The Biggest Ponzi Scheme in History: Pensions

This post took me a looooooong time to write, simply because it was so painful. As much as I hate to admit it (and probably you too), pensions have now turned out to be the biggest ponzi scheme in history. Although there are no exact numbers, experts estimate that there are trillions of dollars worth of unfunded pension liabilities in the U.S. alone. Let’s use a little bit of logic here, and we’ll realize that there is ABSOLUTELY no way the problem with those unfunded pension liabilities will be solved.

Unfunded liabilities, added in with an ageing population.

The problem all starts with the general ageing populace. As western society grows older, more and more people will be depending on their retirement pension plans to support their lifestyle. Once that huge chunk of the American populace hits retirement, we can no longer expect them to add money into pension funds. On the contrary, the retirees will be withdrawing money from their pension funds. So what we have here is an ageing population that’s depending on their pensions for a living, and trillions of dollars worth of unfunded pension liabilities! So the only way to fill that gaping hole in unfunded pension liabilities is to get young people to contribute more and more of their salary towards these pension funds. Since the population is ageing, and as a percentage young, working people are decreasing, one can see that young people will be forced to contribute more and more of their salaries towards these ridiculous pension funds. Let me give you an example. I had a really good friend who had a well paying, respectable job. In the year 2000, he was required to put only $600 into his pension fund. In year 2004, he was required to put $890 in his pension fund. But in 2007, he was required to put $4500 into his pension fund. This number comes to show that pension funds are getting increasingly desperate to attract new money and fund the unfunded liabilities. A ponzi scheme indeed.

Less workers, which means better invesment returns are needed to fund liabilities

Since the population is ageing, as a percentage, working people are decreasing. Due to this reason, pension funds will need to squeeze an  even higher investment return from an ever dwindling pension fund (that way they can continue to pay retirees). Which leads to my next point.

Harsh investment environment.

The investment environment and market conditions will be especially tough. We have entered a secular bull market. As I mentioned above, pension funds now need to squeeze an even higher investment return from an ever dwindling pool of money. I hate to break it to you, but 99% of pension managers suck. Seriously. You’re probably even a better investor than 99% of pensionfund managers. The majority of pension fund managers nowadays have grown accustomed to riding a HUGE secular bull market (1982-2007). Truth is, even the village idiot can make money in a bull market. All it takes is to buy, hold, and sit on your couch watching TV all day. But as you’ve seen, investing in a secular bear market is tough. Simply put, 99% of pension fund managers are terrible at investing in bear markets. During the financial crisis of 2008 – 2009, pension funds performed the worst. Pension fund managers were slow to react (because they got lazy and accustomed to bull markets), and thus got annihilated in the ensuing bloodbath.

Due to the dwindling amount of money in pension funds, pension fund managers are going to need to crank out even bigger investment returns in order to fill the ever widening gap in unfunded liabilities. That just simply going to happen. Tough investment environment + terrible pension fund managers = no way the unfunded liabilities will be funded.

Summary.

My point is that an ageing population means more money will be needed to support the pension funds of those retirees. The fact that there are already trillions of dollars worth of unfunded pension liabilities, coupled with the fact that the investment environment will be very tough (pension managers aren’t up to the task), means pension funds will be forced into a HUGE ponzi scheme. They’ll need greater and greater contributions from the percentage-wise diminishing workforce to feed the retirees. Once there’s no money left in the pension fund system, this ponzi scheme is ready to implode.

Don’t trust your money to pension funds. 99% of the time, pension fund managers are no better of an investor than you. And if your company goes bankrupt, then your life savings are gone too. Many people are forced to put money into their pension funds. If so, then only put the minimum amount required.

Still think that you should trust your life savings to pension funds? Then ponder this. Are you willing to let others control your fate? Are you willing to let others control whether or not you achieve financial success?

10 Responses to “The Biggest Ponzi Scheme in History: Pensions”

  1. Dr Dean November 4, 2011 at 8:27 pm #

    Tony, in general I think those who are in large pension funds that have a deficit are indeed in trouble. The “estimated” returns are too generous and will those targets will never be hit.

    Those who are not making contingency plans with additional personal savings will be in trouble.

    Each plan though has different issues, so those with pension plans need to dig deep and find out how their plan is being funded and what the projections are.

  2. Squirrelers November 4, 2011 at 12:15 am #

    Better to take cash in hand up front. I know of people that were given this option, one I recall smartly took the money up front in lieu of a monthly payment. These people were of an older generation.

    You never know what can happen in the future, and it’s tough to retire on someone else’s promise to take care of you. Best to focus on self-determination and controlling retirement funds directly.

    • Tony Chou November 4, 2011 at 6:45 am #

      Exactly. You’re hoping for a promised tomorrow.

  3. retireby40.org November 1, 2011 at 4:02 pm #

    That’s why we should open the border and let younger workers in to support the retirement system. :D

    • Tony Chou November 1, 2011 at 4:10 pm #

      Agreed.

  4. sfi October 31, 2011 at 7:33 pm #

    In many states these are ponzi schemes because the link between contributions and benefits is not established. You may have seen those stories about union members and other state workers who work for a short time as a public employee and earn a full pension based upon other income that isn’t even related to their public service income.

    The private sector is working to fix the pension problem by instituting Cash Balance Accounts. We need the same reform in the public sector.

    sfi

  5. krantcents October 31, 2011 at 3:46 pm #

    Not all pensions are Ponzi schemes. I will receive a pension from the California Teachers pension fund (CalStrs). I contribute 8% and the school district matches it. Very similar to Social Security. The people who manage CalStrs and CalPers do a very good job of growing the fund. The problem is the state is underfunding the school districts and allowing them to delay making their payments to the fund.

    • Tony Chou October 31, 2011 at 4:52 pm #

      Exactly. BTW, do you know who’s managing the CalStrs fund?

    • Matthew December 2, 2011 at 6:54 am #

      It’s important to note though that all pension schemes are affected by demographic changes, and all rely on future workers. Funded schemes are no better in this than unfunded ones. See
      http://www.imf.org/external/pubs/ft/wp/2000/wp00139.pdf

      • Tony Chou December 2, 2011 at 1:20 pm #

        Thanks for the link.