Wednesday, March 4, 2009

The Next Bubble and Financial Time Bomb

As everyone now knows, the epicenter of the current financial meltdown was the housing bubble and an accompanying complex mortgage funding morass. And that mortgage funding fiasco isn’t over by a long shot. There is another estimated $1.5 Trillion dollars in Alt-A and Jumbo Prime mortgages destined for failure/foreclosure later this year.

Making matters worse is another financial time bomb that is only just starting to reveal itself.

Pension Funds.

Pension plans are a bubble that is now bursting wide open. Five major factors contribute to the crisis: mounting stock market losses, optimistic plan assumptions, longevity (retirees living longer), overly generous payouts, and a surge of boomer retirements.

Last week we got a taste of what lies in store when Canada's biggest pension fund manager, Caisse de depot et placement du Quebec, reported that it had lost a massive $39.8 billion in 2008.

The Caisse, an arm's length agency that manages investments for various public and private pension plans in Quebec, blamed tumbling stock prices and a depreciating Canadian dollar for its record loss, a loss bigger than the GDP of some small countries, such as Kenya or Latvia, according to 2007 World Bank figures.

And the Caisse is only the canary in the coal mine for a looming disaster. It is conceivable that that the phenomenon of “retirement” may be limited to one generation.

After World War II, for the first time ever, workers were promised that — after working thirty or so years — they would be able to securely retire. That was largely the case…for one generation.

The second generation is having a devastating reality check. 2008 was supposed to be a watershed year for retirement: it was the first year that the baby-boomers turned 62, and the retirement frenzy was to begin.

Early in the year, however, a study was conducted that found one-fourth of these boomers were delaying retirement. The economy has since nosedived, and many more retirements are being delayed.

The experts are calling this the “perfect storm” for retirement. Everything that could go wrong is in fact going wrong.

At the end of September, just as the crisis was beginning to gain steam, it was discovered that in the previous year the value of stocks in retirement accounts had fallen by nearly $2 trillion! Much more has been lost since then. This is especially devastating since almost one-third of those in their 60s had 80 percent of their retirement savings in stocks.

And government pension funds have been similarly destroyed.

Every “safe bet” for investing has been proven unsafe; the recession has left nothing untouched. After the dotcom bubble burst — taking with it millions of people's retirement savings — the housing market became the place to invest. Now the safest possible investment, too, has turned sour. For millions of people, the home they lived in was their nest egg, which they had planned to sell and move into a smaller place.

No more.

And as real estate values are ravaged, many are turning to see many corporations in big business starting to declare bankruptcy and escaping any “pension obligations”.

This sudden evaporation of pension obligations apply with equal weight to workers already retired, many of whom are seeing their pensions slashed in half, forcing them out of retirement.

This phenomenon is at the center of the GM debate as the giant automaker lumbers under the weight of the pension and health care benefits of its retired workers.

The autoworkers struggle is at the forefront of a looming pension struggle nationwide.

Public employees will soon find their pensions under immense attack as the economic crisis intensifies, and government budgets are depleted.

With each passing day of this economic crisis, the looming obligations of both public and private pension funds grows as the next great catastrophe.

And it escapes largely unnoticed by the vast majority of Canadians for whom it will affect.


  1. Thank you for drawing attention to this financial black hole in formation. The Caisse is but the first disaster uncovered in this domain.

  2. Thanks for the comment. Welcome to the blog.