Saturday, October 25, 2008

Crash Less Likely?

Perhaps only with a brand new truck. The headline number in this story is so shocking, I had to relink to CR in case you guys didn't click on the link on the right.

http://calculatedrisk.blogspot.com/2008/10/cliff-diving-volvo-truck-sales-plunge.html

When you dig into the numbers, it is not as bad as the headline number due to the inclusion of cancellations of previous orders, but regardless, almost every economic indicator like this is in nosedive mode.

One effect of this crisis of which I have heard very little discussion is the question of pensions. Even before this crisis, most pensions were underfunded, meaning there were not enough assets in the pension fund to meet all the expected future payments to pensioners. Companies and the government got around this problem by increasing the expected returns of the assets - so instead of expecting to earn 6% on average in the future, some companies increased expected earnings to, say, 8% to offset the shortage of assets.

Now even the more conservative 6% looks way too optimistic. Many of the instruments that are now trading for pennies on the dollar were the same instruments that were supposed to be funding pensions.

There is almost no way that pensions are going to be able to pay out as expected. Either payouts will need to be reduced or the government will need to step in and "create" the additional money. The latter option is much more politically palatable, since people do not like seeing their wages garnisheed, but unfortunately, any money created will be more than offset by the inflation it creates. Either way, many soon-to-be-retirees who have assumed that their pensions are an iron-clad promise of a certain retirement lifestyle are about to have a very rude wake-up call.

My mom falls into this category, and I am now beginning the process of trying to gently wake her up to the possibility that the pension that she has always assumed would support her in retirement may, in fact, be much less assured than she assumed.

Unfortunately, there is an inevitable tendency towards denial, or worse, a desire to shoot the messenger. But mathematics is not open to negotiation, and right now, the numbers are brutal.

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