeseomlit
Then why is my employer paying me with it? Why do savings accounts exist at
the bank? Are we supposed to go out and buy bonds and gamble on stocks when we
receive a paycheck? Maybe the stuff we use for currency shouldn't be printed
out of thin air and have no inherent value

~~~
selectodude
Not all of it, but sitting on cash is not smart. Cash is for very short term
spending. It’s not a long term store of wealth. It never has been. Currencies
that become a store of wealth inevitably fail.

Source: actual real life economist.

~~~
ryacko
Cash is for liquidity.

I don’t know what you define as very short term, but emergency funds should be
in cash, so should money set aside that is meant to be spent in a few months.

------
epx
Negative interest rates and cash-hoarding companies signal that there is not
enough investment opportunities in the world anymore, so it became impossible
to secure a retirement income through savings alone. That's it. The source of
retirees' income will have to change.

~~~
ryandrake
Not enough investment opportunities or not enough willingness/creativity to
invest? I can’t believe that these billionaire companies and individuals
literally searched the entire globe and concluded there is not a single
investment opportunity that would produce a risk-adjusted return greater than
0%!

------
sleepysysadmin
There isn't going to be some sort of general rule on this. Some pension funds
deal entirely in government issue bonds that won't be harmed. Other funds are
operated similar to how Warren Buffet operates; the pension fund literally
buys major infrastructure.

So you certainly can't blanket statement this one. Furthermore, every major
country passed in exactly the same year(2014) that pension funds can now cut
benefits to stay solvent. This was done by Obama, Harper in Canada, and really
no political partisanship at all; right wing and left wing did this across the
high income countries.
[http://www.pensionrights.org/issues/legislation/summary-
pens...](http://www.pensionrights.org/issues/legislation/summary-pension-
cutback-provisions-multiemployer-pension-reform-act-2014)

So fundamentally the author is wrong. Pension funds arent going to be
destroyed. The pensioners are the ones who will be taking cuts. Grandpa is
going back to work; even though he still has a pension.

~~~
dragonwriter
So, your argument against the articles claim that boomers will be hurt because
of the impact on pensions is that it's wrong because pensions will just cut
their benefits?

I'm not sure that qualifies as the article being “wrong” so much as not being
completely clear on why it's thesis is correct.

~~~
sleepysysadmin
>Pension Funds Are Going To Be Destroyed In The Next Recession

[https://www.dictionary.com/browse/destroyed](https://www.dictionary.com/browse/destroyed)

The article I read is arguing that Pension funds will no longer exist. Pension
funds wont be going anywhere.

~~~
dragonwriter
The hyperbolic use of “destroyed” to mean adversely impacted, including in
performing a thing’s intended function is so common than it may even exceed
literal use of the term. The thesis of the article (as is usually the case) is
not the headline, but (as laid out in the last two sentences of the first
paragraph) that the impacts of the e next recession won't be limited to
Millenials but born heavily by boomers through the impact on pensions.

(Though, I would argue, it would also literally destroy pension funds, but as
a more distant effect of causing them to be perceived as not delivering value,
but that's entirely outside the focus.)

~~~
sleepysysadmin
>The hyperbolic use of “destroyed” to mean adversely impacted,

There was no hyperbole there. It was at best clickbait. I would accept
clickbait; but my default understanding on that article is that they are
proposing the end of pensions.

>Though, I would argue, it would also literally destroy pension funds, but as
a more distant effect of causing them to be perceived as not delivering value,
but that's entirely outside the focus.)

Pensions are pyramid schemes. It's a valid argument to be made. The author for
sure is going down that route.

------
BubRoss
Are most people able to take the money out of their pension early by just
accepting some penalties? That could mean a sort of run on pension funds if
people get spooked and pensions are under funded.

~~~
dragonwriter
> Are most people able to take the money out of their pension early by just
> accepting some penalties?

Not really. I think a fairly typical pension plan you can withdraw funds from
only if you leave employment covered by it, and the refund is typically of
your contributions plus interest (not employer contributions made on your
behalf.)

Note that this (and the article) uses “pension” narrowly to mean “defined
benefit retirement plan”, not broadly to mean “retirement plan, including
defined contribution plans as well as defined benefit”. Defined contribution
plans can usually be withdrawn from at a penalty more freely.

------
vxxzy
Isn’t this by design? When interest rates lower, institutions are forced to
find yield elsewhere. Don’t central banks lower interest rates to make saving
less attractive?

~~~
smt88
Pension funds != savings

Pension funds are intended to be large pools of money invested wisely,
ensuring that retirees from a certain employer can be paid what they were
promised.

Changing interest rates would affect how the fund managers invested the money
(in theory). It's unlikely that pension fund managers can recession-proof
their investments, partly because recessions by definition are harmful to
almost everyone who is holding securities when they begin.

------
vnchr
A response to “The Next Recession Will Destroy Millennials” to include the
corresponding destruction of Boomers too...

I find this language and the agenda of fear to be concerning.

~~~
somebodythere
Millenials are more likely to be the ones destroyed. The government will bail
out the pensions and millenials (current and future workers) will pay the tax.
This is the consequence of being underrepresented in government.

~~~
vnchr
I will not be destroyed by a recession.

------
lota-putty
Today's billionaires believe they earned their wealth & deserve to keep all of
it. All they did is invent shrewd ways to leech from the society artfully
without moral responsibility.

In a way they're worse than average kings/queens from history.

[https://assets.weforum.org/editor/large_P5jdSz3P6OAUa75Orq2L...](https://assets.weforum.org/editor/large_P5jdSz3P6OAUa75Orq2Lr2n
--s4b-JHWiU4eBssSTd4.png)

~~~
blaser-waffle
The average king of queen thought they have a literal Divine Right from God,
and were absolutely willing to enforce that with violence and suppression.

There are a lot of good reasons to hate on the ruthless capitalist business
class, but don't pretend that actual monarchs were somehow more benevolent.
There were a lot of revolutions and civil wars in history -- for a reason.

------
bryanlarsen
I expect inflation to destroy pensions and retirement savings. We're heading
towards a time when there are going to be only 2 workers for every retiree.
We're going to need a lot of people to take care of retirees, and that's a
crappy job that most won't want to do. Currently such jobs pay poorly but I
expect them to have to crank those salaries a lot to fill them.

~~~
tryptophan
This is the situation in Japan, and they have lower inflation than we do.
Younger people are just told to suck it up, and they do, as their standard of
living drops.

USA is much more freindly to low skill immigration too, which would reduce the
need for raising wages for these jobs.

------
bryanrasmussen
This seems U.S centric though, I wonder how other parts of the world will do
with pensions.

~~~
leokennis
In The Netherlands:

\- Pensions are already "squeezed" (people get less pension than they
originally were told they would)

\- The age you can retire was alway 65, now it's 67 and growing with life
expectancy (every year of life expectancy = 8 months later retirement)

\- Pension funds want/lobby for more lenient rules so they need to have less
cash on hand...not sure if they'll get it

~~~
brnt
The Dutch Planning Bureau publishes graphs of net-benefits people on average
may get out of the pension system, and those numbers as function of your
birthdate are quite staggering:

[https://tweakers.net/ext/f/YflHE563fficH8f0MAv7zIFj/full.jpg](https://tweakers.net/ext/f/YflHE563fficH8f0MAv7zIFj/full.jpg)

------
ohiovr
I want an interest only mortgage when rates go negative.

------
chrisgd
Cassandra is apropos

------
cc439
Pension funds have been allowed to decay so far in such an unseen manner that
there is now a universal aversion to peering behind the curtain because the
naked truth is too terrible for anyone to process. That there are only a
handful of small, independent journalists/bloggers willing to touch the
subject, as is the case with this article, is a sign that there is fear at the
highest levels of a national conversation on the issue which would be born
from honest reporting by mainstream sources. The ramifications that stem from
exposing the pension system as utterly broken beyond repair would threaten to
topple the whole house of cards propping up modern society.

CalPERS in particular has become subject to multiple mini-scandals recently.
The first of which is the competency of their latest CEO and the thoroughness
of their hiring practices (1). Even the most charitable interpretation of her
resume and skillset would arrive at the conclusion that Marcie Frost is a
figurehead/cheerleader type CEO at best. Combine that with the recent
announcement of Yu Ben Meng's return to CalPERS as CIO and there is certainly
room for concern (2). Meng left CalPERS in 2015 to serve as deputy chief
investment officer of China's $3.2 trillion State Administration of Foreign
Exchange. We are now facing a situation where the nation's largest public
pension is managed by a man considered so trustworthy by the country we are
currently waging a trade war against that they placed him in charge of their
largest capital fund. Even if everything is financially and legally above
board, this kind of tone-deafanagemeny by the CalPERS board does not induce
great confidence in their leadership or stewardship abilities.

(1): [https://www.nakedcapitalism.com/2018/08/marcie-frosts-
shoddy...](https://www.nakedcapitalism.com/2018/08/marcie-frosts-shoddy-
resume-alone-reason-not-hire-calpers.html)

(2):
[https://www.pionline.com/article/20190204/PRINT/190209951/ne...](https://www.pionline.com/article/20190204/PRINT/190209951/new-
calpers-cio-ready-to-make-nimble-dynamic-investing-shifts)

------
mitchtbaum
sorry, Cassandra

I misunderstood

