Pensions pools contain trillions of dollars to pay out retirement benefits. Or, they should contain trillions of dollars. The truth is these pools are terribly underfunded, so if you’re depending on a pension in your retirement years, the message is clear: consider a Plan B.
According to the World Economic Forum, worldwide pensions were underfunded by $70 trillion—that’s larger than the top 20 economies in the world combined.
If we look at the US alone, federal, state, and local government pensions are $7 trillion short. Even worse, Social Security is underfunded by almost $50 trillion!
Take a look at Illinois’ pension plan, for example. The situation is similar for many pension plans across the US.
The situation isn’t unique to public pensions. US corporate pensions are underfunded by roughly $550 billion—and one-quarter of these funds are expected to see red within the next ten years.
From conservative to high-risk investing
To be able to make the payments they have promised, most pensions must achieve about an 8% annual return. This has been possible, historically, through a mix of conservative, fixed-income investments, but we’ve seen a decade with ultra-low interest rates, making such returns nothing but a dream.
Therefore, pensions have no choice: they must take on more and more risk to break even. Basically, they are taking your retirement money to the local bookmaker, hoping to come ahead on the final stretch.
In other words, pensions are buying more stocks and investing in global real estate, both of which are hugely inflated.
Your pension fund is now a speculative real estate developer
Millions of people are relying on pensions funds for their retirement, and they expect the funds to make conservative investments that can provide stable, decent income. Pensions are not supposed to make huge high-risk bets.
However, in desperate attempts to break even, pension funds have invested an additional $120 billion in real estate, almost doubling their allocation to this sector since 2006.
When we dig deeper into those numbers, we find that their investments in a particular type of real estate investments called “opportunistic investments” have grown sixfold. This term refers to being a real estate developer, so your pension fund is basically building properties now.
With regular real estate investments, pensions purchase assets and earn a reliable income stream, but now they are spending your retirement money on developing speculative land (often taking on debt) in the hope someone will buy it off them at a higher price sometime in the future.
For example, a pension fund purchased a $500 million property in midtown Manhattan and then spent $1,000 per square foot on renovations that took several years, hoping to avoid a market downturn and to flip it with a profit. A ludicrous decision during a market high in one of the most expensive cities in the world.
One of the largest US pension funds, CalSTRS, has allocated $5.7 billion to opportunistic real estate investments, hoping to make between 13% and 30% in profits (traditional real estate returns are between 6% and 9%).
We are ten years into a bull market. Pension funds are buying expensive real estate, taking on debt to develop it, and hoping the market can buy it at a higher price once the development is finished. Everything has to go exactly as planned for pensions to make money on these investments. Even a “slight mishap” such as a recession will ruin their plans—and your pension.