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| Why are Pension Funds Running Out Everywhere? |
| Written by James Chan |
| Wednesday, 20 April 2011 15:30 |
 It’s the pensions. Everywhere from unions to Social Security, pensions have been blamed for any number of fiscal woes of Fortune 500 companies or governments. Most assume that it has something to do with the current recession. However, the reality is not that simple: pensions aren’t running out just because the recession has left them cash-starved, but because of broader demographic trends. Imagine pension funds as any other company, with cash inflows and outflows. On one hand, pension funds get money from younger workers in the workforce. On the other hand, the funds are distributed to older workers (mostly retirees). In other words, when your pension funds are deducted from your paycheck, they don’t go into a secure vault, waiting for you to collect them at retirement. They go towards paying older workers, just as your pension will be funded by the next generation of workers. As you can probably figure out, there is one fundamental problem towards this approach: what if there are too many retirees relative to workers? What we’ve seen over the past few decades is the pension funds buoyed by the huge number of baby boomers in the workforce. This is why Social Security had a $4 trillion surplus in the 1990s. In the last generation, we had a large population of workers funding a relatively small amount of retirees from the World War II era. Therefore, even during recessions, we didn’t often hear about pension funds failing.  However, currently, the tables have turned. All the baby boomers that worked to contribute to the pension funds are retiring, and there aren’t enough workers to support them. In a healthy pension system, this would be when the surplus built up would be used to make up for the difference. However, oftentimes the surplus would be used to fund other projects going around in a business or government- a pile of cash sitting around is always tempting. For example, the U.S. government used to routinely borrow from Social Security to fund their pet projects. Here’s the catch- whatever you take out has to be put back in; eventually you’ll have to divert money from other sources back into pensions. This can be painful. Especially when you have no money left to begin with, as is the case right now. What we have is a pension deficit in which the money has already been spent long ago. Normally, what would happen is that we divert funds from other productive sources to use on pensions, which would cause a recession. However, since we’re already in a recession and there’s a lack of income to divert from, pensions are going bankrupt or have to be restructured. Even when the recession ends, there is no guarantee that the hole we dug is going to be completely filled. In fact, the chart below shows that we’ll run out by 2037. And the government is keeping Social Security sacrosanct. We can only hope. (Photo: Andreas Kollegger) |
Comments
What they need to figure out is how to adjust the support system so people that need the money will have access to that money when they retire.
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