Western societies are facing a major problem as a result of increased pension costs. In particular, across all states the cost to maintain solvent state sponsored pension funds has increased greatly in the last 5 years. This trend will continue on for the next 10-15 years. The cause is largely to do with demographics and a years of lackluster return on investment.
The main problem is not so much how to keep the various pension funds solvent. That’s ‘easy’ in the sense that employer contributions, employee contributions and other sources of cash infusions can be adjusted to meet the pension’s payout liabilities. The harder question to judge and answer is how big of an impact does this wealth transfer have on our society in the decades and generations to come.
We live in a world of limited resources. Governments, whether local, state or national have constraints. Every year a budget is developed for that exact purpose; how to allocate the resources at hand. Higher costs to maintain pension systems is akin to a snake wrapping itself around its prey. Slowly the grip is tightened and the prey has greater difficulty breathing. How tight will the squeeze of these pension systems become? How will this strain impact our society’s ability to move forward with the vitality of past generations?
I am worried about the impact based on history. We know that one of the main drivers of the decline of the automobile industry in the U.S. stemmed from increased costs and inflexible labor. Partially this had to do with maintaining a very expensive pension system for groups like the United Auto Workers. No free lunch exists. If a dollar goes to supporting a pension system, then it cannot be spent on research and development. The same goes for public pensions. If a dollar goes to support a public pension system, that dollar cannot be directed to hire a teacher.
In the end, I believe the rising costs of pensions throughout the next decade will have a significant negative impact for western countries, especially the U.S. It will constrict our resources, which will make it more difficult for us to maintain our competitive footing. Whether it’s to ensure our communities are safe via fire and police services or ensuring our youth receive the education they need to advance our technological society, across the board less resources will be available to maintain and grow standards of success.
No need to run for the hills. Be aware of this trend and its impact and factor it into your long-term investment factors.
Stay tuned for future postings on how to hand these long-term winds of change.