Is your future pension safe?
... tied to the spinning wheels of the Global Casino?
I was prompted to pose this question because of a recent report in the media concerning the future payments of retirement funds to Dutch pensioners.
Between 2025 and 2028 the €1.5tn Dutch pension industry is transitioning from a system in which final payouts to pensioners are guaranteed to a defined contribution framework, in which employers are only tied to the amount they put in. That will mean holding much less long-term sovereign debt to back their long-term promises and freeing up more funds to invest in higher-returning assets such as equities and credit.
Investing in ‘higher-returning assets such as equities and credits’ means diverting the savings of Dutch citizens away from the safe assets that are Dutch government bonds, and investing instead in assets that are far riskier.
There are three problems with this strategy. Under Defined Contribution pension schemes the risks associated with investment of the citizen’s pension savings in stocks and shares falls on the individual saver. Under Defined Benefit pension schemes, risks are pooled and collectivised, as explained below. If riskier investments were to make losses, then the burden of compensating pensioners for those losses would fall on the collective public sector as a whole. Third, by divesting from investment in the safe asset that is a Dutch sovereign bond, the ability of the Dutch government to raise long-term finance from pension funds will be restricted…and could disrupt the process whereby Dutch savings are borrowed by the Dutch government and returned to citizens in the form of regular interest payments over the life of the bond, and ultimately as pension pots for retirees.
In my forthcoming book - The Global Casino: How Wall St Gambles with People and Planet I have a chapter on how your pension is tied to the activities of speculators in the Global Casino; as are the pensions and savings of millions of others. And what that means for all our futures, and our security.
Below is a brief extract.
To begin at the beginning. One of the most important ‘pillars’ of today’s international financial system was laid by the brutal dictatorship of Chile’s President Augusto Pinochet in the early 1980s. Its most significant experiment - the privatisation of pensions savings - was to change the international world order. That experiment was led by a Chicago-trained economist, Jose Pinera.[i] Deemed a success it led UK Prime Minister Margaret Thatcher and US President Ronald Reagan to enthusiastically adopt the privatisation model.
However, responsibility for the subsequent and massive transfer of wealth from a growing number of individual savers into the hands of private ‘managers’ of global corporations and their shareholders, lies in the first instance, with the field of economics. The capture of the economics profession by the neoliberal Chicago School in the 1970s led to the adoption of an ideology that promoted financial de-regulation; unrestrained cross-border capital flows; ‘free’ trade; and the privatisation of public assets – including pension funds.
These changes in economic theory and policy led invariably to capitalism’s escape from the regulatory guardrails of democratic policymaking at the level of the domestic economy. Cut adrift from society’s values, rules and laws, the finance sector was empowered to create a new ‘territory’ for financial speculation, profit-taking and capital gains. To finance that new territory, they were gifted with the world’s nest eggs. Those nest eggs built up vast stocks of financial assets in the new ‘territory’. That territory is what this book defines as the Global Casino.
Financial globalisation and the transfer of risk on to individual pensioners
As a result of pension privatisation household savings were, and are, funnelled into the ‘vaults’ of both private pension funds and asset management companies based on Wall St., and the City of London. Brett Christophers in his book Our Lives in Their Portfolios: Why Asset Managers Own the World, estimates that by 1980 about $100 billion had been transferred to Wall St. corporations. In 2014 the Bank of England estimated that private asset management companies including the Vanguard Group, Blackrock and State Street Global had scooped up and managed about $87 trillion of the world’s savings (assets) globally.[ii]A sum equal to the whole of the world’s income that year.
That figure seems high, but by the year 2020 financial assets under management (AUM) had jumped to $100 trillion. By 2023, the total had risen to $112 trillion - $12 trillion more than global income. [i] One hundred and twelve trillion US dollars is an alarmingly large sum of money. The vastness of the sum is what makes it inconceivable to most people. That may also be the reason its existence is often simply denied or ignored by professional economists as well as politicians and commentators.
The Bank of England’s executive director, Andy Haldane, explained in 2014 why the sums of savings in the hands of global, private companies had increased dramatically over time. Unsurprisingly it was not down to the skills & foresight of fund managers. It was simply that the pool of prospective global savers had become larger, older and richer. After 1950, average life expectancy had risen by nearly 50%, world population had risen by a factor of three and world GDP per capita had risen by a factor of nearly 40.[ii]
Once lodged inside a private asset management corporation, your pension nest egg can be actively invested by managers in securities, including highly rated government bonds (debt), to earn interest. Or the funds may be invested in more speculative stocks and shares, currency, property or commodity markets. Quite often pension funds are invested ‘passively’ by the manager of the fund simply tracking and investing in a basket of securities (Exchange Traded Funds) that trade like stocks and shares.
From the 1980s onwards there was a concerted worldwide move away from traditional, pay-as-you-go state-administered pension systems in which tax revenues were used to pay pension benefits.[iii]
Under such Defined Benefit (DB) pensions, risks are, and were pooled and collectivised, and benefits defined in advance. They were in effect, publicly guaranteed.
Under the new privatised Defined Contribution (DC) pensions, benefits are not defined in advance, and risk and reward shifted on to the individual pensioner, saver or insurance holder.
In the UK, membership of pooled and collectivised pension schemes fell from 31% to 14% between 2008 and 2014.[iv] At the same time contributions to the riskier Defined Contribution (DC) funds were roughly twice as large as those to Defined Benefit (DB) schemes. The risk is almost entirely one-sided as the executive director of financial risk at the Bank of England reminded pensioners in 2014:
“……asset managers do not bear credit, market and liquidity risk on their portfolios. Currently, Blackrock has over $4 trillion of assets under management but has only $9 billion of assets of its own. Fluctuations in asset values do not threaten the insolvency of an asset manager as they would a bank.
Asset managers are, to a large extent, insolvency-remote.”
This means that while companies like Blackrock might manage (invest) pensions and pension funds in globalised markets, they are not responsible for the asset that is the pension in a pension fund. When markets downgrade the value of an asset, it is the pensioner that bears the risk, not, for example, Blackrock (or any other Asset Management Fund) managing the investment of your pension fund in global markets for assets. Unlike asset managers, pensioners are not “insolvency-remote.”
The transfer of wealth to private corporations that operate in what is effectively an unregulated stratosphere, means households are increasingly exposed to global financial markets, and, as the Bank for International Settlements (the grand-daddy of all central banks) explained mildly: “retirement income is subject to greater variability than before.”[v] This is not only the case in OECD countries but also in emerging markets, where pension reforms adopted a structure predominantly based on Defined Contribution (DC) pension schemes.
[i] Boston Consulting Group 20th Annual Global Asset Management Report. 25 August, 2022.
[ii] ibid
[iii] ibid
[iv] Speech by Andy Haldane, Executive Director, Financial Stability. The Age of Asset Management? Bank of England, 4 April, 2014.
[v] Srichander Ramaswamy,BIS Working Papers No 368. The Sustainability of Pension Schemes, January, 2012.…
[i] See Ireland, P. W. Law and the Neoliberal Vision: Financial Property, Pension Privatization and the Ownership Society In: Northern Ireland Legal Quarterly. 62, 1, p. 1-32
[ii] Bank of England, 4 April, 2014.
Financial deregulation in the U.S. began with the creation of the first money market funds. Not long thereafter the global economy was hit head-on by the creation of OPEC, the result of which was stagflation (i.e., high inflation and high unemployment at the same time). As a young adult the financial impact was immediate. The lesson I learned was to live within my means and begin to build savings. When I married, my wife and I committed to living on one income, saving and "investing" as much as possible. Our careers were reasonably successful and our strategy allowed us to retire while still in our 50s back in 2005. Our financial assets have always been conservatively invested; so, despite the ebb and flow of the distinct financial markets, retirement has been comfortable.
It seems clear that those who experience far greater financial stress are in one of two groups. First, are those who for whatever reasons never earn enough to more than meet very basic needs. Something like one out of four age 65 and over in the U.S. live on Social Security benefits alone, with no accumulated financial assets to draw upon. Second, are those who for whatever reasons have always spent everything they earn even though they have an income that is well above 100% of national household median income. Their own big hope for retirement is the appreciation in the value of the land underneath their residence. Equity in a primary residence is THE major source of net worth for a high percentage of senior households who own their primary residence.
Isn't there an element of "and so what" in chucking everything at building yet another unstable bubble? Even when it goes kerplunk - yet again - the speculative sector will end up richer and that is deemed their incentiviser and the rest of us get plunged into further destitution and that is deemed our incentiviser?
(Perhaps an economics a bit like driving in Formula 1 motorsport: you don't actually intend to crash for that is the end of the game for now, but you would not be half as incautious if you actually had to pay for all of the crash damage yourself? 🙂)