Regardless of who wins the presidential race, a long-term loser will certainly be America’s forlorn future retirees.
Whether you’re a young public-school teacher in California, a rocket scientist in Tampa, or an artisan brewer in the Pacific Northwest, chances are your pension fund lacks the capital it needs to cover future liabilities. That includes private-sector plans as well as public ones from the federal to the municipal level. And for reasons that should surprise no one, our governing elites are not likely to confront the problem anytime soon, let alone fix it.
Much of the crisis is fueled by simple demographics. Not only are baby boomers retiring in human waves, they are doing so on the backs of a dwindling work force on static wage rates that never fully recovered from the 2008 financial collapse. A recent report from the National Institute of Retirement shows that the average American household has a mere $2,500 saved for its retirement. The study also found that people near retirement have set aside only $14,500 – enough to live on for about three months. Among working households in the U.S., 40 percent have set aside nothing at all for retirement and twice that many did not have enough socked away to cover a single year of expenses.
As tempting as it may be to blame such low saving rates on a reckless consumer culture that fetishizes mobile phones and flat-panel TVs, the facts are sobering. According to the US Bureau of Labor and Statistics, the percentage of working age adults who have full-time jobs has been idling at 48 percent since 2010 – the lowest full-time employment level in 33 years. At the same time the number of publicly listed companies trading on American exchanges has been reduced by half in the last two decades in tandem with the dwindling of new and existing customers. In response, companies either dissolve or merge with competitors, which puts more workers on the street. The circle tightens.
If only Social Security could compensate for these gaping deficits. In fact what stands for our national pension plan covers only about 35 percent of an average household’s pre-retirement income. There is also the uncomfortable fact that Social Security is, by its own account, due to run out of money by 2034. According to Moody’s, the Social Security funding gap is estimated at $13.4 trillion or 75% of GDP.
There is more to this crisis than actuarial tables however. Not only has our shrinking work force enfeebled both economic growth and the tax base, legislators have, by refusing to take on the scandal of the US tax code, baked a culture of evasion in which Fortune 200 companies may pay the most miserly of duties or park billions of dollars in taxable revenue abroad. Change is unlikely in part because Capitol Hill is run like an auction house, but also because few lawmakers are willing to invest time and political capital for the sake of reforms, however badly needed, that will take years to bear fruit. It’s the same reason our infrastructure is in such a lamentable state: no respecting pol wants to fight for a new bridge or light-rail line if the tape-cutting ceremony won’t be held until he’s left government.
There is also the wide wake of quantitative easing to consider. The easy-money policy beloved by central banks has gutted the pension-fund industry of yield along with the rest of the fixed-income universe. Despite pouring an estimated $500 billion into their pension funds since 2009, companies as well as unions are grappling with their worst deficits in 15 years as the Federal Reserve and other monetary authorities consume trillions of dollars in securities as part of its low-interest rate strategy to stimulate growth.
Pensions are caught squarely in the middle. The average yield on the US 30-year bond has fallen to 2.4 percent while pensions still rely on 6.5 percent or higher annual returns. Take the giant California Public Employees Retirement System, which in July announced it returned a mere 0.61% during the fiscal year ending June 30th, well short of its needs to fund obligations to retirees. It was the second year in a row that it missed its target.
As Bloomberg writer Lisa Abramowicz put it to readers last month: What’s an honest pension fund manager to do? Sell his existing holdings and lock in losses? Liquidate other positions to buy new bonds? Plead for more contributions? The most likely outcome, she suggested, is that company boards and municipal officials must increase their contributions to pensions under their authority or negotiate cuts to their obligations. Either option, she says, will slow the velocity of money and attenuate growth at a time when just the opposite is needed.
In pat speeches lawmakers render our children in reverent hues even as they rob them of their citizens’ birthright, wittingly or otherwise, through their own indolence and neglect. Having squandered the opportunity to fix the pension-fund problem before it became a crisis, only the most invasive solutions are available to us. We must redefine the very concept of how many can be or should be covered. That means giving others an incentive to leave the system through a wholesale reform of the tax code.
In the second half of this special two-part edition of Promontory I will present a foundation of reforms on which a sustainable retirement system could be built.