Over the past decade most governments in the Western World have largely increased their spending on social security and pensions. Even though the respective budgets already consume a large part of total government funds people continue to demand more and better public health, disability, unemployment, and pension benefits. If they think that they can maintain and even increase the current benefit level they are wrong.
According to a report by the U.S. Social Security Board of Trustees Medicare will likely be insolvent by 2026 and Social Security will not have enough money to pay for promised benefits by 2035. The American Legislative Exchange Council (ALEC) calculates that unfunded public pension liabilities have reached almost USD 6 trillion or USD 18,000 for each resident of the United States. This is because actual investment returns over the last decade have fallen 1% short of the projected annual investment return of 7-8% which has been the basis for benefit pledges. Therefore, it is no wonder that pension plans are severely underfunded. And it could get even worse. To compensate for lower returns fund managers have started to invest larger portions of their funds in riskier assets. Once the prices of these assets collapse the funding shortage will get even worse. Already today pensions funds in Kentucky, Illinois and New Jersey are close to running out of money. Expect that list to get much longer in the future.
The situation in Europe does not look much better. For example, the German welfare system, which is a pay-as-you-go system, already consumes a large part of the federal budget despite a booming economy and a low level of unemployment. Once a crisis strikes premiums will have to rise steeply or the government will have to put in additional money. The situation will be aggravated by the fact that the German workforce is shrinking. Low skilled immigrants from Africa and the Middle East will hardly fill this gap but rather worsen the situation as they expect full benefits without ever having paid into the system. Disputes about the allocation of scarce resources between the growing group of retirees, jobless and immigrants on one hand, and the declining work population on the other hand will inevitably accelerate.
Other countries in Europe, Canada, Australia and New Zealand have social security and pension systems that differ widely though most of them are ailing. A thorough analysis of each of them goes well beyond the scope of this article. So do your own analysis for the country you live or plan to retire. Only emerging economies are a bright spot. A global crisis will hardly affect their level of social security and pensions payments …… because they hardly have sufficient systems in place.
The only good thing about the social welfare system is that it will not go bankrupt. Instead it will be bailed out by the government and eventually cut benefits in order to survive. This will especially hid pensioners. Those who think that the negative impact of the public pension breakdown will be mitigated by their corporate pension need to think again.
A 2018 study by Cheiron found that 121 multiemployer pension plans in the U.S. covering 1.3 million workers are underfunded by USD 49 billion and could become insolvent within 20 years. Pension plans by the big U.S. corporations are equally underfunded by billions of dollars. For instance, General Electric (GE) has just decided to freeze pension benefits for 20,000 employees. The situation in Europe is not much better. A recent analysis by the Flossbach-von-Storch-Institut in Germany found that there is a pension gap of EUR 146 billion just for the Top 30 corporations in the DAX. If you hope to enjoy a carefree retirement thanks to your public and corporate pension you are suffering from delusion. Expect to be forced to sell some or all of your assets and/or continue working until your death.
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