Look Back to Look Ahead
In the 1990s, even though interest rates were too low from 1995 on, all was well with pension funds. The U.S. stock market zoomed upwards, so many funds' value soared far above their actuarial liabilities.Many companies stopped contributing to their funds, and General Electric (NYSE: GE) even found a way to make profits on its pension funds goose the company's reported profits - thus siphoning more bonuses and stock option gains into management's pockets.
After 2000, the profits went into reverse. Pension funds then responded foolishly; they transferred a huge percentage of their money into "alternative investments" such as farmland, forests, private equity funds and hedge funds.
Essentially, they bought a lot of assets at inflated prices - like, well, anything to do with real estate in 2004-07 - and paid inflated fees for mediocre performance.
However, apart from the losses from the market crashes of 2000 and 2008, the real problems for pension funds came from the steady decline in interest rates engineered by Alan Greenspan and Ben Bernanke.
For example, even though stock prices are at record levels, and the asset sides of the pension funds ought to be doing fine, Bernanke's low interest rates have swelled the liabilities sides to enormous heights, so pension funds' funding deficit is at levels more typical of the bottom of bear markets than several years into a recovery.
What's more, the problem won't go away when interest rates rise again. That will make stock and bond prices decline, reducing the asset side of the funds' balance sheets. It will also push leveraged hedge funds and private equity funds into bankruptcy, wreaking further havoc.
No One Is Exempt
The problem of pension funds also extends to baby boomers' own retirement savings. You see, what may look good on your statements isn't usually put through the same actuarial calculations that pension funds build.That means what looks like a fairly decent pile of money when looked at in cash, translates into an absolutely pathetic annual sum if you try to turn it into an annuity (because annuity calculations are based on the same arithmetic as pension fund accounting).
The fact is, most retiring baby boomers keep their IRAs and 401(k)s in cash, withdrawing the amounts of money they need to live on.
What needs to shouted from the rooftops is, more likely than not, the withdrawals they make are too large, and will exhaust the available funds long before the unfortunate owners expire.
Baby boom retirements are destined to be thoroughly miserable, mostly thanks to Bernanke; those with funded pension plans will find their plans in bankruptcy, while those without pensions - the IRA and 401(k) majority - will simply find the bankruptcy transferred to their own finances.
The solutions are simple, but not easy: save every penny you can, pray QE ends quickly and just in case, work till you drop.
In all seriousness, to the extent you invest, buy into emerging markets with good growth rates and no Ben Bernanke. They may have risks, but at least they avoid the Bernanke risk you have to live with in the rest of your life.
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Guest Editorial 23 May, 2013
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Source: http://feeds.moneymorning.com/~r/moneymorning/jOLe/~3/pVx8AfcGnFw/
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