The race to disaster
The benefits of being an investment generalist are that you can connect different specialist insights into a bigger picture in order to get new insights. And sometimes these new insights can be summarised in one sentence - in this case, “We are all doomed”.
During the last two weeks there have been several reports on the results of a study by the Chinese Academy of Social Sciences which projected that the Chinese government pension system is likely to run out of assets by 2035. Thanks to China’s one child policy, the number of pensioners will rise steadily in the next decades while the number of active workers declines. The result is that the Chinese government pension system, which – as most pension systems around the world – uses contributions from active workers to pay pensions for current pensioners, will see its assets peak in 2027 and then witness a rapid decline. Unless people work longer, pension benefits are cut or pension contributions are increased (probably a combination of all three), hundreds of millions of Chinese pensioners face destitution in old age.
If that sounds bad, consider that the Chinese government pension fund system is still better off than what we have in the West, where baby boomers benefit from excessive promises made from the 1960s to the 1980s. In the US, the Pension Benefit Guaranty Corporation (PBGC) is the safety net that pays pensions once a private or government pension fund fails and becomes insolvent. The Multi-employer Fund that covers most private pension funds has only about $2bn in assets at the moment, while drawdowns are expected to surpass $4bn per year in the 2030s. But don’t worry yet about the 2030s. This safety net is expected to run out of assets in 2025, leaving 10 million pensioners in 1,400 pension funds without an income – and that is only the number of pensioners covered today. Who knows how many additional pensioners will have to be covered in the next six years?
Even some of the best-managed pension systems in the world are at risk: the Swiss government pension scheme (AHV) is projected to run out of assets by 2030 unless major changes to the pension system are made, changes that will hurt both current workers and current pensioners. So, by the mid-2030s in most countries, government pension systems will be insolvent or unable to cover anywhere near the incomes workers are promised.
The silver lining, if there is one, is that these pensioners won’t have to suffer for too long. According to the latest report of the Intergovernmental Panel on Climate Change (IPCC), the world’s climate will increase by 1.5C above pre-industrial age levels by 2030 without a serious course-correction. This means that as we head towards the pension-poor decade of the 2030s, wildfires, floods, hurricanes, droughts etc. will become so frequent and so devastating that major economic disruptions appear inevitable. This in turn means spiking food prices and a much higher risk – especially for older people – of getting seriously hurt in a natural catastrophe. In short, destitute pensioners whose pension income has ceased will be eradicated by climate change since those are the people that are least likely to be able to afford high quality housing, health care or food. They probably won’t be fit for fighting off raving mobs either. Good times…
Projections for government pension assets
Source: Pension Benefits Guaranty Corporation, Bundesamt fur Sozialversicherungen, Chinese Academy of Social Sciences, Fidante Capital.