Wall Street loves low interest rates, and the speculative frenzy that results from repeated doses of easy money. But the era of ultra-low rates is bankrupting pensions, one basis point at a time.
That’s the conclusion of a depressing Wall Street Journal story this week. It notes that fiscal 2016 results have been dismal for many pension fund managers, with the lousy returns on fixed-income investments a key culprit.
Throw in two major recessions, and two bear markets since the turn of the century, and you get a recipe for a funding crisis.
The blue-chip Wilshire Trust Universe Comparison Service now estimates that 20-year annualized returns will slip to less than 7.5% this year. The firm has never seen returns that low in the 16 years it has been tracking the pension fund industry. It’s also a huge decline from the solid double-digit returns that pension funds enjoyed in the early 2000s.
Low interest rates are making it difficult for cities to fund the pensions of retired policemen, teachers, firefighters and other employees. Taxpayers must make up the difference.
One example from the Journal: Pension costs have tripled for the school system in Erie, Pennsylvania, forcing the government to close schools, fire workers and rely on stapled printouts rather than textbooks for its students.
Low rates also drive up expected liabilities for Corporate America. So unless and until the NIRP/ZIRP environment changes, companies will increasingly have to forgo certain investments or expenditures in order to pump more money into their underfunded pension plans.
The consulting firm Mercer estimated that S&P 1,500 companies had a total pension deficit of $568 billion as of June, up $164 billion just since the end of 2015.
This isn’t just a U.S. problem, either. Spend even a little time Googling the issue, and you’ll read about major pension problems in Japan, Australia, Canada, the U.K., the Netherlands and elsewhere.
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Central bankers have acknowledged the issue, but basically washed their hands of it. They say the benefits for the global economy outweigh the negative side effects of NIRP/ZIRP.
But that argument looks more and more ridiculous to me when I read stories like these, and when I factor in the “Everything Bubbles” that easy money policies have inflated.
That’s because I know an incredibly painful day of reckoning gets closer with each hour that passes, and each basis point that interest rates fall.
Until next time,