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Saturday, 12 November 2011

Pensions, markets & the baby boomer time bomb

Since the day after the election, the news is that things aren't as good as it seemed during the campaign and in fact are very bad. If you had listened to Dr. Forskitt or me during the campaign, this is exactly what we were telling you, (or rather trying to get through the media blackout).

As pension monies are withdrawn from the market and paid out
a collapse in share prices is inevitable
Between 2011 and 2016 the baby boomers retire
The latest post-election 'revelation' is that the States Employees pension fund is in deficit. Indeed last year beneficiaries were given only a 2% rise rather than the full inflation linked rise that the scheme aims for and it would appear that less than inflation rises are set to continue for the foreseeable future.

Likewise the Social Security (or State Pension) fund is in deficit. According to government estimates by 2030 (I won't even have hit retirement age by then) the fund will be exhausted. So what am I paying all that Social Security for I wonder?

If I sit down and work out what the return on my investment is likely to be, I suspect that it will fall far short of the return I would have achieved had I kept the money and invested it myself.

The investment of the millienium so far has been gold, which started out at $295 per troy ounce and is currently around $1,800 per troy ounce, a healthy 600%+ rise far outstripping any other investment class. Successive social security ministers have invested exactly £0 in precious metals.

The truth is of course that Social Security is not an investment, it is a tax. Not that any government will ever admit that.

The government of Jersey is not unusual in fact the same problem plagues all western governments. Estimates of the shortfall in the equivalent funds of the United States for example, are $7.8 trillion.

People worry about the ageing population and the increased cost of care that will result but the real danger is the pension funds themselves.

Markets are fairly simple things, the price is a measure of the number of people who want to buy and the number of people who want to sell - if more people want to buy then the price rises and if more people want to sell the price falls. But who owns all these shares in companies? The answer is the large pension funds. The large pension funds which will have to sell the shares to give the money back to those people who are retiring.

As the baby boomers hit 65 (between 2011 and 2016) they will be forced by law (in the US, UK and European Countries) to withdraw their money from their pension funds and those funds will remove the money from the market. The Social Security funds which every nations has built up will all begin to be depleted removing more funds from the market. These factors will inevitably cause prices to tumble unless new purchasers enter the market. With continuous increases in tax reducing the capability of working people to invest, this is simply not going to happen.

The decline in share price has already started, but companies have been intervening in the market to buy up their own shares to the tune of $109 billion dollars in the second quarter of 2011. There are other good reasons to do this now, holding cash is a liability in these inflationary times, but there are limits to the company's cash reserves and with more and more funds to be withdrawn from pensions the downward pressure on share prices will continue to be felt.

As the share prices collapse so will the value of those pension funds, it's a chilling thought but the 2030 estimate is likely to prove to be inaccurate (and not in a good way).