by Simon Black, Sovereign Man:
In the year 1348, after more than a decade of war with France, Kind Edward III of England noticed that many knights who returned home from the front lines had become completely impoverished.
The war had taken a massive financial toll on Edward’s men. Some of them had been captured in battle and forced to sell all of their property in order to ransom themselves. Others had become grievously wounded, and their permanent disabilities prevented them from earning a living.
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So the King created a special foundation to care for some of these men, who became known as the ‘Poor Knights’.
Those who were admitted into the foundation received an annual pension of 40 shillings, worth roughly $3,000 in today’s money, plus free room and board at the College of St. George.
It was a nice idea. But naturally it didn’t take long for Edward’s pension fund to become mismanaged.
The pension fund was in such dire financial straits, in fact, that it was typically only able to provide for three ‘poor knights’ at a time.
Eventually– and I’m talking hundreds of years later– the pension was ultimately restructured (i.e. bailed out) by King Henry VIII, and later by his daughter Queen Elizabeth I.
Financial mismanagement and bailouts have been the common fate of pension funds throughout history.
Emperor Augustus of the Roman Empire, for example, established a retirement fund for his legionnaires called the Aerarium militare. But subsequent emperors couldn’t resist dipping into the fund to pay for their lavish lifestyles and pet projects. So the aerarium ultimately went bust.
Today pension funds around the world are in a similar position– and this is not a controversial statement. Even the OECD acknowledges that the worldwide ‘funding gap’ of public and private pensions runs into the tens of trillions of dollars.
To put this figure in context, the United Nations projects that adaption costs from climate change will run approximately $10 trillion over the next thirty years.
Furthermore, the Institute of International Finance estimates that COVID-19 has cost the world a whopping $24 trillion.
And yet, according to the US government’s own financial report, the long-term unfunded pension liability JUST for Social Security is $55.9 trillion– more than the cost of climate change and Covid-19 COMBINED.
I bring up the examples of Covid and climate change because they’re two of the most vocalized issues in the world right now. Everyone is screaming about masks, vaccines, and the environment.
Yet hardly a word is uttered anymore about the pension crisis, even though, at least from an economic perspective, it completely dwarfs the other issues.
It also keeps getting worse.
Inflation, for example, is an enormous problem for Social Security.
Even before the pandemic, Social Security’s key trust fund was projected to run out of money by the early 2030s.
But last year’s Covid lockdowns meant that millions fewer people were employed and paying in to the Social Security system; that means a LOT less revenue for the program.
And now with inflation surging, Social Security has to make Cost of Living adjustments and increase the monthly benefits to its tens of millions of recipients.
These are pretty much the worst possible conditions for the long-term health of Social Security. And it means that the trust fund will likely run out of money even sooner than projected.
It’s ironic that, last year, the Social Security administrators actually reduced their long-term inflation forecast.
In other words, the trust funds’ projections are based on certain macroeconomic assumptions. And the administrators assumed that the inflation rate would be 2.4%.
Actual inflation is now 5.4% (according to the US Labor Department). And the long-term rate of inflation over the last 50 years has averaged 3.9%.
Here’s another one: Social Security assumes that the real interest rate on its investments (i.e. the amount of money it earns AFTER inflation) will be 2.3%.
Wrong again! The actual real rate of return they’re earning is now MINUS 3.9%. And the rate has been negative for YEARS.