Americans’ Retirement Could Be in Trouble
This statement may sound dire, but it’s really worth making: the retirements of many Americans could be on the line.
In case you didn’t know, pension funds run by cities and states across the U.S. are severely underfunded. They don’t have enough money to pay out benefits to those who have been putting money in them.
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How big is this amount? You can read more about it here.
Why are these pension funds struggling? They got caught in the whole financial crisis and what happened after that. They have been struggling because the returns on their assets are much lower.
Why the Next Stock Market Crash Could Be Deadly
Now on to why retirement for many Americans could be on the line.
You see, in order to reduce their unfunded liabilities, pension funds really only had two main options:
- Make the contributors pay more.
- Invest in riskier assets.
Asking contributors for higher amounts of money wouldn’t have been the most feasible option.
So, they subscribed to option two: Invest in riskier assets.
Know that a pension fund’s main goal is to make sure that assets are preserved and that they earn a sustainable return on these assets. Pension funds get top dollar for doing this.
But, we are seeing them take risks.
Pension Funds Buying a Lot of Stocks
Consider the recent report by Wilshire Associates Incorporated, which closely looked at 96 pension systems of cities and counties.
Here’s the troubling part: as a whole, the pension funds in the report had massive exposure to stocks. At the end of 2017, their portfolios consisted of 30% U.S. stocks and 20.6% non-U.S. stocks. That’s over half of their portfolios in stocks. (Source: “2018 Wilshire Consulting Report on City & County Retirement Systems: Funding Levels and Asset Allocation,” Wilshire Associates Incorporated, last accessed September 24, 2018.)
Truth be told, stocks are getting more expensive and riskier by the day.
The U.S. stock market is trading at 96% above its long-term price-to-earnings (P/E) ratio. The only other time something like this happened was in the midst of the Great Depression. Markets are trading today at much higher valuations than they did in 1929. You can read more about that here.
Non-U.S. stocks look scary, too.
In emerging markets, we are seeing a lot of headwinds. Their stock markets have come down a fair bit, and more losses could follow.
In developed countries, problems remain. Britain is a risky bet due to Brexit talks, the eurozone is struggling with slow growth, and Japan is stagnant.
Why Does This All Matter?
Dear reader, the odds of a stock market crash are increasing. I am not talking about a crash in the U.S. only; a global sell-off of some sort could be ahead.
If this is actually the case, what do you think will happen to pension fund assets? They will decline in value. I think they have allocated a lot of money in stocks, and this is not good.
A stock market crash could mean more misery for those who are saving for retirement.
I can’t stress this enough: We could have a retirement crisis at hand. It will not end well.
