Connecting the Dots: What if This is a Retirement Crisis?

by boolean_10

TLDR: Pensions have shifted away from safe assets to equities and “alternative assets” over the past ~30 years. The U.S. has an ageing populace and we will be seeing a ton of retirements over the next decade. Less safety in retirement assets will lead to higher levels of savings and a lower velocity of money. Deflation and whatnot.

Let’s look at some facts:

Pension shifts:

“State and local public pension funds have significantly changed their asset-investment strategies over the past three decades. They have shifted a large percentage of fund assets away from fixed-income securities, such as government and corporate bonds, toward equities and alternative investments, including hedge funds and private equity funds. This shift has increased the riskiness and complexity of pension portfolios and has coincided with significantly higher investment fees.”


About ~50% in equities as of 2016.

37% of all workers in a retirement plan in the pension system. Link

Height of baby boom was 1960. They will reach retirement age in 2025. Roughly 10,000 people will be retiring each day for the next decade. The peak will be ~2023 but will stay high through ~ 2030. Link

Pensions are normally pre-funded and can survive for a while but are still dependent long term on the assets they are invested in. Certain pensions offer more guarantees than others. Link

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Putting it all together:

Go back a few decades and retirement was all about fixed income assets like investment grade bonds. Interest rates have gone down over the years and have been very low since the Great Recession and will be near 0 for at least the next two years according to JPow just the other day. More and more retirement accounts, like pensions, have been using riskier assets like equities. This shift, combined with a market crash due to a mixture of the pandemic and the low levels of liquidity prior to the pandemic have fucked things up. Chickens are roosting and whatnot. While pensions are pre-funded, we are talking about an extremely high rate of retirement at ~10,000 individuals per day.

So you’ve read all that and are wondering: now look here, it’s 2020, that doesn’t sound all bad, how can it get worse? It can!

Velocity of Money and the Potential Deflationary Crisis:

Unlimited QE has done a lot to get the market back on track. This will give funds that manage pensions and retirement accounts time to reallocate their investments. Good for boomers. But, that means that we will be seeing a reallocation to safer assets. All the safe assets offer essentially no return on investment thanks to low interest rates. Now, retirement will depend more on savings/social security. As more people save and fewer invest, an already low velocity of money will decrease. If people don’t trust the market because it looks rigged, they are likely going to be fearful of investing. Look at Warren Buffet for example. The FED really only has tools to affect the markets. Policy that will affect inflation will mostly come from Congress. Think stimulus checks. I don’t want to speculate about the economy or long-term unemployment too much as we will know much more in the next few months. Here is a paper claiming ~8% unemployment after 2 years. High unemployment, an ageing population and worries about retirement don’t sound like a good combination for increasing an already low velocity of money.

There is also the concern of stagnant wages for working age Americans, given that Millennial and Gen X wages never recovered after the Great Recession. And of course, large corporations remaining successful and being aided by the government allowing them to buy up competition and eventually using that leverage to reduce wages because what are you going to do, work somewhere else? Not if there if there isn’t any competition. Also student loan debt creating a generation of renters leading to significantly less saving and wealth as a function of age. I’ll let someone else write about that topic.


Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.


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