That’s the gap in unfunded liabilities that face U.S. public pension funds that still have utterly unrealistic assumptions of 8% annual growth. The gap in the private sector is about $500 billion.
To paraphrase the great Senator Dirksen, “A trillion here and a trillion there and pretty soon you are talking real money.” It would be funny if it weren’t so tragic. The problem with pensions in the advanced industrialized world is simple: They’re effectively irreparable.
The Financial Times ran a story on this subject this week noting the following: “It’s existential. That’s the one-word summary of the scale of the challenges,” says Alasdair Macdonald of Willis Towers Watson, an actuarial consultancy. “You can pull different levers, but the declines in rates is an existential problem for the entire pensions system.”
The pension problem is exacerbated by the fact that we are all living much longer.
Under normal circumstances, that would be cause for celebration. But actuarially and economically, it’s a nightmare. As the 21st century progresses, advanced industrialized societies will have a larger portion of their population draining their resources for much longer than anyone has ever imagined. The toll on productivity could be enormous, unless we make massive advances in robotics and rethink the nature and compensation of work.
|Pensions are in big trouble.|
In the meantime, however, the pension crisis has exposed the fatal flaw of quantitative easing (QE) monetary programs. As the Financial Times so perceptively notes: “Any solution to the (pension) problem involves individuals saving more and companies investing less — a result that blunts the primary goal of easy monetary policy: stimulating spending.”
Indeed, the irony of this is that no matter how much money you print — no matter how low the rates are — individuals and corporations will simply hoard more for fear of their future income demands.
That’s why the next policy shift in the world is going to be fiscal.
|The problem with pensions in the advanced industrialized world is simple: They’re effectively irreparable.|
Regardless of whether Hillary Clinton or Donald Trump come to power, government spending is going to skyrocket. And that’s actually not a bad thing. With rates near zero, governments can borrow trillions of dollars at virtually no cost. And as long as they invest that money into assets like roads, bridges, and fiber optic lines, the productivity boost from such a move could be massive. That’s especially true in the U.S., where crumbling infrastructure is on the verge of sending us into third world status.
So while non-conventional monetary policy has been virtually useless in jump-starting the economies in the G-7 universe, it may eventually push policymakers into the right direction as the era of austerity comes to an end.
For all you Starbucks fans out there, the news keeps getting better: In addition to a nice move higher since mid-August to a recent price of $57 and change, a California judge dismissed a case that accused the coffee-store titan of under-filling its iced drinks. According to U.S. District Judge Percy Anderson: “If children have figured out that including ice in a cold beverage decreases the amount of liquid they will receive, the Court has no difficulty concluding that a reasonable consumer would not be deceived into thinking that when they order an iced tea, that the drink they receive will include both ice and tea and that for a given size cup, some portion of the drink will be ice rather than whatever liquid beverage the consumer ordered.” Couldn’t agree more.
There’s no doubt about it: Summer 2016 has turned out to be a nice fling for investors: The rally off the June 23 Brexit vote — and the ensuing somewhat unstoppable euphoria — has made for a quaint summer dalliance. Certainly, anxieties over valuations, mixed economic data, and a fluctuating dollar have weighed on investors. And even though the slow grind higher — which has driven the markets deeper into record territory — has been somewhat orderly, the not-uncommon low August volumes may be hiding a potential downturn. So, once fall gets up on its legs, beware: There could be more downside action just around the corner.
It’s no surprise that — without much more to chew on — the markets are pretty much fixated on Fed Chair Janet Yellen’s speech on Friday from Jackson Hole, Wyoming. With the symposium’s rather uninspired title of “Designing Resilient Monetary Policy Frameworks for the Future,” everyone will be waiting to see where rates are headed.
And according to Robert Tipp, head of global bonds and foreign exchange at Prudential Fixed Income: “The market is only pricing a 50/50 chance of a hike this year. If they want to get this done, and they don’t want to shock the market and create a whole repeat of last year’s market volatility from not going [last September] … they have to inject the expectations of another rate hike. The best defense is a good offense.” We’ll just have to wait and see.
The Money and Markets team