A few months ago, the largest public and private pension funds announced that they were so underfunded that they would have to begin cutting benefits, or in the case of Central State Pension Fund, even cut payments to retirees altogether. But this now appears to be just the start of a worldwide pension collapse thanks mostly to the actions of global central banks in their decisions to pick a few winners to the detriment of everyone else.
This announcement was from back in May, but here in the last week of August, two new critical reports show that the problems in the global pension arena are not only limited to a segregated few, but are occurring fast and furious around the world.
World’s Biggest Pension Fund (Japan) Hit with a $52 Billion Loss
So just within the past three months we have seen the world’s largest pension fund, and America’s two largest public and private funds experience losses so dire to their capital that they are beginning to cut promised benefits to current and soon to be retirees.
But it certainly doesn’t stop there, and in something that took place on Friday in the state of Illinois, the problem is now bringing the taxpayer into the mix at a time when the economy is ready to fall into the next recession.
And on Aug. 26, the board DID vote to lower the estimated return from market investments down to 7% from 7.5%, meaning by law the Illinois state government must make up the shortfall with appropriations from their general budget. And since they don’t have any money, it also means that the people of Illinois can now expect increases to their taxes to make up for this new $500 million per year obligation.
Now getting back to why the Fed is the primary culprit in the killing of private and public pensions. Both by law, and by choice, the vast majority of pension funds use stable, low risk AAA financial instruments to earn yields, which normally means they invest in sovereign, municipal, and corporate bonds, along with the occasional REIT and annuity type platforms. But with the central banks having crushed interest rates over the past 10 years, and especially following the 2008 Credit Crisis, some pension funds have had to dip their toes into the world of speculation, which meant that their capital was very much at risk when assets such as stocks declined in the markets.
(See Japan’s pension losses above, all tied to their playing in equity markets)
But sadly, it doesn’t stop there. Two state pension funds, that of Hawaii and South Carolina, are now going full retard and are selling puts in an attempt to achieve any type of yield where the markets on average have been providing only .5 – 1% return from low risk investments.
These are just the world’s pensions we have described here, and do not include the insolvencies in most country’s government run retirement insurance schemes, nor the trillions held by retirees who will soon be dumping their equity holdings to begin paying tax obligations on their 401K, IRA’s, and mutual funds. And when you couple this disaster with a world that is drowning in historic and unprecedented debt, the outcome is obvious, and we are now seeing the start of it as the collapse is fully underway.