Why Your Pension Could Be Reduced to “Virtually Nothing”
If you or a loved one has a pension, please read this Dispatch closely.
As we’re about to show you, America’s pension system is close to collapsing. When it does, millions of Americans will lose a huge part of their life savings.
Many folks will be unable to retire. Some will need government assistance just to make ends meet.
It wasn’t always this way. For years, America’s pension system worked fine. Employees would pay into the pension during their working years. When they retired, the pension would send them a check every month. Folks could count on their pension to be there when they needed it.
Those days are over.
• One of America’s largest private pension funds is running out of money…
The Central States Pension Fund manages nearly $18 billion for 400,000 workers in 37 states.
Like many pension funds, it’s running out of money. It pays out about $3.50 for every $1 it takes in. It doesn’t take a math whiz to realize that’s a serious problem.
In February, the fund announced plans to cut benefits by as much as 61%. A retiree receiving $3,000 a month would only get $1,180 after the cuts go into effect.
The fund sent out letters warning pensioners that their benefits would be drastically cut.
• Dan Steinhart, executive editor of Casey Research, says the story hit close to home…
A close family member of mine got one of those scary letters in the mail.
He’s 78 years old and retired. He worked as a truck driver for a large, well-known company for 40 years. For most of his career, he paid into the pension.
The pension promised to pay him about $2,500/month ($30,000/year) when he retired. Not a ton of money. But combined with Social Security and what he saved up for retirement, it would have been enough to live on.
Well, he recently got this letter in the mail. It essentially says the pension will go broke unless it drastically reduces his payments. Here’s a copy of the actual letter, with his personal information blacked out:
If you can’t make out the text, here’s the most important part:
The Plan’s actuary has calculated that if the proposed reductions are not implemented, then the Plan is projected to be insolvent and unable to pay benefits when due during the plan year starting February 1, 2017.
In other words, the fund will go broke if it doesn’t greatly reduce payments to retirees.
• Before the cuts go into effect, the government needs to approve them…
According to CNNMoney, the Treasury Department rejected the plan because “it would not actually head off insolvency.”
Now, the fund’s only chance at survival is if the government rescues it. CNNMoney reported last month:
The Central States Pension Fund has no new plan to avoid insolvency, fund director Thomas Nyhan said this week. Without government funding, the fund will run out of money in 10 years, he said.
At that time, pension benefits for about 407,000 people could be reduced to "virtually nothing.”
• Four other multi-employer pension funds have announced benefit cuts since December…
Many more funds will likely do the same.
According to the Pension Rights Center, 58 multi-employer plans are in “critical and declining” status, meaning they might have to cut benefits to survive. Seven of these funds have warned that they could go broke within eight years.
• Many pensions are recklessly trying to close their “funding gaps”…
As we said earlier, a pension collects money from workers. But it doesn’t just stick this money in a vault. It invests it.
Until recently, pension funds invested almost exclusively in bonds.
Generally speaking, bonds are less risky than stocks. When a company issues a bond, it promises to pay back the loan amount plus interest. When a company issues stock, it doesn’t make any promises like this. Instead, stock investors get a share of a company’s profits…that is, if it makes any profits.
Bonds are also less volatile than stocks. They performed much better than stocks during the last two financial crises. The Wall Street Journal reported on Tuesday:
[I]n 2002, safer corporate bonds returned about 11%, while U.S. stocks fell roughly 22%…
But during the 2008 crisis, stocks fell more than 37% and higher-quality bonds declined 3.3%.
• Thanks to the Federal Reserve, most bonds pay next to nothing these days…
As Dispatch readers know, the Fed has held its key interest rate near zero since 2008. This has made it extremely hard to earn a decent stream of income.
In 2007, a 10-Year Treasury yielded 4.6%. These days, it pays 1.8%. And 10-year, high-quality corporate bonds yield about half of what they did in 2007.
• Yet, most pension funds still have wildly optimistic investment targets…
Most expect to make between 7% and 8% returns on their money each year.
They can’t do that owning bonds alone. They have to own riskier assets. The Wall Street Journal reports:
To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments:
adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.
• Most pension funds are falling well short of their investment goals…
Last year, the average pension fund made just 0.30%.
These funds are making almost nothing while risking billions of dollars. That’s because the stock market is a very dangerous place to be in right now.
As Dispatch readers know, U.S. stocks are expensive. Corporate earnings are falling. And many important stocks are trading like a financial crisis has begun.
• A stock market crash would accelerate America’s pension crisis…
It would lead to billions of dollars in losses. It would force many more pension funds to slash benefits. And it would almost certainly cause some funds to fold.
To make matters worse, the government won’t be able to bail out broke pension funds. The Washington Post reported on Monday:
The Pension Benefit Guaranty Corp., which insures private pensions, is dealing with long-standing financial woes with the fund that protects multi-employer pension plans. The program, which some experts say wasn’t really intended to be used, was set up more than four decades ago to serve as a backstop for private-sector pension plans. But it has been relied on more than expected by large plans on unsteady financial footing.
The fund’s deterioration could pose a threat to the 10 million people in multi-employer plans who could soon be left without a safety net for their pensions.
• Millions of Americans could see their life savings disappear…
We encourage you to take control of your financial future whether you have a pension or not.
U.S. pension funds are the single largest pool of money in the world… If they collapse, the global financial system collapses.
We urge you to own cash and physical gold. Right now, the global financial system is incredibly fragile. Setting aside cash will help you avoid losses if stocks fall. This will also put you in a position to buy stocks when they get cheaper.
Physical gold will also help you preserve wealth. Gold has served as real money for centuries because it has a rare set of qualities: It’s durable, easily divisible, and easy to transport. You can take a gold coin anywhere in the world and folks will recognize its intrinsic value.
Gold is also a safe haven asset. Its value often soars when the economy or financial system runs into serious trouble.
Casey Research founder Doug Casey thinks the price of gold will “go to the moon” in the coming years. In short, Doug believes we’re about to get hit by a major financial crisis. When this happens, “paper currencies will fall apart, as they have many times throughout history.”
This crisis will impact every American. It won’t matter if your money is in a pension, the stock market, or even one of America’s “too-big-to-fail” banks.
Chart of the Day
If you want a decent return these days, you'll have to own risky assets.
Today’s chart shows the “basket of assets” a typical investor would need to own to earn a 7.5% return. Remember, most pension funds aim for annual returns of between 7% and 8%.
In 1990, you could make this by owning just bonds. These days, you have to own stocks, real estate, and other risky assets to have a shot at a 7.5% return.
This is what the mainstream media calls “reaching for yield.” It’s why so many investors could lose a fortune during the financial crisis. Again, you can thank the Fed for this.
Why Your Pension Could Be Reduced to “Virtually Nothing”
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