In childhood days, the lessons in economics were very plain and very simple, “if you spend your money on that, you won’t have it to spend somewhere else”. The straightforward lesson that you cannot spend your money twice would seem an apparent truth, but it doesn’t seem to have been so to some people. In questions over shortfalls in pension funds, there has been an assumption that the money can be spent in one way, and then someone else will come along, (the someone else generally expected to be the government), to give more money so that it can then be spent in the other way.
Pension laws have safeguarded the rights of pensioners: if a pension fund went under then they were entitled to whatever of the proceeds that remained necessary to maintain their pension payments. Of course, if the entire balance in the wound up fund was exhausted meeting commitments to existing pensioners, then contributors to the scheme, who may have paid twenty or thirty years of contributions, would be left with nothing.
The Government is now moving to redress the balance. Minister Joan Burton explained on RTE News how measures were being introduced to ensure there were rights for contributors as well as pensioners. What Minister Burton did not explain was that the future is likely to be bleaker rather than brighter.
Many pension funds are in trouble because their income does not cover their commitments; the yields on the investments they have made are insufficient to cover their liability to their pensioners. Short of someone discovering the philosopher’s stone and becoming able to make gold, it is hard to see how anyone could get the figures to balance. The global financial crisis caused a collapse in confidence, so people stopped investing money. To encourage people to borrow and to invest, the central bank interest rates were cut to all time lows; the yields on government bonds, the sort of investments that are safe in uncertain times, then fell to very low percentages. Low yields in one market have a knock on effect on other markets, people move their money, demand for other investments pushes up their price and means the yield on those investments falls: an investment yielding 6% when it was giving you €6 for each €100 invested, only yields 4% if it costs you €150, and only €3 if it costs €200. There seems no sign in the immediate future that economies will recover, and interest rates rise, and bond yields increase.
Paradoxically, the weakness of economies is bringing record prices on the stock markets. Investors trying to find return in their money, much of which is ordinary people’s pension funds, are putting money into shares in companies that pay dividends and the more they do so, the more those share prices rise and the harder it becomes to get a reasonable return on one’s investment. Like all bubbles, the stock market bubble will burst and there will be another round of pension fund problems and further assumptions that money can be spent twice.
“Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal”, Jesus once told his friends. A worldly adviser now might add, “but if you do lay up treasures, be careful who manages them”.