“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.”  – George Burns.

Something rather odd happens when you finish reading Roger Lowenstein’s “While America Aged” (Penguin, 2008). You come to realise that the Wall Street Journal reporter who has previously written about the failure of Long Term Capital Management and the success of Warren Buffett has managed to write extensively about the US pensions industry and still capture your interest. As with Mr Lowenstein’s earlier books (“Origins of the Crash” and “When Genius Failed”), “While America Aged” comes at the looming pensions crisis –for crisis it surely is – from the perspective of some grotesque foul-ups. As the subtitle puts it: “How pension debts ruined General Motors, stopped the New York City subways, bankrupted San Diego, and loom as the next financial crisis”.

Those suffering from financial crisis overload can take a breather, of sorts. The pension and demographic disaster threatening the west (not just the US) is grave, but will work its way toward us slowly, if insidiously. And that is largely the problem. As Mr Lowenstein tells it, a number of administrations – both civil and corporate – conspired with unions to short-change the retirement system. But the final day of reckoning is inevitably shunted forward out of mind (or until the officials involved leave office). Future pensioners are an easy mark compared to venal lobbyists in the here and now. Pension deficits are not like market crashes (although their severity can obviously be exacerbated by them); rather, their malign evolution is something of a slow-burner. To put it another way, banking and property crises are short term. But an underfunded pensions system is the issue of a lifetime.

Two anecdotes are particularly striking. At a board meeting at ailing carmaker Chrysler, CFO Gerald Greenwald asks his fellow directors to identify the company’s biggest supplier. “US Steel,” suggest some. Others suggest Goodyear Tyre & Rubber, or parts supplier Dana. “Nope; you’re all wrong,” responds Greenwald: “It’s Blue Cross” [the US health insurer]. And it is the burden of healthcare benefits, allied with pension costs, that could yet see General Motors out of business altogether within short order. In another, Lee Iacocca, hired from Ford to help Chrysler stave off bankruptcy, has a sudden flash of acknowledgment during a Greenwald presentation: “The three of us – we’re the ones who created this problem.” Lowenstein interprets this as “a clever, if oblique, reference to labour, government, and business – the unhappy trinity of health care policy.” And in the detailed coverage of GM’s increasingly crippling pension load, or the desperately grubby shenanigans foisted upon the San Diego City Employees’ Retirement System so that high-profile incumbents could feather their own nests, there is a constant tension between management (or government) and labour. To placate angry unions and to forestall damaging strikes, pension pots, Lowenstein tells us, are constantly raided to pay off today’s workers at the expense of tomorrow’s. Or in the words of New York transit workers’ representative Roger Toussaint, one of the many colourful characters that populate these pages, corporate management is invariably seeking ways to “sell out the unborn”. 

Failing to provide for longstanding obligations is hardly a US monopoly. As trustee Paul Greenwood recently wrote in the FT,

“The UK government has consistently under-reserved for public sector pensions, whether for the state pension scheme or for public sector employees.”

And pension consultant John Ralfe suggests that unfunded public sector pension liabilities total over £800 billion. Britain may be worse placed than the US, in that a demographic tidal wave is about to swamp fiscal reality. As the Office for National Statistics has just revealed, for the first time in history, the UK now has more people of pensionable age than children under 16. The widespread improvement in mortality rates is evidently good for the healthy individual (Help the Aged said the data were cause for celebration), but a horseman of the apocalypse as regards future, rather than existing, pensioners.

When Bismarck introduced pensions for elderly bureaucrats in the late 1800s, the retirement age was originally set at 70, versus an average life expectancy of 46 years. A generation raised within a culture of expectation and entitlement, which may not be economically active but which is certainly aware of its “rights”, is soon to collide with some unforgiving statistical trends.

And Lowenstein doesn’t even touch on the wholly separate issue of how all these (largely underfunded) pension schemes should be best positioned to maximise investment returns or, perhaps more pertinently, to minimise investment risks. One does not, in general, go to the pension fund community in the expectation of finding investment best practice. A tradition of concentrating on stock markets, bond markets and property as core asset classes sits uneasily with the potential for a synchronised bear market in all three.

The history of the management of pension funds is in many instances, variously, a history of greed, mismanagement, prevarication and outright denial. (By sheer coincidence, three UK individuals connected to pension trustees were arrested on Friday on suspicion of fraud.) Both companies and municipal interests have shown themselves adept at stealing from the future. There will come a point, and we will soon reach it, when hard decisions can be postponed no longer. Both governments and corporations are making promises that will be increasingly difficult to keep. With huge challenges already facing today’s investors, can we really expect strong leadership on pensions from politicians who have proven so inept at handling institutionalised incompetence elsewhere ? Within this context, the rise of the self-invested pension seems unstoppable.