Government backed pension in the context of government failure

[guitarplayer]

Does anyone know of stories of government backed pensions in the face of government failures?

Trying to think of failed states and I suppose some states in the great depression could approximate this, then I am thinking collapse of Argentina in the 80s (was it?). Happy to do my research, mostly asking if anyone knows of documented stories around the topic.

I am thinking here of pension schemes (often defined benefit) for public sector employees, but to a lesser extent the question would pertain to social security provision.

Ultimate question is what actually might be the risk of this hedge failing, despite it often being quoted as the 'gold standard'.

I expect someone will say it differs between one country and another in terms of how strong of an economy / diplomatically the country is. But given that history is being written before our eyes and I am interested about time decades from now, I will be happy to read on any such story.

[ertyu]

the entirety of russia and eastern europe essentially had no pensions for ten or so years there. inflation rendered the amounts meaningless and states were in such economic trouble that the tax base was nowhere near sufficient for -- anything really. in terms of the west, what's often cited are the financial repressions that allowed european countries to erode their debt post ww2, which was the same process but slower. some predict the same would happen in the EU and US now - interest rates held below the rate of inflation with long-duration stocks and bonds suffering.

[fiby41]

"Inflation rendered the amounts meaningless" is what happened here as well. After independence, the 500+ "princely states" had the options of joining India, Pakistan or remaining independent [as separate countries.] Those that chose to join India lost their kingdoms, kept their palaces and personal wealth plus received a pension which remained nominally the same despite inflation.

[sky]

The City of Detroit went bankrupt, and pensions were affected. I don't know if city employee pensions went away entirely or if they were negotiated down, but I know they were reduced.

[chenda]

Does anyone know of stories of government backed pensions in the face of government failures?

Fred Goodwin

[Ego]

Ultimate question is what actually might be the risk of this hedge failing, despite it often being quoted as the 'gold standard'.

As you say, it depends on the country. Lebanon or Argentina show how rapid inflation eliminates the value of a pension. Recent events in the UK show how a doom loop almost caused the entire pension system to collapse. Had the Bank of England not intervened, UK pensions would have had a negative net asset value.

Both the Lebanese Central Bank and the Bank of England took actions. The BOE intervention worked where the Lebanese did not. The question is, what would need to happen for the BOE to be as impotent as its counterpart in Lebanon? Same for the Fed.

It would almost certainly happen in stages. What would those stages look like? What are the most likely triggering events the next time?

This recent crisis was triggered by duration mismatch in both the US and UK. Nobody was talking about duration mismatch and then suddenly everyone was talking about it. Who can be trusted to spot trouble on the horizon the next time? Who has access to the data, the reach to get the word out, the ability to do so without triggering the event, and a willingness to speak about it before profiting from it? That would be a rare individual.

Does each intervention make the next crisis more likely or does it make us collectively more willing to trust the central bankers to manage each crisis as it arrives?

[guitarplayer]

Interesting, thanks all. I am thinking of inflation linked pensions, so rendering the amounts meaningless would not apply - unless the system breaks, i.e. the promise of linking to inflation is not upheld. This risk is something I am interested in looking at. Also, interested in retirement schemes that are pay-as-you-go, such as the social security benefits, which do not really have to be bailed out in the standard sense like in the Guardian article but in some sense a political decision has to be made whether to keep them going and how.

[loutfard]

As a government employee, the main risk I run with my pension is exactly this. My future pension has inflation protection and even adjustment to increases in wage of future workers. As long as the system doesn't start creaking or fall over, that is. My future pension is fully based on a so-called repartition scheme, as opposed to accumulation. My pension contributions are paying for the current pensions. I have to count on the government entirely to keep its promise that future workers will pay for my future pension.

My options for building a pre-tax accumulating individual pension are close to zero. Well, technically, I have the opportunity to save up to 1000€/year in a post tax plan like everyone in this country. 1000€/year won't get one very far in western Europe. Plus the 30% initial tax discount gets eaten by the +- 1.5%(!) expense ratios and the taxation at the end.

As you say, most people here consider a government pension the golden standard in terms of financial resilience and robustness. I think I know better.

There's some very interesting overviews of places that experienced hyperinflation. In almost all scenarios, that at least decimated any existing government pensions. Years later, after stabilisation, there would often be some minimal social corrections.

An interesting case was Germany after the second world war. The economy in tatters, West-Germany did assume responsibility for all nazi era pensions.

[guitarplayer]

Thanks @loutfard, so what are the implications of the fact that you know better? is one of them aiming to apply ere principles?

I will do my research on places that experienced hyperinflation. Actions of post war west Germany give an indication how this would play out in a western world nation.

[loutfard]

Thanks @loutfard, so what are the implications of the fact that you know better? is one of them aiming to apply ere principles?

My significant other and I are trying to increase our financial resilience and robustness. Not doing the best job at the moment, but certainly not the worst either. We're finding our way forward.

Things we have integrated fairly well into this strategy:
- We own a summer house and the land around it. It is our costliest mistake against ERE principles. Like with almost all summer houses, it's a financial drain. At the same time, it offers some resilience should the proverbial shit hit the fan. We could live there and hardly consume anything.
- Other than that, we live a relatively frugal life:
- transportation:
- no car
- cycling: lots of paid cycling to work, wife uses free employer provided bicycle
- flying: Our biggest budget item here by far is plane travel to my wife's native country at least twice a year.
- communication:
- cheapest decent quality internet and mobile phone apps
- second hand laptops from a reliable and super cheap source
- clothing and furniture: mostly second hand, some diy
- food:
- waste app
- home cooking
- foraging and harvesting: nuts, mushrooms, blueberries, cherries apples, some potatoes after the machine harvest. Might not be the best time investment, but we enjoy it a lot.

I will do my research on places that experienced hyperinflation. Actions of post war west Germany give an indication how this would play out in a western world nation.

I find qualitative, individual stories interesting too, sometimes even more than quantitative ones. Of course, it's super interesting to realise the US are the anomaly, not having seen any hyperinflation in the last 250 years. The actual experiences and observations of smart people having lived through real economic adversity could also provide very actionable ideas for improving resilience and robustness.

My wife's grandmother is in here 80's. She is a university trained economist and has survived the Latvian lat (birth-1940), the USSR ruble (1940-1941), a combination of German occupation special notes/Reichsmark/USSR ruble (1941-1945), the USSR ruble (1945-1992), the Latvian ruble (1992-1993), the Latvian lats (1993-2014) and the euro (2014-current). Except for the euro, all of these came with stories of people losing most or all of their savings.

Grandmother once told us a story of baking a birthday cake with ground-up pasta instead of flour... in the 1980's. Or how one lady transformed from a land owner's wife whose conscripted husband died in the war to a communist party aparatschik in a whim, confiscating the only horse the family had just paid its last savings for "for the kolchoz". Even at her age, she's still a very perceptive observer, and a creative economic survivor. She worked until the age of 70. Her pension is substantially less than half what would be considered poverty level around here, but she manages.

I believe the ERE community has a lot to learn from individual tales of resilience in the face of actual adversity like hers.

[Western Red Cedar]

Trying to think of failed states and I suppose some states in the great depression could approximate this, then I am thinking collapse of Argentina in the 80s (was it?). Happy to do my research, mostly asking if anyone knows of documented stories around the topic.

I am thinking here of pension schemes (often defined benefit) for public sector employees, but to a lesser extent the question would pertain to social security provision.

Ultimate question is what actually might be the risk of this hedge failing, despite it often being quoted as the 'gold standard'.

Stockton, California immediately jumped to mind as an example. They were the largest US city to declare bankruptcy in the last ten years. This resulted in some new case law about pension obligations for municipalities that declared bankruptcy. Of course, this might be irrelevant to those living outside of the US.

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In terms of my personal approach to hedging my bets as someone who has a pretty large chunk invested in a pension, I trust that it will be there in 25 years, but have a number of backups in place. I have a guaranteed access to my personal contributions if I ever need them (plus the interest that accrued), along with Social Security and the personal stash. I will admit that it is a little frightening to look at the assumed returns in some of the public US pension plans, along with the level of funding in certain states for those plans.

I find a lot of value in digging into some of this stuff, but I keep coming back to the well-articulated point that @bsog made regarding planning horizons for life and finance:

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