America’s Pension Nightmare – Making a bad situation even worse

To scare you even more, here is a table showing the rates of return historically by decade for both the United States and Japan:

 

 

Japan’s rate of return on all investments for the past 20 years has been rather negligible at best and negative at worst.  Overall, a buy and hold philosophy yielded a massive 1.42 percent rate of return and an equity investment philosophy would have lost 4.62 percent compared to a rather paltry gain of 4.36 percent on 10 year bonds.  While Japan’s economic situation does seem to be atypical, we must remember that in the early 1980’s it appeared that the Japanese economy had nowhere to go but up, up, up.  It was the economic superpower of the world.  Does any of this sound familiar?  Just in case you don’t think that it can happen in the United States, here’s a link to a 2010 paper by James Bullard, President and CEO of the St. Louis Federal Reserve, in which he discusses the probability of a Japanese-style deflationary scenario for the United States.  Here’s a quote from “The Seven Faces of “The Peril”:

 

“I emphasize two main conclusions: (1) The FOMC”s extended period language may be increasing the probability of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome.”

 

Apparently, he hasn’t looked at these charts either!

 

With the ongoing debt talks, it is readily apparent that the United States Social Security program may simply not exist in its current form for those of us who will be retiring in the next two decades.  While that is terribly unsettling, it is even more unsettling to think that our privately and publicly funded pension plans might not be there for us either.  To complicate matters even further, Americans are constitutionally obliged to cover these pension shortfalls one of two ways; through cutbacks in service or through increases in taxes.  Oh brother, we just can’t win for losing.

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