An enormous pension crisis is coming our way. And it is likely to cause a seismic shift in how we view saving and investing.
I generally consider that to be a positive development. However, the way we get there is bound to be ugly. At this moment the looming pension crisis is like a distant storm on the horizon. Many people know that it will arrive at some point. Some even believe that it will be bad.
But few truly understand the magnitude of the pension disaster to come.
A pension is just a fancy way of saying that a company, financial institution or government will cut you a monthly check for the rest of your life once you reach retirement age. Almost all pension plans manage large pools of assets that are used to pay out these benefits. Under normal circumstances, these assets (usually stocks and bonds) grow in value over time, allowing the pension plan to keep up with its obligations. This is referred to as being “fully funded”.
So far, so good, right? Unfortunately, we aren’t living in financially normal times. You see, many of the assets contained in pension plans these days are rather questionable.
For example, I recently read an article by financial commentator Wolf Richter titled “This Deal Shows How the Junk-Credit Market is Still Irrationally Exuberant“. It details the sad story of a company called Asurion, which is borrowing $3.75 billion in the capital markets.
The problem is that Asurion is already highly levered. It is rated B1 by Moody’s, which is deep in junk territory. Furthermore, Moody’s considers the company’s borrowing binge to be “credit negative” – code for the strong possibility that it will downgrade Asurion in the near future.
The bad news doesn’t end there, though. Asurion will not use the proceeds from the new debt to expand its business or buy another company. Instead, it will use the entire $3.75 billion to issue a special dividend to its partial owner, a private equity firm.
If this sounds bad, it is because it is. Asurion is already neck deep in debt. Taking on more debt will not improve its chances for long-term survival.
But this is where things get interesting. Asurion isn’t 100% owned by the private equity company mentioned above. Instead, the private equity firm has cut some other “investors” (read: bag-holders) in on owning Asurion. One of those investors just happens to be the Canadian Pension Plan Investment Board, which manages the Canadian equivalent of Social Security in the United States.
Oh, and Asurion’s business is selling extended warranties on cell phones, consumer electronics and home appliances – a superfluous service if ever there was one!
So here is what is going to happen. In the next recession, the inevitable will occur and Asurion will go bankrupt. The unfortunate equity owners (like the Canadian Pension Plan – indirectly the Canadian people) will get a goose egg. Any holders of Asurion debt (mutual funds, other pension plans, etc.) will take a massive haircut, getting pennies on the dollar.
Oh, and if there is a God in heaven, Asurion will hopefully be liquidated in its bankruptcy, if for no other reason than so we can’t go through this demented financial rollercoaster again at some future date.
Now Asurion’s grim situation isn’t a one-off. The corporate world has been borrowing hand-over-fist for the better part of a decade now. When the financial storm finally hits, it will be unbelievably intense.
And regular people expecting their pension payouts will be at the center of this default hurricane. And this doesn’t just apply to the minority of the population that still gets a defined-benefit pension from their private employer. It is also going to hit millions of pension holders who work (or used to work) for state and local governments.
Even social security beneficiaries (which include nearly every American citizen over the age of 65) will feel the pinch of the pension crisis. According to the Social Security Administration’s 2018 report, the Social Security Trust Fund will be fully depleted in 2034.
But once the looming pension crisis smashes into the economy, you can expect this drop dead date to arrive far sooner than anyone expects. This is because the cratering economy will bleed a lot of jobs, driving down payroll tax collections that would have been used to fill the Trust Fund. At that point, absent a substantial increase in payroll tax rates, Social Security will only be able to pay out 75% of its scheduled benefits.
And that brings us to the real crux of this article – how you can avoid the coming pension crisis.
I would direct your attention to the photo at the top of this post. It shows a 5 troy ounce vintage silver bullion bar that I recently purchased from Etsy. This classic, loaf-shaped bar is undoubtedly an older ingot from the 1960s. In fact, it is possible that the “64” stamped on the lower left-hand corner of the bar is actually the last two digits of its date of manufacture – 1964.
If this is the case, this vintage silver bar would have been equivalent to almost $6.50 in U.S. silver certificates (before they ceased being convertible in 1968).
But the greatest thing about this beautiful vintage silver bar was its price – a mere $110, including shipping!
I find it amazing that you can still pick up gorgeous and desirable hard assets like this for so little money, while the financial “professionals” chase treacherous junk bonds. $110 is less than the price of one share of Facebook ($148), Alibaba ($152) or Boeing ($356) stock. And it is less than the price of a single token of the Maker ($450), Ethereum ($119) or Bitcoin Cash ($130) crypto-currencies. And unlike these dubious assets (or your monthly benefit check), hard assets won’t collapse in value in the coming pension crisis.
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