The Pension Illusion
December 4, 2015
There is surely no aspect of modern life, not even health or national security, in which the disconnect between the degree of importance that a specific issue has for an average person and the degree of interest that person takes in said issue is as great as in everything to do with pensions.
Pensions, however, are one of the great turn-offs. Even people obliged by law to put money aside every month, pay little heed to how much they save, what becomes of their savings, or whether this is anywhere near enough to meet their needs, ‘when they retire’. Regulators impose obligations on pension funds and other financial institutions as to the frequency, the content and other aspects of the communications they must send to their savers/ members/ clients – but no government has yet obliged the recipients to read what they receive, and no power on earth can make people understand what is in these reports.
It may be critical to their future, if they are to have one after ending their working careers, but many people simply don’t want to bother themselves with this subject.
Granted, there is a counter-argument that, with regard to pensions, ignorance really is bliss. Surely, the citizens of most Western countries do not wish to learn that their governments are bankrupt and that, as a consequence, their pensions are often a feel-good façade. The lethal cocktail of demographics – too few young people versus a swelling phalanx of retirees – and democratic politics, which has seen too many politicians legislate, over too many years, too many commitments to too many people, has already ensured that people beneath the age of 50, have little-to-no chance of receiving the state pensions their governments have undertaken to pay.
ZIRP and NIRP
This long-term threat has been severely aggravated in the last seven years by an unprecedented financial reality. Government of developed countries have adopted extremely unorthodox monetary policies, such as ZIRP (zero interest rate policy) and even NIRP (negative…). These policies have distorted all financial and asset markets, pushing the prices of everything from shares to homes to unsustainable levels.
But let us, for the sake of the discussion, assume that these policies will be maintained – after all, no-one back in 2008 believed that they would last for three years, let alone seven or more. That will allow the value of people’s homes to rise further, and the prices of bonds and equity to climb still higher — but it will mean that income from bank deposits, from interest on bonds and even from dividends on shares will become increasingly hard to find.
For people who already were pensioners and/or retirees in 2008, or became such subsequently, the dearth of income from their investments, whether in pension funds or in any other framework, is now an established fact. In many cases, this brutal reality has blighted their supposedly “golden years”. In the US, where retirement is not mandatory, many people have remained in work through and beyond the age of 65, or have even taken on additional jobs to help make ends meet.
In Israel, the situation is less acute — for various reasons – but the basic problem is very much present. As elsewhere, the unexpectedly long period of ZIRP means that the pressure on pensions accumulates steadily. The regulatory agency in charge of this area – a Treasury department called “the Commissioner for Capital Markets, Insurance and Savings” – has become increasingly concerned, in tandem with its becoming increasingly intrusive and bossy with regard to all aspects of pension savings, management, reporting, etc.
The regulatory body is, of course, unable to address the root of the problem, which is the warped structure of global financial markets in the era of ZIRP. It must, perforce, make do with trying to wrestle with the results of the malaise, which are simply that pension funds cannot generate high enough returns on their investments – especially in the dominant component of their portfolio, which are bond holdings of one sort or another.
Bridging the gap between the level of yields that can reasonably be expected in today’s markets, and the level of payout that pension funds need to meet their obligations to their savers, can be done in one of three ways. Raising the official retirement age or raising the level of pension contributions are both intensely unpopular, for obvious reasons – and hence politically unacceptable.
That leaves the option of changing the terms of the pension scheme itself – and this is what is currently being done. The Histadrut is determined to oppose this and to demand that the government revert to subsidising older people’s pensions. This, of course, would require higher taxes…
The bottom line is that the pension chickens are beginning to come home to roost – even in a country like Israel, where both the demographic structure and the pension system are in far better shape than in most European countries and American states. Clearly, there is going to be considerable trouble over this issue. But before the balagan really begins, it would be really worthwhile to learn and understand how your personal pension plan/s work and how exposed you are to the gathering pension storm – and whether and what you can do about that.