The ticking time bomb of the social security system will not explode in 2025, but 10 years earlier, or next year, according to a study by the Institute of Labor of the General Confederation of Greek Labor (INE/GSEE) which is to be presented in Thessaloniki on Thursday.

GSEE’s annual report on the Greek economy includes a chapter on the aging population and the sustainability of the social security system from 2013 to 2050. Its conclusions, which Kathimerini has seen, say that the prolonged recession and high unemployment have brought forward the pension system’s crumbling point by a decade and that in order to become viable the system requires additional resources of 950 million euros for 2016 alone.

The system’s extra requirements are expected to grow rapidly in the following years, soaring to 2.67 billion euros for 2020.

The authors of the study note that pension cuts and a hike in the retirement age would have allowed for the sustainability of the system until 2025 had it not been for the deep and protracted recession and high unemployment. As a result 2015 is seen as the year when the social security system could fall apart.

They add that new measures will be necessary due to reduced state funding (from 16.4 billion euros in 2012 to just 8.6 billion per year from 2015 to 2018), an explosive rise in the jobless rate, an increase in the number of new pensioners (from 40,000 in 2009 to 100,000 per year after 2010), salary reductions and the growth in undeclared and flexible labor.

Already the social security funds’ cash reserves have dwindled from 26 billion euros in 2009 to just 4.5 billion last year, while the demographic shift in Greece resulting from longer life expectancy and a reduction in the birthrate has contributed to a 15 percent increase in the pension burden on funds, the study notes.

The INE/GSEE economists also note that after the recent interventions to the pensions system, the average age of retirement has grown to 63 years (not including early retirement options), while pensions have been cut by about 32.5 percent.

Most weekdays, Thanassis Tziombras, a 50-year-old worker at the shipbuilding zone here at the main Greek port of Piraeus, is up before dawn and out looking for work by 6 a.m.

Some 40 minutes away, in the posh Athens suburb of Psychico, Constantinos Tsimas, a 54-year-old U.S.-educated marketing consultant, wakes up to another day of working the phones and emails seeking clients.

There is a social gulf between these two men, but they are united in one thing: the financial and psychological struggle that comes with being older and unemployed in a country where the economy has shrunk by almost a quarter in six years.

Greece's economy has taken such a brutal beating that it is in a category apart from other European countries suffering through the recession. Where Greece lost some 25% of its economic output, Spain lost about 6%. Experts say that, even as the Greek economy begins to recover, the shock has been so severe that older workers are unlikely to ever hold full-time jobs again.

Unlike in other parts of Europe, Greek reforms have largely removed provisions that protected older workers. In Spain and Italy labor-market regulations favoring baby-boomers over their children are still largely in place, entrenching the so-called two-tier labor market. But in Greece, everyone seeking work largely faces similarly poor odds, said Raymond Torres, head of research at the International Labor Organization, the United Nations labor agency.

While Greece's youth unemployment is still a record for the EU--almost 60% of people aged 15 to 24 were out of work in 2013--the unemployment rate among older Greek males is about twice the euro-zone average and almost four times that of Germany.

Some 18% of 40-to-59-year-old Greek men were out of work last year, according to Eurostat, the European Union statistics agency. In the U.S. where the recession set in sooner than in the EU, the unemployment rate for men in this age group peaked at 8.2% in 2010 and has been declining since to reach 5.7% in 2013.

One in five jobs lost in Greece between 2008 and 2013 was from the middle-aged male group. The Spanish equivalent was one in eight. In Italy, middle-aged men actually added jobs in the recession years.

Greece's older men are more often families' sole breadwinners. Female employment rates here, at 43.3% in 2013, are the lowest in the EU, where the average is 62.5%, according to Eurostat.

Recent pension reforms, meanwhile, mean older Greek men who have lost their jobs could be looking at several years of no income. Greece has increased the retirement age to 67 for both men and women, changing a decades-old system that allowed some categories of workers as young as 55 to retire on a full pension.

"If they don't have a job and they have to wait so long for a pension, what are they doing in the meantime? They are at serious risk of poverty, " said Anne Sonnet, a senior economist at the Organization for Economic Cooperation and Development, a Paris-based think tank.

In Greece, with its macho, traditional culture, unemployed men are at risk of depression, says Dr. Kyriakos Katsadoros, a psychiatrist and the science chief of Klimaka, a suicide-watch nongovernmental organization in Athens, who also noted risks of alcoholism and domestic violence.

"We were used to providing for our families through honest work. We were proud of our work--now we're just ashamed," says Mr. Tziombras, counting his worry beads between his fingers.

He is sitting in an old classroom on the port now used by the Communist-led laborers' union here. "Don't kill the mosquitoes--it's others who are sucking your blood," is written in chalk on the blackboard.

He says the union, apart from political guidance, provides "solidarity and psychological support" to workers.

The shipbuilding zone at Perama in Pireaus, once buzzing, is now a wasteland of idle cranes and scattered ship parts. Men sit in cafes waiting for word that a vessel has docked for maintenance and is in need of day workers.

At its peak in 2008, 6,500 men worked here. The shipbuilding industry retains workers on a daily rate as opposed to hiring them as staff, but in 2008 there was so much demand that these workers were effectively employed full time. In the good years, they would take home a net daily salary of about EUR70, or about $95. They haven't agreed to cut this rate, despite calls by employers' associations. Today, about 1,000 workers remain, doing sporadic work.

Mr. Tziombras says his wife managed to find a job as a cleaner at a local school, bringing a few euros into the household budget, but their relationship has been strained by the financial woes. Economists say it is a growing trend in Greece for women that didn't previously work outside the home to take jobs as their spouses lose theirs.

Late last year he drove across the country to get a few days' work at a factory. He has been doing odd jobs at construction sites around Piraeus and Athens, and continues to show up each morning at the port ready for work. The last time he got a job was for three days in January.

"We have gone through our savings, we've sold everything we owned, we stopped any nonessential activity," Mr. Tziombras says.

A law against foreclosing on primary homes means that he isn't likely to lose his home because of mortgage arrears, although he frets the provision may soon be revised. His two children, 17 and 22, are in high school and college. They will continue to depend on him for years, he predicts.

Concerns are in some ways similar in Mr. Tsimas's wealthier neighborhood. Shame at being out of work is the first thing mentioned.

"It's socially shameful but, more than anything, I was ashamed because I had to ask my wife for money," Mr. Tsimas says.

His wife brings home a good salary from her investment-banking job, but the loss of income from his work still hit the family budget, which supports one child at a British university and one in a private school.

He, too, has turned to politics and voluntarism to feel useful--although a very different brand to communist Mr. Tziombras and his labor-union activism. Mr. Tsimas is a member of Drassi, a liberal political party that seldom gets more than 1% in elections. He runs an online forum with friends where they debate about the economy and politics.

For all the shared experiences of shame, financial struggle and family strain, the bottom line for the two men is very different.

"I actually think unemployed working-class guys my age may be better off in a way, because their expectations were always lower," says Mr. Tsimas. "Being at this state at 54 is certainly not what I expected for myself."

Still, his material concerns are not about survival.

"Last year I gave my daughter my iPhone for her birthday," he says looking at his own older mobile phone. "I couldn't afford a new one."

Mr. Tziombras says he has given up on all of the smaller joys of life for him and his family, like dance classes for his daughter or the occasional night at the movies with his wife. It's now all about subsistence.

"Cutting everything that's not food turns the workers into animals," he says.

The first time Gikas Hardouvelis left his job as a bank economist to try his hand at Greek politics, in 2000, the country was preparing to join the euro currency union, looking forward to a period of prosperity and optimism.

The second time, in late 2011, Greece was teetering on the brink of a disastrous exit from the common currency, its finances and politics in free fall.

Now, as the country’s finance minister, Mr. Hardouvelis aims to steer Greece out of its catastrophic recession, his hopes lifted by the first indications of an upturn.

“A pessimist would say, ‘Everything is difficult around the world — in Europe, how can you grow?’ ” Mr. Hardouvelis, a Harvard-educated economist, said recently in his Athens office. It was his first interview since joining the government in a cabinet reshuffling in June. “An optimist would say, ‘Once you’ve fallen so much, it’s easy to pick up.’ ”

Mr. Hardouvelis is the first finance minister since the onset of the country’s four-year economic crisis to assume his role in the face of predictions that things will get better rather than worse. The Greek economy, now 25 percent smaller than in 2009, is expected to grow 0.6 percent this year.

And because Greece recorded a primary surplus in the spring — a budget in the black before debt repayments — it is eligible to begin exploratory talks with its international creditors about easing its huge debt burden, which stands at 174 percent of gross domestic product.

Success, though, will require him to enforce economic changes pledged to Greece’s troika of international creditors: the European Commission, the European Central Bank and the International Monetary Fund. They have kept the country afloat since 2010, when it narrowly avoided bankruptcy, with rescue loans worth 240 billion euros, or $317 billion.

Three days of talks with representatives of the troika on the progress of those changes are to begin on Tuesday. Analysts and international economists are divided about Mr. Hardouvelis’s chances of success.

In his previous political roles, Mr. Hardouvelis was only an adviser, first to the Socialist prime minister Costas Simitis from 2000 to 2004, and later to the technocrat prime minister Lucas Papademos, who was installed in late 2011 to lead a six-month coalition government after the previous Socialist administration collapsed.

Now, as a senior member of Prime Minister Antonis Samaras’s coalition government, Mr. Hardouvelis faces the challenge of administering harsh medicine that the recession-weary Greek public is finding tough to swallow.

The regimen will include modernizing an antiquated tax system, introducing a new property tax that aims to spread the burden more evenly and continuing a crackdown on tax evasion.

The second overhaul of Greece’s retirement system since 2010 is already in progress. It involves consolidating dozens of pension funds into three. An effort is underway to cut about 6,500 jobs from the Civil Service. Privatization of many state-owned assets, which has long been on the to-do list but has yet to show much progress, is back in focus, as potential buyers — chiefly from China — eye airports and other infrastructure.


Some experts maintain that Mr. Hardouvelis is the right man for the job, saying he has an ideal mix of experience and abilities. A widely cited academic, he has advised private and state banks, including the New York Federal Reserve, and has engaged in politics and diplomacy during critical moments in Greece’s recent history.

“He has a strong reputation in international economic policy circles, which should be extremely helpful in negotiating with international creditors,” said Kenneth S. Rogoff, a professor of economics at Harvard and a former adviser to the International Monetary Fund. “Of course, his task of trying to restore growth in a country with weak institutions that faces strong creditors is not an easy one.”

Others say he lacks the combative nature required for Greek politics and imposing his will on a reluctant populace.

Jens Bastian, an economic consultant and former member of the European Commission’s task force in Athens, compared Mr. Hardouvelis with his predecessor, Yannis Stournaras, who now heads the Greek central bank but had experience running a private bank before he was tapped for the ministry.

“He never held front-line positions which required him to sign decisions like Stournaras,” Mr. Bastian said.

The new minister’s first real test will come when he meets with the troika’s representatives. After the coming talks in Paris, the parties will reconvene later in September in the Greek capital — a symbolic move intended to indicate that Greece is ready to assume greater control of its actions.

“Greece has done most of the reforms; the next phase is to solidify them, to make sure they don’t reverse,” Mr. Hardouvelis said. “I think it will be done in a more efficient way in the future, precisely because the troika is not right on our neck. They’ll be staying in the background.”

Of the €240 billion in rescue loans pledged to Greece by the troika since 2010, only a small portion remains to be disbursed: €1.8 billion from the European side and €15.6 billion from the I.M.F.

The loans have been dispensed in installments in exchange for painful austerity measures, including Civil Service salary cuts and tax increases that have reduced personal incomes by a third, left nearly one in three Greeks unemployed and shrunk the economy by a quarter.

Greek officials contend that it is in the troika’s interest to hold off on additional austerity. “They have an incentive to allow us to let the economy grow because then we can better service our debt,” Mr. Hardouvelis said. He said he was eager to draft a growth plan, investing in promising sectors like agriculture and shipping to create jobs and to diversify exports beyond the economically anemic European Union.

A debt restructuring in 2012 required private sector bondholders to forgive some €100 billion, but the prospect that Greece’s creditors will share the pain this time is essentially off the table. As the eurozone teeters on the brink of recession once again, member states, particularly Germany, are in no mood to ask their taxpayers to incur losses.

Greece’s aim, instead, is to reduce the cost of servicing its debt through lower interest rates or longer maturities. “Our debt is big, but it’s also very long term, so it’s easily serviceable,” Mr. Hardouvelis said.

He added that the government planned to tap international markets with a new bond issue in the coming weeks, the third round of fund-raising in three months after four years during which financial markets were essentially closed to Greece.

Problems in the broader eurozone — stagnation in Italy and France and political jousting over the continued fiscal discipline championed by Germany — may now favor Greece, Mr. Hardouvelis said, smiling apologetically at the irony. The eurozone’s slump, he said, “necessitates an expansionary monetary policy, which keeps interest rates down and keeps borrowing costs down.”

When troika inspectors arrive in Athens, Greece’s budget will once again come under a microscope. Mr. Hardouvelis bristles at the suggestion that inspectors might take a hard line, noting that foreign auditors originally doubted Greece’s predictions of a primary surplus, only to be proved wrong in the spring. “I hope this has taught them a lesson, and they don’t insist so much on the fiscal side,” he said, noting that a Greek recovery would be undercut by any “new, onerous targets.”

Mr. Hardouvelis, the son of farmer from a small fishing village in Greece’s southern Peloponnese peninsula, said he was sensitive to the social effects of the long siege of austerity. And despite his Harvard pedigree — he went there on a scholarship — Mr. Hardouvelis makes it clear he does not consider himself part of the entitled Greek political elite.

“I understand what unemployment is,” said Mr. Hardouvelis, 58, who is married with two children, one still a student, the other doing his obligatory military service. “I didn’t have a dad who would send me $1,000 a month to make it at college.”

Greeks are overtaxed, he said, but he added that tax relief would need to be preceded by growth. There may be action, though, to temper some “extreme cases” — like a tax on heating oil, which has fallen short of revenue targets while having a negative effect on the environment because Greeks have turned to burning wood to heat their homes.

Mr. Hardouvelis contends that the current government is leading a more “mature” society and that the lackluster results of anti-bailout opposition parties in elections to the European Parliament in May signal a public realization that there is no viable alternative to the country’s living within its means — however meager for now.

“Greeks don’t buy promises anymore,” he said. “They know they will be the ones that have to finance them.”

I don’t see Crete as picturesque, smiling place. Its form is austere. Furrowed by struggles and pain. Situated as it is between Europe, Asia and Africa, the island was destined by its geographical position to become the bridge between those three continents. That’s why Crete was the first land in Europe to receive the dawn of cvilisation which came from the East. Two thousand years before the Greek miracle, that mysterious, so-called Aegean civilisation was in full bloom on Crete – still dumb, full of life, reeling with colours, finesse and taste which surprise and provoke awe. It is in vain that we defy the traces of the past.

I believe there is an effulgence, a magic effulgence radiating out of ancient lands which have struggled and suffered a great deal. As if something remains after the disappearance of the peoples who have struggled, cried and loved on a patch of land. This radiation from past times is particularly intense on Crete. It penetrates you the moment you set foot on Cretan soil.Then you are overcome by another, more concrete emotion. Anyone who knows the tragic history of the last centuries of the island is transfixed when he reflects on the frenzied struggle on that land between men fighting for their freedom and oppressors raving to crush them. These Cretans have grown so familiar with death that they no longer fear it. For centuries they suffered so much, proved so often that death itself could not overcome them, that they came to the conclusion that death is required in the triumph of their ideal, that salvation begins at the peak of despair. Yes, the truth is hard to swallow. But the Cretans, toughened by their struggle and greedy for life, gulp it down it like a glass of cold water.

“What was life like for you, grandfather?” I asked an old Cretan one day. He was a hundred years old, scarred by old wounds and blind. He was warming himself in the sun, huddled in the doorway of his hut. He was ‘”proud of ear” as we say on Crete. He couldn’t hear well. I repeated my question to him, “What was your long life like, grandfather, your hundred years?” “Like a glass of cold water,” he replied. “And are you still thirsty?”

-- Excerpt from Pierre Sipriot’s interview with Nikos Kazantzakis French Radio (Paris), 6th May 1955

While I was away in Greece (more on that trip later this week), there was one big bombshell that got everyone's attention. Michael B. Marois of Bloomberg reports, Calpers to Exit Hedge Funds, Divest $4 Billion Stake:

The California Public Employees’ Retirement System plans to divest the entire $4 billion that it has with hedge funds, saying they’re too expensive and complex.

The decision to eliminate 24 hedge funds and six hedge fund-of-funds, isn’t related to the performance of the program, said Ted Eliopoulos, the interim chief investment officer. The board of the $298 billion pension, known as Calpers, hasn’t decided where to invest the money after the pullout, which will take about a year, he said.

“We concluded that we would eliminate the hedge fund program in order to reduce the complexity, reduce the costs in the program, particularly in relation to our view that given the scale of Calpers, we would not be able to scale a hedge fund program to a size that would really move the needle,” Eliopoulos said today in an interview.

The largest U.S. pension is getting out of hedge funds even as other large public plans such as New Jersey’s add to the private portfolios. Calpers has been working to reduce risk after the global financial crisis wiped out more than a third of its wealth, forcing it to increase contributions from taxpayers to cover losses. Calpers first invested in hedge funds in 2002 to help meet target returns to cover the growing cost of government retiree benefits.

Fund Fees

The pension fund paid $135 million in fees in the fiscal year that ended June 30 for hedge fund investments that earned 7.1 percent, contributing 0.4 percent to its total return, according to Calpers figures.

Calpers earned 18.4 percent in the fiscal year as global stock indexes rose to records. The fund’s market value reached $300 billion for the first time July 3, making it bigger than all but two companies on the Dow Jones Industrial Average.

The pension invests in funds run by Och-Ziff Capital Management Group LLC, Bain Capital LLC’s Brookside Capital, Lansdowne Partners LP and Canyon Partners LLC, according to a report from Calpers. Its fund-of-funds investments include funds run by Rock Creek Group LLC and Pacific Alternative Asset Management Co.

Calpers’ return goal is 7.5 percent. The annualized rate of return on its hedge fund investments over the last 10 years is 4.8 percent.

Alternative Investments

Hedge funds have amassed a record $2.8 trillion in assets as institutional investors pour money into alternative investments. McKinsey & Co. said last month that assets in alternatives, which also include real estate and private equity, may reach $14.7 trillion by 2020, double the current level.

Unlike traditional money managers, hedge funds can bet on rising as well as falling prices of securities, aiming to make money in any market environment. They generally charge fees of 2 percent of assets and 20 percent of returns, a level of remuneration that some institutions have balked at.

While Calpers was one of the earliest pension funds to invest in hedge funds it has lagged behind many of its peers in increasing investments. The $60 billion Massachusetts fund has 9.5 percent of assets in hedge funds.

New Jersey’s state plan, with $81 billion in assets, has added more than $1 billion in new hedge-fund investments in fiscal year 2014.

Calpers’ former chief investment officer, Joe Dear, who died in February from prostate cancer, restructured the pension’s portfolio after he was hired in 2009 to steer the fund through the recession. He shed speculative real estate investments and focused on private equity, emerging markets, hedge funds and public-works projects to help meet the fund’s targets. Dear’s permanent replacement has yet to be named.

Calpers has more than 1.6 million members in its retirement system and more than 1.3 million in its health plans. The fund administers health and retirement benefits for 3,090 public school, local agency and state employers.

In his article, Justin Lahart of the Wall Street Journal reports, Calpers Shows Masters of Hedge-Fund Universe Have No Clothes:

The most surprising thing about the California Public Employees' Retirement System's announcement Monday that it will be exiting its $4 billion investment in hedge funds over the next year may not be the decision itself, but that it took so long.

In the fiscal year that ended this June, the pension fund's hedge-fund investments returned just 7.1%. That compares with a 12.5% return for the Vanguard Balanced Index Fund, which follows the allocation of 60% stocks, 40% bonds that pension funds have historically followed. In the prior year, Calpers's hedge-fund investments returned 7.4% versus 10.8% for the index fund.

It isn't just Calpers. Hedge-fund tracker HFR's composite index, which measures the equal-weighted performance, after fees, of over 2,000 funds, has been underperforming the passive bond-and-stock portfolio since 2009. During the crisis year of 2008, it lost 19%, only marginally better than the index fund's 22.2% loss. That performance made it a bit harder to accept the idea that hedge funds' ability to offer downside protection justifies the hefty fees they charge—typically a 2% management fee and 20% of investment profits.


What has happened to the onetime masters of the investing universe? Hedge funds may have become a victim of their own success. With assets under management tripling to $2.8 trillion from their 2004 level, according to HFR, the field has become so crowded that it isn't as easy for managers to consistently deliver strong performance. Indeed, just as actively managed mutual funds struggled to deliver returns commensurable with their fees and expenses as they boomed in the 1990s, hedge-fund returns have suffered over the past decade.

Certainly, within the broad universe of hedge funds there are managers who can consistently deliver strong performances. But within an increasingly crowded field, picking them is a skill in itself. That further reduces their allure for big investors like Calpers. Such funds can hire outside managers to do this, and incur additional fees, or develop that expertise in-house, and incur additional costs.

Indeed, Calpers said it wasn't hedge-funds returns, but the costs and complexity of running a portfolio of hedge-fund investments that drove its decision. Hedge funds represent just a tiny fraction of the $298 billion Calpers manages, so regardless of whether they performed very well or very poorly, they wouldn't do much to move the needle. For hedge funds to be worth the effort, the pension fund would have had to dedicate a far larger chunk of its portfolio to them.

Given how big Calpers is, and how crowded many hedge-fund strategies have become, such a move would further cut into hedge-fund returns. That is a particular risk since other pension funds, seeing Calpers as a bellwether, might have followed suit.

Instead, other pension funds may follow Calpers's lead and cut or reduce their hedge-fund exposures. One place the money might go is lower-cost strategies that mimic the aggregate returns of various hedge-fund strategies—something that Calpers has begun doing. These promise to provide institutional investors index-like investments that can round out the risk profile of their portfolios like hedge funds do—but without the high fees.

Calpers's move is hardly a death knell for hedge funds. There will always be smaller, sophisticated investors with the patience and experience to find great hedge-fund managers. And there will always be others, seduced by the mystique hedge funds offer, who invest in them even though they shouldn't.

But the high-water mark for hedge funds may have passed. Increasingly, investors will question why hedge funds charge so much for what they do. Hedge-fund managers who don't have a performance-based answer will be in trouble.

Edmund Truell, chairman of the £4.5bn London Pensions Fund Authority, said that hedge funds could no longer justify their so-called “2 and 20” fee structure, and that he understood why Calpers, the largest US public pension fund, decided to ditch its hedge fund programme.

Traditionally hedge fund managers have amassed vast personal wealth by charging their investors a fixed fee of 2 per cent of the assets entrusted to them, and then 20 per cent of any profits they make.

“In a low interest rate environment you cannot justify the traditional hedge fund fee structure, and as a steward of public money we cannot pay those fees,” said Mr Truell. “The move by Calpers reflects investor concerns about the way hedge funds are structured. We have regular conversations with other pension funds and this is a very big issue for them.”

Last year the world’s 25 best paid hedge fund managers made an estimated $21.1bn.

Calpers is not only one of the largest US public pensions funds but was also one of the first to invest in hedge funds, so its withdrawal has dealt a bloody nose to an industry that has become increasingly reliant on inflows from the public sector.


The head of another large UK public pension fund said: “Calpers is an organisation that the US pensions industry looks to for leadership and its decision to withdraw entirely from hedge funds will make people stop and think”.

Earlier this year a report commissioned by the UK government on the country’s £178bn local authority pension funds questioned the benefits of their investments in active managers such as hedge funds because of high fees and underwhelming performance.

Mr Truell, who was appointed by the London mayor Boris Johnson in 2012 following a career in private equity, said that hedge funds should lower their fees to reflect their true expenses, but added that he remained happy to pay for good performance.

“We have no problem with paying people for success, but we want much more transparency on how hedge funds spend our money, such as using budget-based fee structures, and organising club deals,” he said.

Over the past two decades, the profile of investors in hedge funds has shifted from risk-seeking wealthy individuals and family offices to state-backed funds, forcing secretive hedge fund managers to adjust to life as a form of public sector contractor.

Under Mr Truell, the LPFA withdrew its investment in Brevan Howard, a $37bn hedge fund manager run by the Geneva-based British citizen Alan Howard, after it refused to comply with the level of transparency requested by the pension fund.

“There is a lot of recognition that [the hedge fund sector] has not delivered what it promised and the returns have been very disappointing,” said Nick Tomas, a partner at the Edinburgh-based investment group Baillie Gifford, which does not invest in hedge funds.

Canadian pension plans saw their funding worsen in the third quarter this year as a result of falling long-term interest rates, after recording strong improvements over the past two years.

A survey of 275 pension plans by consulting firm Aon Hewitt shows the average solvency of plans fell to 91.1 per cent as of Sept. 26 from 96 per cent at the end of June.

The decline marks the first downturn in funding for defined benefit (DB) pension plans since June, 2012, eroding two years of improvements in funding as interest rates climbed.

“Canadian DB plans have strung together a nice run of winning quarters, but as we have been saying for some time now, market volatility continues to present significant risks,” Aon Hewitt senior partner William da Silva said in a statement.

Aon Hewitt said decent stock market returns and contributions from employers helped to offset some of the decline in the third quarter, and said some pension plans have implemented “de-risking” strategies to make them less sensitive to interest rate movements and did not suffer as much.

Mr. da Silva said pension plans are still in much better health than they were a few years ago, but said more plans should be implementing de-risking strategies, which include shifting more investments into categories that are not as sensitive to interest rate movements.

“Now that we have seen plan solvency decline for the first time in over a year and a half, hopefully this will serve as a wake-up call to all plan sponsors to consider their funding and investment strategies with risk management as their key objective,” he said.

The survey found 23 per cent of pension plans were more than 100 per cent funded at the end of the third quarter, a decline from 37 per cent above full funding at the end of June. Pension funds are more than 100 per cent funded when they have a surplus of assets compared with their pension liabilities.

Aon Hewitt also warned in its report Tuesday that pension funds are facing a further hit in 2015 when they will have to account for new Canadian mortality tables released earlier this year, showing average lifespans have climbed further.

The firm said that if those tables had been applied in the third quarter this year, the average funding of pension plans would have fallen more sharply to 86.9 per cent instead of 91.1 per cent.

Ian Struthers, a partner in Aon Hewitt’s investment consulting practice, said a correction in stock markets this winter coupled with the impact of the new mortality tables would create “a perfect storm of lower returns and increasing liabilities, erasing the tremendous gains many plans have experienced over the last 18 months or so.”

The pension-consulting firm, Aon Hewitt, has found that the solvency of Canadian defined benefit pension plans fell in the most recent three months.

“Decent equity market returns and pension plan contributions helped offset some of the declines, but overall plan solvency ratio dropped in the third quarter by more than four percentage points from the second quarter – the first decline in plan solvency since June 2012,” said the report issued this week.

Aon Hewitt said that the “decrease in discount rates used to value plan liabilities,” was the main driver for the drop in solvency ratios during the quarter. While the decrease had a positive impact on fixed-income assets, it had a “negative impact on transfer values and the cost of purchasing annuities,” it said.

Of the more than 275 pension plans included in its survey, Aon found their median solvency funded ratio – defined as the market value of plan assets over plan liabilities — stood at 91.1% at Sept. 26, 2014. In contrast, the comparable ratio was 96% at the end of June. In April 2014, the ratio was 96.8% — the peak for the year. But as a sign of how far things have improved over the medium term, the solvency ratio was 88% in September 2013.

“Now that we have seen plan solvency decline for the first time in over a year and a half, hopefully this will serve as a wake-up call to all plan sponsors to consider their funding and investment strategies with risk management as their key objective,” said William da Silva, senior partner, retirement practice, at Aon Hewitt.

As for the future, da Silva said that “market volatility continues to present significant risks and plan sponsors should be implementing or fine-tuning their de-risking strategies in order to stay current and optimized in the face of ever-changing capital market conditions.”

Indeed Aon Hewitt expects that the release, next year, of actuarial standards for solvency valuations will be a major negative for the solvency of pension funds. Those new standards, which will take into account the new mortality tables released earlier this year, “will have a real impact on the solvency liabilities of DB plans,” because mortality tables project longer life spans for Canadian pensioners.” If those standards were in effect today, Aon Hewitt estimates that the solvency ratio would be 86.9% compared with 91.1%.

The slide in solvency in the third quarter also meant a drop in the percentage of funds that are fully funded. At the end of September, about 23% of the surveyed plans were more than fully funded compared with 37% in the previous quarter and 15% in the third quarter of 2013.

Greece's lagging progress in the privatization of state assets was expected to be the focus of talks on Friday between officials of the privatization agency TAIPED and troika mission chiefs with the foreign envoys said to be pressing for selloffs worth 10 billion euros by the end of 2016.

According to sources, the target of 1.5 billion euros for 2014 is considered very difficult to achieve due to a series of postponements to tenders and competitions.

At 2 p.m. troika envoys are scheduled to meet with Energy Minister Yiannis Maniatis with further talks with Labor Minister Yiannis Vroutsis due at 6 p.m. An initial meeting between the troika and Vroutsis on Thursday allowed each side to present their views on proposed changes to the pension system and on labor reforms.

On Saturday morning, at 9 a.m., foreign auditors are to meet with Finance Minister Gikas Hardouvelis in a bid to reach a consensus on the draft budget for next year which is to be presented in Parliament on Monday. According to sources, the Greek side predicts that the primary surplus for 2015 will be close to 2.8 or 2.9 percent of gross domestic product, close to the 3 percent target.

• I left on September 6th and flew directly to Athens with Air Canada. I booked my flight last minute and paid accordingly ($1,700). I'm undergoing a research study for a new vaccine for MS using my own blood and it is hard to book trips ahead of time because I need to be in Montreal at specific dates as part of the protocol.
• The flight to Greece is always fun. It was a direct flight, lasted nine hours, but since you leave in the late afternoon, you get to sleep (flight back is torture, ten hours and it's during the day). I flew Air Canada because I couldn't find the dates I wanted with Air Transit, the other airline that flies directly to Athens in the summer. 
• Even though the seats are a bit tighter, I prefer Transit but Air Canada Rouge was fine. The staff is young and pleasant as opposed to the typical ones they have on domestic flights. The only thing that pissed me off is that I wasn't told to download the Air Canada App on my iPad to view movies so they told me to rent their iPad for $10. I made a big stink of it and the guy ended up giving it to me for free because his credit card machine wasn't working properly (What happened to the good old days when everything was provided to us for free? For $1,700, we shouldn't be renting any iPad or paying for wine and booze on the flight!).
• Once I got to Athens, clearing customs was a breeze. They move very quickly and you don't have to walk a lot like we do here at Montreal's Pierre-Elliott Trudeau airport. I love the airport in Athens and I found out that the deal with PSP Investments was recently finalized. PSP now owns a 40% stake in Athens' Eleftherios Venizelos airport, with the state owning the biggest chunk (55%). I still think this was a great purchase for PSP with the only major risk being political (more on that below).
• Once I picked up my bags, I proceeded to go upstairs to the Aegean Airlines counter to take my flight to Heraklion, Crete (Travel tip: once you exit the doors to go outside, turn to your right and the elevators are close by to go up to second floor). I love Aegean Airlines and highly recommend you book your tickets online as early as possible to get the best deals (Travel tip: Aegean provides you with a complimentary copy of their Blue Magazine, which is a great resource to find beautiful boutique hotels on the Greek islands). 
• Once I arrived in Crete, I felt at home. I was greeted by my sister, nephew and bother-in-law who were excellent hosts even though they were very busy. I quickly settled into my routine of waking up late, having my Greek frappé, then heading off to the beach at Karteros or to the Candia Maris hotel where I ate like a king, tanned and swam. I alternated between the beach and hotel but the beach was my favorite because I love the ocean breeze and listening to waves while tanning and snoozing.
• I spoke to a lot of cab drivers in Heraklion and all of them were complaining that even though there was record tourism in Greece, the tourists in Heraklion are all "packeto," meaning they are all staying at all inclusive hotels and spending no money for cabs and restaurants (tavernas). Some cab drivers complained of French and Russian tourists trying to bargain with them for cab fares, which I find ridiculous (try bargaining with a NYC cabby and they'll send you to hell!).
• It's true that there was record tourism in Greece and that in Crete, as opposed to Santorini, Mykonos and other islands, there are a lot of hotels that operate with large European travel agencies to fill their hotels up with all inclusive tourists who fly directly to Crete from Germany, England, France and other places and stay on the island for a week or two at a ridiculously low cost (Crete has two main airports, one in Heraklion and one in Chania). 
• I'm not a big fan of all inclusive tourism, especially in Greece where it's a crime to stay at your hotel and not venture off to see museums and walk around and eat at local restaurants. Even in Heraklion, which is not considered a touristic mecca, there are great places to walk, browse stores and amazing little restaurants (Travel tip: My favorite little taverna in Heraklion is Terzaki near Agios Dimitrios church but there are plenty of other great restaurants like Loukoulos and 7 Thallasses where my cousin took us to enjoy an exceptional fish meal that was out of this world).
• But all inclusive hotels are great for hotel owners because they know their revenues beforehand. Also, while cabbies may not like them, record all inclusive tourism is still good for the Greek economy because you have to feed these tourists and provide them with beverages. In other words, the heyday of tourism is gone (the good old eighties and nineties when you traveled to Greece and converted USD or CAD into drachmas), but it still directly or indirectly supports many jobs in an economy fighting to climb out of a depression.
• Also, it's worth noting that things are not great in the eurozone. It's going through its own deflation crisis, so a lot of European tourists visiting Greece are on a very tight budget and are happy to take their family on an all inclusive vacation. Of course, there are plenty of others who can afford to stay at luxury villas in Mykonos, Santorini, Crete and elsewhere (Travel tip: One of the hottest luxury resorts in Greece right now is Costa Navarino which was fully booked for the summer season. In Crete, my favorite luxury resort is the Blue Palace in the beautiful Elounda/ Agios Nikolaos area where there are other internationally acclaimed luxury resorts. If you go there, get ready to pay big bucks but booking early might save you a little).
• There were less Russian tourists this year than last year in Greece and Crete. The sanctions hurt two major Russian travel agencies that went bankrupt and the fall in their currency didn't help. I met a couple of Russians in Crete who told me we're being fed propaganda nonsense on Ukraine. I agreed with them and Greeks are very pro-Russian and think the western media is spreading lies and misinformation on the "Ukraine crisis" (What else is new? Read my comment on fracking EU sovereignty).
• The banking system in Greece is on life-support. There are so many Greeks who took out big loans prior to the crisis and are unable to pay them, especially now that they're getting hit with real estate taxes. For example, I heard of a police officer making 1,900 euros a month who took a loan for 200,000 euros to build a 280,000 euro house outside Heraklion for him and his family (2 children). Once the crisis hit, his income fell to 1,100 euros a month, the value of his house plummeted by 50% or 60%, and he has to pay real estate taxes, leaving him unable to pay the loan. The banks were stupid to provide him and hundreds of thousands of other Greeks with easy credit and they don't want to foreclose on homes (by law, you can't foreclose on a first residence and even if they did, there are no buyers), so they try to negotiate and get whatever they can. 
• One of my uncles who is a very respected businessman in Crete told me that the problem isn't just with those that don't have money to pay off their loans because their incomes were reduced or they lost their job. "The problem is also with the rich tax evaders who have a lot of money, took out huge state-backed loans and aren't paying them back or their fair share of taxes" (like Italy, tax evasion is a national sport in Greece).
• I also met with a few self-employed businessmen who are hurting because of the crisis, had to fire people and are unable to pay their IKA or TEVE, which is their social security and medical insurance claims. One cab driver told me: "I have to pay 850 euros every 2 months and I'm worried that when I need it, there will be no pension or money to cover my medical expenses."
• The biggest problem in Greece remains the bloated public sector. I'll keep saying it because I think it's criminal to have people in the Greek private sector paying one tax after another to support the bloated public sector. 50% of working Greeks work in the public sector and many more rely of the public sector for work. The Greek government has stiffed many private businesses (owing them money they'll never receive), forcing them to shut down, and no politician in Greece has the guts to drastically reduce the size of the public sector. Why? Because they're all vying for votes, lying through their teeth, promising them that they can afford to maintain the status quo, which they know they can't afford. 
• It's a national travesty.Not one public sector job was cut throughout this crisis. The brunt of the crisis was felt in the private sector where massive unemployment is wreaking havoc on the economy. Public sector workers were forced to accept drastically lower incomes and pensions, but that was the least that should have been done. Much more reforms are needed to curb the excesses in the public sector but with Greece in a depression, nobody wants to see more pain.
• Greece desperately needs foreign investment but there are too many special interest groups (like pharmacists, lawyers, etc) and powerful wealthy families who are making it impossible for foreign multinationals to invest in Greece. Not to mention that corporate tax rates and bureaucratic red tape are insane, all to further support a lot of unproductive public sector workers who don't have annual performance evaluations or credentials for the jobs they occupy. There was a recent move to inspect credentials of public sector workers but the left-wing SYRIZA party blocked it to garner votes (ridiculous, Canadian public sector workers are a lot more productive than most of their Greek counterparts but Greek private sector workers work much longer hours than their Canadian and American counterparts).
• Young workers in Greece are grossly underemployed and taken advantage of. The unemployment rate for Greek youths is close to 60% but those that are lucky to have a job are paid peanuts (minimum wage is roughly 500 euros) and been taken advantage of. For example, I met one young lady working as an accountant in Heraklion for a decent company, making 700 euros a month, which barely covers her rent, food and gas. You have a generation of highly intelligent, highly qualified young Greeks that are either unemployed or grossly under-employed. Most of them are unable to move out of their parents' house and they are literally scraping by to survive with little or no savings. If they lose their job, they get 350 euros a month in unemployment insurance for a year and then nothing (there is no welfare in Greece). Forget about having kids, a house and a productive life. The Greek dream is dead which is why many are learning a second and third language to get the hell out of Greece and find work elsewhere, but as we all know, that isn't easy either.
• Many Greeks wrongly blame the Greek Orthodox Church. There were plenty of Greeks who told me that the Greek Orthodox Church pays no taxes on its huge real estate holdings. My uncle in Athens set the record straight: "The Church gave away 92% of its vast real estate holdings to the government during the crisis in order to make priests get paid a token amount as civil servants. These priests have many children and are not paid well, often dying in poverty. The Church (and other charities) pay full taxes on their remaining real estate holdings and they do a lot of great work which the media doesn't cover to help thousands or poor and disabled Greeks. Come with me to the church down the street and I will show you many ladies volunteering their time to cook meals for desperately poor families. They do this for free because it's part of our faith." Of course, my uncle is a good Christian who pays all his taxes and volunteers his time to countless charities, including visiting prisoners who were jailed for illegally crossing the Greek border.
• The Greek media is thoroughly corrupt. I can't overemphasize this. The media routinely extorts and blackmails government officials and businessmen to gain loans or debt forgiveness. The big media barons in Greece who own newspapers and television chains owe hundreds of millions of euros and they are not paying up. Instead, they threaten government officials that if they don't get what they want, they'll publish slanderous articles on them or make them look terrible on television. They all do this which is why I take everything I read or hear in Greek media on domestic affairs with a shaker of salt (their coverage of international affairs, however, is way better than the crap you'll find on Canadian and American TV).
• The Greek justice system is a joke. There is no real justice in Greece because the judicial system is in critical condition. It's too slow, too arcane and by the time you take someone to court, it's too late to recover funds because the money is either gone or parked offshore. Hundreds of thousands of Greek businessmen are owed millions in euros which they will never see, no thanks to ridiculously weak Greek judicial system which favors crooks and tax evaders.
• The Greek healthcare system is a joke. There are way too many doctors in Greece (they accept too many medical students studying abroad in countries like Bulgaria, Romania and Italy) and most of them are starving because they're not being paid by the state. The top cardiac and orthopedic surgeons are still making off like bandits, but the state is starting to nab many of them who have millions of undeclared income in their bank accounts. But most doctors are not being paid by the state, forcing many of them to accept fakelakia (envelopes stuffed with cash) to survive. Big pharmaceutical companies are cutting back their staff and budgets in Greece after being hosed during the crisis where they accepted Greek bonds as a form of payment for expensive drugs. Public healthcare is running out of money forcing many Greeks to get private healthcare but only a few can afford the premiums. 
• The Greek education system desperately needs funds. One area where Greece still scores high marks is in education. Greek students study much harder than their North American counterparts and their mathematics, physics, engineering and medical students are among the best in the world which is why the very best often get scholarships to study at top European and American universities. There is a tremendous amount of pressure placed on kids to study insane hours to score high to be placed in a good university, hopefully near where they live so that their parents can afford to send them to university. But the cutbacks in education have been draconian and many professors are trying to offer the same level of education on a shoestring budget.
• Greek deflation continues to be a scourge. The latest data shows Greek consumer prices fell 0.3 percent in August, with the annual pace of deflation slowing from a 0.7 percent drop in July. Deflation remains the biggest worry in Greece and the rest of the eurozone and the ECB has fallen way behind the deflation curve, which is why I see further weakness in the euro. In fact, I see the euro falling below parity over the next 12 months, and possibly even lower. 
• Greeks hate the new real estate tax. The number one complaintI heard on my trip was on the new real estate tax (ENFIA). Greeks hate it and in many cases they are justified to hate it. Why? Because it is based on pre-crisis valuations and does not reflect the true economy where it's next to impossible to sell real estate in this market.Worse still, rents have plummeted and many people are not paying their rent (good luck taking them to court).
• The mysterious case of burnt Porsche Cayennes. The Greek government is taxing everything it can get its hands on. Swimming pools, cars, real estate and more (still needs to go after bars and clubs in Santorini and Mykonos). One ingenious way of taxing is called tekmirio. It's a consumption tax on everything, including the apartment Greeks rent in a nice neighborhood. If you drive a fancy car in Greece, you're going to get socked with heavy taxes. It's come to the point where many people have given in their license plates because they can't afford the upkeep on their expensive cars (gas is also taxed very heavily in Greece). Some Greeks actually started driving their fancy cars into remote areas and burning them (claiming they were stolen) to collect insurance money but when the insurance companies caught wind of an unusually high number of scorched Porsche Cayennes, that put a dent in this scheme.
• Dark political clouds on the horizon. The biggest cloud hanging over Greece right now is political. It's dealing with the SYRIZA virus. If Alexis Tsipras, leader of SYRIZA, manages to win a majority government (impossible but he might align himself with others to form one), then you might see yet another major eurozone crisis emanating from Greece. Unfortunately, Greeks don't vote with logic, they vote against reforms which they hate, even if it means possibly sending the country back to the Dark Ages. I blame the myopic austerity policies for this which have spurred deflation and done nothing to promote growth, allowing SYRIZA and other political extreme parties to gain in popularity. Germany, troika and the current Greek coalition government are all to blame for this as they continue to ignore the euro deflation crisis. 
• Love that Greek humor! So the leaders of Germany, France and Greece are all asking God a question. Germany's leader asks "when will Deutcheland be the world's economic power?," to which God replies "100 years." Germany's leader starts crying. France's leader also asks the same question and God replies "200 years." He starts crying. The Greek leader then asks "when will we pay off our debt?". God starts crying (lol).
• Greece remains the best place to vacation in the world. In my humble opinion, you simply can't beat Greece as a place to vacation. Great weather, beaches, food and it's a relatively safe place compared to other places in the world. Sure, there are some parts of Athens that are scary at night but nowhere near as scary as some parts of big American cities. The Greek islands are amazing, you can literally walk anywhere and feel extremely safe. 

The divergence in global monetary policy - as the Federal Reserve prepares for its first rate hike in mid-2015 while counterparts in Japan and Europe consider adding stimulus - will drive the U.S. dollar higher this quarter, a CNBC survey of currency strategists and traders shows.

The rise of the dollar index – a gauge of the greenback's value against a basket of six major currencies – has been virtually unassailable, racking up gains for a record 12 straight weeks – its longest winning streak since its 1971 free float under President Nixon.

"We expect a strategically strong dollar over an extended period measured in months and years," said David Kotok, chief investment officer at U.S. money manager Cumberland Advisors with $2.3 billion in assets under management. "Our central bank is at neutral and unlikely to revert to QE (quantitative easing) again. The rest of the world has not reached that stage."

Kotok is not alone. Eighty one percent of respondents expect the greenback to set new highs, while just under a fifth believes the rally will fade.

In a research report on September 30, Deutsche Bank flagged the dollar's ascent as a major headwind for the commodities complex and predicted that the move has further to go.

"A new long-term uptrend in the U.S. dollar is now firmly entrenched and will continue to pose risks to large parts of the commodities complex," Deutsche Bank strategists said in their Commodities Quarterly. "On our reckoning we are only half way through the current U.S. dollar cycle in duration and magnitude terms."

Fed policymakers last month indicated that they expect faster rate hikes next year and the year after. The central bank in its mid-September meeting pushed up its expected path of interest rate increases – the so-called Fed 'dots' forecast. That's likely to set the tone for further dollar gains, though yields on U.S. treasuries - on short and medium-dated notes - suggest the bond market remains unconvinced.

"For Q4 we believe U.S. economy remains on track which means market's rate expectations will move to align more closely with the Fed's 'dot' forecasts," said Vassili Serebriakov, currency strategist at Wells Fargo. "The USD should remain supported, and we see EUR/USD at 1.25 and USD/JPY at 112 by the end of Q4."

A bit stretched

Still, some argue the rally risks exhaustion towards year-end after such a blistering and historic run. The dollar index rose to a four-year peak at the start this quarter, boosted by upbeat U.S. jobs data on October 3.

"[The] dollar has scope for continued upside but the move is getting a bit stretched and may become more nuanced into the year-end," said Ilya Spivak, Currency Strategist at FXCM Live.

Nick Bennenbroek, head of currency strategy at Wells Fargo, said 'corrective weakness' was in store for the U.S. dollar: "While the Fed is moving closer to tightening, policy action is not imminent just yet. Against the backdrop of current market positioning, that provides some scope for the U.S. dollar to soften."

Meanwhile, dollar bears emphasize that the currency's headlong rush higher is at odds with economic fundamentals."The strength in the U.S. dollar doesn't necessarily reflect underlying economic strength," said Gavin Wendt, Founding Director & Senior Resource Analyst at Sydney-based Mine Life Pty. "The market is being misled with respect to potential Fed interest rate increases - I can't see the Fed raising interest rates in mid-2015 as the economy won't support it."

The dollar index (DXY) hit a high of 86.74 on Friday - its strongest level since June 2010 - and rose 7.7 percent in the third quarter. That's its largest percentage increase since a 9.6 percent gain in the comparable period in 2008.

The US dollar is on a roll. The currency’s gains last month took the US Dollar Index near four-year highs.

The Dollar Index, a measure of the greenback’s value against a basket of currencies including the euro, the yen and the pound, appreciated more than 3.8 per cent in a month, which all but solidified the bull trend for the dollar and primed it for an even stronger closing through the end of this year.

In its third consecutive month of gains, the Dollar Index is approaching levels last reached in 2010, and technically a move towards 88.64 will be next up for the currency. The dollar has been a big beneficiary of the one-way downwards move in the euro, which was further exacerbated last month, but the improved sentiment about the US economic situation continues to build momentum and this is converting into increased flows into dollar-long positions.

Amid a stellar US economic calendar last month filled with stronger-than-expected numbers, perhaps the key figure was the headline US nonfarm payroll report. The most recent data showed that 248,000 new jobs were added in September, well above expectations of 215,000.

The key takeaway from the report was the unemployment rate, which dropped to 5.9 per cent, below an expected 6.1 per cent and the lowest since July 2008. The improved figure caused large inflows into dollar-long positions (the Dollar Index gained more than 1.2 per cent on Friday) as the data further solidified the US recovery and increased bets that the Federal Reserve would look at increasing rates sooner rather than later.

Estimates have the Fed poised to increase US interest rates in July next year, but the US data docket showing signs of improvement leads to increased speculation of a rate hike sooner than expected – and this expected interest rate differential leads to an increased demand for the currency with the higher interest rate, in this case the dollar. With the European Central Bank in the midst of aggressively cutting rates, the euro-dollar pair is susceptible to further downsides through the medium term.

The euro’s torrid run continued through last month, with the common currency slipping 3.85 per cent against the dollar and 1.6 per cent against the British pound. The euro-dollar conclusively took out our target support at 1.28 to close just above 1.25 levels.

Technically, we predict the euro-dollar testing the 200 Month Average, which sits at 1.2214 in the month ahead, and with the current condition of the European data docket we fully expect this target to materialise.

The ECB president, Mario Draghi, last month slashed rates across the board. The main refinancing rate was cut to 0.05 per cent from a previous 0.15 per cent, the deposit facility rate was cut to minus 0.20 per cent from minus 0.10 per cent and the marginal lending facility rate was cut to 0.3 per cent from 0.4 per cent.

Although the ECB could not cut rates any further at its latest meeting last Thursday, Mr Draghi hinted at further asset purchases in the region of €1 trillion. The potential for such an increase in the ECB’s balance sheet will no doubt continue to pile the pressure on the euro, and with the data coming out of Europe showing no signs of improvement, it is not a matter of if but when Mr Draghi will pull the trigger.

The fundamental drag of upcoming ECB action will no doubt test 1.22 in the euro-dollar cross, and looking ahead to the closing months of the year this could open the door to a break of 1.20 levels. We still expect the cross to hold above 1.18 for the rest of the year.

Along with the euro, a stronger dollar will also lead to further downsides in the pound, the Australian dollar and gold in the month ahead.

The Scottish vote was a make or break for British pound forecasts, and although the No vote made the pound-dollar rally initially to 1.65 levels, a weaker second half of last month caused the cross to close below 1.60 for the first time in 11 months. The Australian dollar moved to its lowest level this year, and deteriorating sentiment from China will continue to weigh down Aussie-US dollar forecasts. The Australian dollar gave up more than 6.2 per cent against the greenback last month and we expect the weakness to continue in the month ahead with a test of 0.83 on tap.

And finally, gold is consolidating around a key support level of US$1,180 an ounce. Despite the recent bear trend in the precious metal, we expect these levels to hold in the month ahead while stabilising in the current range to close out the year.

A baby born in 2012 will live to a record 78.8 years old on average, as U.S. life expectancy grew and fewer Americans are dying from heart disease, cancer and other chronic illnesses.

That’s a gain of about one month compared to 2011, according to a report released today by the Centers for Disease Control and Prevention. Average life expectancy for women was 81.2 years. Men will live an average of 76.4 years.

The life expectancy in the U.S has increased 1.9 years since the start of the century, though it was unchanged from 2010 to 2011, the last time the agency released figures.

“We continue to follow the pattern that we have been seeing for a few decades, where life expectancy is gradually increasing and death rates from the leading causes of death are decreasing,” said Elizabeth Arias, a demographer at the CDC and an author of the paper.

Eight of the 10 main causes of death fell, including a 1.8 percent reduction in heart disease-related deaths and a 1.5 percent drop in cancer deaths. The rate of suicides, however, rose by 2.4 percent. Heart disease and cancer account for about half of all deaths, Arias said.

The infant mortality rate, which counts the ratio of infant deaths to births, has also improved, with 8.9 fewer infant deaths per 100,000 live births in 2012 compared to 2011.

While most groups saw gains, the death rate among Hispanic males and females was unchanged. The biggest decline in mortality was among black women, according to the data, which is collected by the National Center for Health Statistics and based of nearly every U.S. death certificate.

The life expectancy for an infant is based on the assumption that the death rate remains the same for the entire life of the child, though that is unlikely since the death rate has been on the decline for decades, Arias said.

America’s older population is in the midst of unprecedented growth, but the country is not prepared to meet the housing needs of this aging group, concludes a new report released today by the Harvard Joint Center for Housing Studies and AARP Foundation.

According to Housing America’s Older Adults—Meeting the Needs of An Aging Population, the number of adults in the U.S. aged 50 and over is expected to grow to 133 million by 2030, an increase of more than 70 percent since 2000 (see interactive map). But housing that is affordable, physically accessible, well-located, and coordinated with supports and services is in too short supply.

Housing is critical to quality of life for people of all ages, but especially for older adults. High housing costs currently force a third of adults 50 and over - including 37 percent of those 80 and over - to pay more than 30 percent of their income for homes that may or may not fit their needs, forcing them to cut back on food, health care, and, for those 50-64, retirement savings.

Much of the nation’s housing inventory also lacks basic accessibility features (such as no-step entries, extra-wide doorways, and lever-style door and faucet handles), preventing older persons with disabilities from living safely and comfortably in their homes.

Additionally, with a majority of older adults aging in car-dependent suburban and rural locations, transportation and pedestrian infrastructure is generally ill-suited to those who aren’t able to drive, which can isolate them from friends and family. Finally, disconnects between housing programs and the health care system put many older adults with disabilities or long-term care needs at risk of premature institutionalization.

“Recognizing the implications of this profound demographic shift and taking immediate steps to address these issues is vital to our national standard of living,” says Chris Herbert, acting managing director of the Harvard Joint Center for Housing Studies.

“While it is ultimately up to individuals and their families to plan for future housing needs, it is also incumbent upon policy makers at all levels of government to see that affordable, appropriate housing, as well as supports for long-term aging in the community, are available for older adults across the income spectrum.”

Of special concern as the older population in the U.S. continues to swell are the younger baby boomers who are now in their 50s. With lower incomes, wealth, homeownership rates, and more debt than generations before them, members of this large age group may be unable to cover the costs of appropriate housing or long-term care in their retirement years.

Indeed, while a majority of people over 45 would like to stay in their current residences as long as possible, estimates indicate that 70 percent of those who reach the age of 65 will eventually need some form of long-term care.

In this regard, older homeowners are in a better position than older renters when they retire. The typical homeowner age 65 and over has enough wealth to cover the costs of in-home assistance for nearly nine years or assisted living for 6 and half years. The typical renter, however, can only afford two months of these supports.

“As Americans age, the need for safe and affordable housing options becomes even more critical,” says Lisa Marsh Ryerson, President of the AARP Foundation.

“High housing costs, aging homes, and costly repairs can greatly impact those with limited incomes. The goal in our support of this report is to address the most critical needs of these households and it is AARP Foundation’s aim to provide the tools and resources to help them meet these needs now and in the future.”

Rosemary Anderson could be 81 by the time she pays off her student loans. After struggling with divorce, health problems and an underwater home mortgage, the 57-year-old anticipates there could come a day when her Social Security benefits will be docked to make the payments.

Like Anderson, a growing percentage of aging Americans struggle to pay back their student debt. Tens of thousands of them even see their Social Security benefits garnished when they cannot do so.

Among Americans ages 65 to 74, 4 percent in 2010 carried federal student loan debt, up from 1 percent six years earlier, according to a Government Accountability Office report released Wednesday at a Senate Aging Committee hearing. For all seniors, the collective amount of student loan debt grew from about $2.8 billion in 2005 to about $18.2 billion last year.

Student debt for all ages totals $1 trillion.

"Some may think of student loan debt as just a young person's problem," said Sen. Bill Nelson, D-Fla., chairman of the committee. "Well, as it turns out, that's increasingly not the case."

Anderson, of Watsonville, California, amassed $64,000 in student loans, beginning in her 30s, as she worked toward her undergraduate and graduate degrees. She said she has worked multiple jobs — she's now at the University of California, Santa Cruz — to pay off credit card debt and has renegotiated terms of her home mortgage, but hasn't been able to make a student loan payment in eight years. The amount she now owes has ballooned to $126,000.

"I find it very ironic that I incurred this debt as a way to improve my life, and yet I still sit here today because the debt has become my undoing," Anderson said in prepared testimony for the hearing.

Despite not making payments, she's managed to keep the education debt in good standing, she said.

Ed Boltz, a bankruptcy attorney in Durham, North Carolina, who is president of the National Association of Consumer Bankruptcy Attorneys, said in an interview that many of the seniors he sees with student loan debt are also struggling with challenges such a medical problems, job loss or divorce. Some, he said, went back to school with hopes of making a higher salary and that didn't pan out, or the children they helped fund to attend school are not in a position to help the parent in return.

"They are stuck with these debts and they can't try again," Boltz said. "There's no second act for them. It holds off on people retiring."

The GAO found that about 80 percent of the student loan debt by seniors was for their own education while the rest was taken out for their children or other dependents. It said federal data showed that seniors were more likely to default on loans for themselves compared with those they took out for their children.

It's unclear when the loans originated, although the GAO noted that the time period to pay back such debt can range from a decade to 25 years. That means some older Americans could have taken out the loans when they were younger and they've accumulated with interest, or got them later in life — such as workers who enrolled in college after a layoff in the midst of the economic downturn.

The GAO found that about a quarter of loans held by seniors ages 65 to 74 were in default. The number of older Americans who had their Social Security benefits offset to pay student loan debt increased about fivefold, from 31,000 to 155,000, from 2002 to 2013.

"As the baby boomers continue to move into retirement, the number of older Americans with defaulted loans will only continue to increase," the GAO said. "This creates the potential for an unpleasant surprise for some, as their benefits are offset and they face the possibility of a less secure retirement."

Typically, student loans can't be discharged in bankruptcy. In addition to docking Social Security, the government can use a variety of tools to recoup student loans, such as docking wages or taking tax refund dollars.

Sandy Baum, a senior fellow at the Urban Institute, said these seniors having their Social Security docked likely don't have much discretionary income and Congress should consider taking away this option. There's a limit to how much Social Security can be docked, but some seniors are left with benefits below the poverty level, the GAO said.

"It's not an issue that affects large numbers of people," Baum said. "It's a very big issue for people who are affected by it."

Converting large public sector pension plans into defined contribution savings accounts for employees could cost governments up to 77 per cent more to provide the same retirement benefit for workers, a report argues.

A study sponsored by the Canadian Public Pension Leadership Council, an association of large public pension funds, says governments considering converting their traditional defined benefit (DB) pension plans would face higher administration costs because defined contribution (DC) plans cannot be run as efficiently.

DB pension plans pay workers a guaranteed level of income in retirement, while DC pension plans operate like individual savings accounts, paying out a retirement benefit that varies depending on the investment performance of the funds.

The pension council said it commissioned the study because there have been increasing calls by some provincial opposition parties and pension advocates for governments to shut down their larege employee pension plans and convert workers to DC savings plans. Former Ontario Conservative leader Tim Hudak, for example, said in 2013 that the province should negotiate a transition to DC pension plans to reduce funding requirements, while the Saskatchewan New Democratic Party advocated in a 2013 study that more governments should shift public sector pensions to a DC model to cut costs for taxpayers.

“There’s an attack on public sector defined benefit plans, and we wanted to substitute facts for impressions,” study author Robert Brown, a pension researcher and actuary, said Tuesday. “We think it’s a fairly overpowering argument.”

Mr. Brown, a retired University of Waterloo professor, said DC plans are less efficient than DB plans because members must pay more for asset management and do not pool their risk of living longer than average; so they must each save enough to cover longer lives.

The result is that a hypothetical $10-billion DB plan would see the cost of providing the same retirement benefit rise by 77 per cent if it converted into individual-account DC plans.

Mr. Brown said DB pension benefits paid to workers are typically composed of 75 per cent from investment income and 25 per cent from contributions, which are typically split equally by employees and the employers. To achieve the same income from individual DC accounts, the study said investment returns would provide just 55 per cent of the final benefit, requiring workers and employers to cover 45 per cent of the cost.

The report said governments must also continue to manage the remaining DB plan that continues to exist after workers are shifted to DC, and have often found their liability soars because workers are not making any new contributions while the funding obligation remains and can grow.

Saskatchewan, which converted employees to DC plans in 1977, saw costs for its legacy DB plan climb in the first decades after it was closed, and will continue paying benefits under the plan for 90 years, the report said.

Two U.S. states – Nebraska and West Virginia – that converted employees into DC plans ended up partly converting back to DB because of a backlash about how low retirement income was for employees, the study adds.

The study also argues that governments do not enjoy the same savings as a private sector companies when they shift workers to DC plans because workers who end up with less retirement income can qualify for higher payments from Old Age Security or the Guaranteed Income Supplement for low-income retirees, so governments have to fund their pension costs through another route.

Mr. Brown said that if the motivation to convert to DC plans is to cut pension funding costs for governments, the outcome would be achieved more efficiently by modifying features of the DB plan – such as eliminating guaranteed inflation indexation – than by eliminating the plan entirely.

“If you’re concerned about the level of costs, then let’s talk about the level of benefits,” he said. “But don’t try to achieve cost reductions just by moving out of the DB delivery model, because it’s the most efficient and effective model there is.”

Jeff Macke of Yahoo Finance reports, What's making the stock market act so crazy?:

It’s not your imagination: the stock market has gone a little bonkers lately. This week alone the Dow Jones Industrial Average (^DJI) plummeted 272 points on Tuesday, rocketed back 274 points Wednesday and sank more than 330 points today. October has already recorded five days where stocks moved more than 1%. That’s as many 1% moves as we saw in the prior five months combined.

So why are stocks so crazy? There’s no set answer but here are three of the most obvious explanations making the rounds on Wall Street.

It’s October

I know it sounds crazy but October is almost by tradition the most volatile month of the year. Whether it’s because of the upcoming holidays, the end of the fiscal year for mutual funds or because we hold elections every other November, October sees far and away the most 1% moves of any month. Remarkably since 1970 nearly one third of every trading day in October has seen the price of stocks change by 1% or more. It's also worth noting that historically bad days like the 1929 crash and 1987's Black Monday crash both took place in October.

Global concerns

The world is always crazy but right now things seem to be rockier than normal. Government officials in Europe are arguing over the best way to ward off an impending recession, growth is slowing to a relative crawl in China and Japan is tipping into a recession. That’s never good for companies driven by exports like General Motors (GM) or McDonalds (MCD).

For their part the Federal Reserve acknowledged these global concerns yesterday and suggested they would be very cautious about raising interest rates because of such worries. That sentiment sent stocks surging, just the latest bit of evidence that investors pay very close attention to every word uttered by the Federal Reserve.

Bad news outbreak

It’s not just overseas. The Ebola outbreak has some investors worried that the U.S. economy, which hasn’t been great to begin with, could freeze. Despite good headline data on employment many economists point out that wage growth in the U.S. has been almost non-existent. The fear may be overblown but this time of year traders tend to sell first and ask questions later.

So what should you do? Probably nothing. If you’re like most investors you’re not looking at your portfolio more than once a month unless or until you see bold headlines about stocks plunging. That can make the prospect of opening up those statements pretty daunting.

The truth is trying to time the market is always a sucker’s game and that’s especially true during volatile times. Days like this aren’t a good time to radically change your long-term strategy.

Professional traders would love to see you panic into dumping some quality blue chips. Don’t be that person. Take a long-term view and if you’re in doubt make an appointment to meet with your financial planner.

Macke also discusses technicals stating two key levels for the S&P 500 he's looking at:

Wednesday and Thursday marked the biggest one day rally and worst one day drop for the Dow Jones Industrial Average (^DJI) for all of 2014. That’s the first time those extremes have been hit on back to back days in nearly 17 years.

Then again, neither 2014 nor this sell-off are over just yet. With pre-market futures for the Dow off by more than 100 points it’s likely the Dow will have given back all of this year’s gains and be negative for the year when the market opens.

That’s sort of a good thing. This sell-off has been noteworthy in its volatility but with decidedly too little fear. Yes the (^VIX), the deeply flawed measure of “fear” among traders, has risen 24% in the last 5 trading days but it’s still in the teens. To put that in perspective, the VIX topped out over 20 in February of this year. Historically about 40 on the VIX is the point at which it can be fairly assumed there’s genuine fear in the market.

There are plenty of fundamental reasons to be afraid. There’s a rational risk of a global slowdown and the Fed screwing things up more than they already have. There is still largely irrational concerns that Ebola is about to kill thousands of Americans and cripple our economy beyond anything the Fed can possibly help. Combining justified and irrational fears is generally a toxic mix for stocks.

So where do we go from here? As most of you know, when markets get emotional I turn to the technicals. Specifically my patent-pending Purple Crayon system. Mock it if you want but these silly pictures have allowed me to survive three major crashes and a few bubbles relatively unscathed so I’m sticking to them.

With the Dow poised to erase its yearly gains, it can be viewed as a good wash-out catalyst but grown ups, or at least professional traders use the S&P 500 for their charts. The next big line of support is the 200-day moving average at 1,904. Look for traders to start trying longs if and when we get there but frankly, I’m not so sure it holds.

The best trend lines are those that the maximum number of people can draw and understand. I ran a long-term chart of the S&P 500 and ran a line from the lows of the summer of 2011 through today. That line has been a critical support multiple times. If you project it out you get 1,800. That level intersects rather nicely with support from the last year or so. It’s also a nice round number… again, part of the point is to keep these things simple. Traders watch big round numbers so you should as well.

If 1,904 fails stocks I have air pocket risk down to 1,800 on the S&P. That’s another 6.6% lower from where we closed yesterday. If we get there the S&P 500 will be negative for the year and the VIX will be at least 40, depending on how fast the drop comes.

1,800 is your Maginot line. If stocks fall below that the war is over and the Bears won. I’m not saying it happens but let’s put it this way: if you lost all your investment gains for the year would you be inclined to buy stock or would you panic and sell everything before you lost more? If the answer is the latter you should maybe take some money off the table ahead of time. If not, simply buckle up and look for opportunities where you can find them.

Imagine a place where pensions were not an ever-deepening quagmire, where the numbers told the whole story and where workers could count on a decent retirement.

Imagine a place where regulators existed to make sure everyone followed the rules.

That place might just be the Netherlands. And it could provide an example for America’s troubled cities, or for states like Illinois and New Jersey that have promised more in pension benefits than they can deliver.

“The rest of the world sort of laughs at the United States — how can a great country like the United States get so many things wrong?” said Keith Ambachtsheer, a Dutch pension specialist who works at the University of Toronto — specifically at its Rotman International Center for Pension Management, a global clearinghouse of information on how successful retirement systems work.

Going Dutch, however, can be painful. Dutch pensions are scrupulously funded, unlike many United States plans, and are required to tally their liabilities with brutal honesty, using a method that is common in the financial-services industry but rejected by American public pension funds.

The Dutch system rests on the idea that each generation should pay its own costs — and that the costs must be measured accurately if that is to happen. After the financial collapse of 2008, workers and retirees in the Netherlands took the bitter medicine needed to rebuild their collective nest eggs quickly, with higher contributions from workers and benefit cuts for pensioners.

The Dutch approach bears little resemblance to the American practice of shielding the current generation of workers, retirees and taxpayers while pushing costs and risks into the future, where they can metastasize unseen. The most recent data suggest that public funds in the United States are holding just 67 cents for every dollar they owe to current and future pensioners, and in some places the strain is palpable. The Netherlands, by contrast, have no Detroits (no cities going bankrupt because pension costs grew while the population shrank), no Puerto Ricos (territories awash in debt but with no access to bankruptcy court) and nothing like an Illinois or New Jersey, where elected officials kicked the can down the road so many times that it finally hit a dead end.

About 90 percent of Dutch workers earn real pensions at their jobs. Their benefits are intended to amount to about 70 percent of their lifetime average pay, as many financial planners recommend. For this and other reasons, the Netherlands has for years been at or near the top of global pension rankings compiled by Mercer, the consulting firm, and the Australian Center for Financial Studies, among others.

Accomplishing this feat — solid workplace pensions for most citizens — isn’t easy. For one thing, it’s expensive. Dutch workers typically sock away nearly 18 percent of their pay, most of it in diversified, professionally run pension funds. That compares with 16.4 percent for American workers, but most of that is for Social Security, which is intended to provide just 40 percent of a middle-class worker’s income in retirement.

Dutch employers contribute to their system, too, but their payments are usually capped. While that may seem a counterintuitive way to make sure that pensions are well funded, it actually encourages companies to stick with pension plans. If the markets drop, Dutch employers do not receive urgent calls to pump in more money — the kind of cash calls that have prompted so many American companies to stop offering pensions. In the private sector, only 14 percent of Americans with retirement plans at work have defined-benefit pension plans — the ones that offer the most security — compared with 38 percent who had them in 1979. And if the markets rally and a Dutch pension fund earns more than it needs, the employers are not allowed to touch the surplus. In the United States, companies have found many ways to tap a pension surplus. The problem today is that there usually is no surplus left.

Dutch companies, as well as public-sector employers, typically band together by sector in big, pooled pension plans, then hire nonprofit firms to invest the money. Terms are negotiated sectorwide in talks that resemble American-style collective bargaining.

This vast collaborative process may sound too slow, too unwieldy and maybe even too socialist for American tastes. But standing guard over it is a decidedly capitalist watchdog, the Dutch central bank. More than a decade ago, after the dot-com collapse, a director of the central bank warned of a looming pension funding crisis. In response, the central bank in 2002 began to require pension funds to keep at least $1.05 on hand for every dollar they would have to pay in future benefits. If a fund fell below the line, it had just three years to recover.

American public pension funds have no such minimum requirement, and even if they did, there is no regulator to enforce it. Company pensions are bound by federal funding rules, but Congress has a tendency to soften them.

The Dutch central bank also imposed a rigorous method for measuring the current value of all pensions due in the future. Pensions are not supposed to be risky, so the Dutch measure them the same way the market prices very safe bonds, like Treasuries — that is, by discounting the future payments to today’s dollars with a very low interest rate. This method shows that a stable lifelong benefit is very valuable, and therefore very expensive to fund.

Notably, the Dutch central bank prohibited the measurement method that virtually all American states and cities use, which is based on the hope that strong market gains on pension investments will make the benefits cheaper. A significant downside to this method is that it lets pension systems take advantage of market gains today, but pushes the risk of losses into the future, for others to cope with. “We had lengthy discussions about this in the Netherlands,” said Theo Kocken, an economist who teaches at the Free University in Amsterdam and is the founder of Cardano, a risk analysis firm. “But all economists now agree. The expected-return approach is a huge economic offense, hurting younger generations.”

He explained that in the Netherlands, regulators believe that basing the cost of benefits today on possible investment gains tomorrow is the same as robbing tomorrow’s workers to pay for today’s excesses.

Most public pension officials in the United States reject this view, saying governments can wait out bear markets because governments, unlike companies, don’t go out of business.

For years, economists have been calling on American cities and states to measure pensions the Dutch way. And, in fact, California’s big state pension system, Calpers, sometimes calculates a city’s total obligation by that method. When Stockton went bankrupt, for instance, Calpers recalculated and found that the city owed it $1.6 billion. Of course, Stockton is insolvent and does not have an extra $1.6 billion, but Christopher Klein, a bankruptcy judge, has said that federal bankruptcy law permits it to walk away from the debt. Calpers disagrees, setting up a clash that seems destined for the United States Supreme Court.

But most of the time, when someone in the United States calls for Dutch-style measurements, pension officials suspect a ploy to show public pensions in the worst possible light, to make them easier to abolish.

“They want to create a false report, to create a crisis,” said Barry Kasinitz, director of government affairs for the International Association of Fire Fighters, after members of Congress introduced a bill to require the Dutch method.

The Dutch say their approach is, in fact, supposed to prevent a crisis — the crisis that will ensue if the boomer generation retires without fully funded benefits. Their $1.05 minimum is really just a minimum; pension funds are encouraged to keep an even bigger surplus, to help them weather market shocks. The Dutch sailed into the global collapse of 2008 with $1.45 for every dollar of benefits owed, far more than they appeared to need. But when the dust settled, they were down to just 90 cents. The damage was so bad that the central bank gave them a breather: They had five years to get back to the $1.05 minimum, instead of the usual three.

American public plans emerged from the crisis in worse shape, on the whole, and many allowed themselves 30 years to recover. But 30 years is so long that the boomer generation will have retired by then, and the losses will have been pushed far into the future for others to repay.

It’s a recipe for disaster if the employer happens to be a city like Detroit. The city’s pension system used a 30-year schedule to cover losses but reset it at “Year 1” every year, a tactic employed in a surprising number of places. In Detroit, it meant the city never replaced the money that the pension system lost. When Detroit finally declared bankruptcy last year, an outside review found a $3.5 billion shortfall, one of the biggest claims of the bankruptcy. Manipulating the 30-year funding schedule had helped to hide it.

“This happening in the Netherlands is totally out of the question,” Mr. Kocken said.

While the Netherlands has a stellar reputation for saving, that doesn’t mean pensions have been without controversy there; in fact, a loud, intergenerational debate is occurring about how to manage pensions. The financial crisis raised new calls for reform, Mr. Ambachtsheer said. Retirees were shocked and angry to have their pensions cut by an average of 2 percent after the crash. That had never happened before, and many had no idea that cuts were even possible. A new political party, 50Plus, sprang up to defend the interests of older citizens and won two seats in the national Parliament.

But something else happened: Dutch young people found their voice. No matter their employment sector, they could see that their pension money was commingled with retirees’ money, then invested that way by the outside asset management firms. In the wake of the financial crisis, they realized that they and the retirees had fundamentally opposing interests. The young people were eager to keep taking investment risk, to take advantage of their long time horizon. But the retirees now wanted absolute safety, which meant investing in risk-free, cashlike assets. If all the money remained pooled, young people said, the aggressive investment returns they wanted would be diluted by the pittance that cashlike assets pay.

“Now the question is, ‘How do you resolve this dilemma?’ ” Mr. Ambachtsheer said. “Everybody wants safety and everybody wants an affordable system, and you can’t have both. It’s become a major public debate in the Netherlands.”

It’s a debate that is rarely, if ever, heard in the United States.

The brutal truth on defined-contribution plans is they're more costly and not properly diversified across public and private assets. More importantly, they will exacerbate pension poverty which is why we have to enhance the Canada Pension Plan (CPP) for all Canadians allowing more people to retire in dignity and security. These people will have a guaranteed income during their golden years and thus contribute more to sales taxes, reducing public debt.  

In my ideal world, you won't have the bcIMC, Caisse, OTPP, PSP, AIMCo, HOOPP or Bombardier, CN, Bell, Air Canada pension plans. You will only have large, well-governed public defined-benefit plans managing the assets and liabilities of all Canadians regardless of whether they work in the public or private sector. If we achieve such a monumental undertaking, we will significantly lower investment and administrative costs and do away with the issue of pension portability once and for all because people will move across public and private sector jobs knowing their pensions are safe and secure, backed by the full faith and credit of the federal government.

The financial crisis of 2008-09 has provided a stress test for the Dutch pension system. It appears that the more flexible defined benefit structure adopted by most plans earlier in the decade, which relies on indexation adjustments to restore solvency, may not be sufficient for the funds to recover fully. In response, policymakers should try to find approaches to compensate for the funding deficits in ways that best distribute risk among participating generations. In addition to the funding increases or nominal benefit cuts that may be needed in the wake of the crisis, policymakers should think more broadly about improving the design of pension funds going forward – through, for example, introducing age differentiation – to more effectively and fairly distribute risk by generations.

A key gauge of deflation risk in Europe is flashing red, dropping to record lows on fears of fresh recession and lack of decisive action by the European Central Bank.

The sudden lurch downwards came as Bank of America warned that France’s debt ratio could rocket to 120pc of GDP within five years, unless the EU authorities take radical steps to reflate the region’s economy. Italy’s debt could threaten 150pc even earlier.

The 5-year/5-year forward swap rate monitored closely by traders plummeted beneath 1.77pc on Friday morning as a global growth scare drove European stock markets to a 12-month low (click on image).

“This rate is the most important market signal on the planet right now. Everybody is watching the chart, and it has just gone off a cliff,” said Andrew Roberts, credit chief at RBS.

Bond markets echoed the refrain, with yields on 10-year German Bunds falling to an all-time low of 0.88pc on flight to safety, though the bond rally can also be seen as a bet by traders that the ECB will soon be forced to launch full-blown quantitative easing.

Mario Draghi, the ECB’s president, has adopted the 5Y/5Y rate as the bank’s policy lodestar, used to distill expectations of future inflation. Any fall below 2pc is deemed a risk that expectations are becoming “unhinged” and could lead to a Japanese-style deflation trap.

Mr Roberts said the ECB’s plan for asset purchases - or “QE-lite” - does not yet add up to a coherent strategy. “We don’t think they can boost their balance sheet by more than €165bn over the next two years by buying asset-backed securities (ABS) and covered bonds together, given the haircut effects. The sums are trivial,” he said.

RBS estimates that the inflation rate has already dropped to below 0.1pc in the eurozone if one-off tax rises and fees are stripped out, and this measure may turn negative in October. “Deflation is already knocking on the door. We think it could happen as soon as next month given the latest fall in food prices,” said Mr Roberts.

“We are reaching the end game in Europe. If they don’t launch real QE and start reflation by the end of the year or soon after, the consequences are too awful to contemplate,” he said.

Ruben Segura-Cayuela, from Bank of America, said low inflation has become “the biggest threat to the dynamics of public debt” in the eurozone, warning that debt ratios risk “spiraling up” even at levels of around 0.5pc.

France’s debt will keep rising from 93pc to 102pc of GDP by 2016, even in the best of circumstances. It will reach 117pc under a “lowflation scenario”, and 120pc if there is no further fiscal tightening. Spain’s debt will hit 113pc under similar circumstances. “What worries us is that we are not even stress testing for deflation,” he said (click on images below).

Bank of America said the ECB may have to take far more radical steps, pledging to violate its own 2pc inflation limit deliberately in order to break out of the vicious circle. “A commitment to keep nominal rates low for a long period does not necessarily work, and alone does not guarantee a recovery. The situation in the euro area might require more forceful action, a nominal anchor that implies the central bank committing to overshoot its inflation target,” it said.

This is almost impossible to imagine, given the political character of the eurozone. Any such move would breach EU treaty law.

It remains far from clear what the ECB intends to do. On Thursday, Mr Draghi vowed “new measures” to head off deflation if necessary, but traders are looking past the rhetoric for hard facts. The ECB’s balance sheet contracted by €10bn last week, falling back to levels of early July. Mr Draghi has yet to flesh out his vague plan to boost it by €1 trillion.

The US Federal Reserve, the Bank of Japan and the Bank of England all set clear timetables, spelling out exactly how many bonds they would buy, and the scale has been much larger in proportion to GDP. The ECB has merely given pledges, and these have since been qualified by the Bank of France, and have been openly attacked by the Bundesbank.

Germany’s five economic institutes - or Wise Men - said the ECB’s asset purchases will add “hardly any” extra stimulus to the real economy and may be unworkable in any case. They said there are not enough private securities that can plausibly be bought, and noted that a previous scheme to buy €40bn of covered bonds had run into the ground.

Analysts are watching German politics just as closely as ECB language. The rise of Germany’s AfD anti-euro party raises the political bar even further for full-fledged QE, and eurosceptics have announced their intention to file cases at the German constitutional court to block asset purchases once they begin.

The court has already ruled that the ECB’s backstop measures for Italian and Spanish debt (OMT) “manifestly violate” the EU Treaties and are probably “Ultra Vires”, which prohibits the Bundesbank from taking part. Pending cases on QE would raise questions over whether the Bundesbank might have to step aside on asset purchases.

The current circumstances are very different from July 2012, when Mr Draghi had the full political backing of the German finance ministry for his OMT rescue plans. This time he must battle critics across the whole political spectrum in Germany.

Giulio Mazzolini and Ashoka Mody, from the Bruegel think tank in Brussels, said the eurozone seems to be tipping into a “debt-deflation cycle” as rising debt and deflation feed off each other, yet the authorities remain paralyzed and still refuse to face up the gravity of the threat. “Even now, ECB officials regard deflation to be unlikely,” they said.

A few years ago, Isabel Huerta, a mother of two living in Valencia, would never venture into a branch of Spain’s leading department store, El Corte Inglés, on a Saturday. “It was always so crowded,” she says. “You couldn’t even get inside the changing rooms.” Not any more. Nowadays, you can drop into any of the four stores in the city on a Saturday afternoon and browse in peace. The aisles, she says, are almost empty. Assistants pursue the few customers that do bother to show up around the shop floor, doggedly chasing an increasingly elusive sale.

Even for the undisputed royalty of Spanish retailing, these are humiliating times but the travails of El Corte Inglés serve as a reminder that no one is immune from the chill that has descended on the country’s consumers. According to Spain’s official statistics office, the Instituto Nacional de Estadística, in 2008 the average Spanish household spent €31,711. Over the following five years that figure fell consistently, dropping to €27,098 last year.

That’s a pretty steep decline, but it tells only part of the story because these figures take no account of inflation. Prices in Spain went up about 9.5% between 2008 and the end of 2013. This means that simply to keep up with rising prices a person would, in theory, have needed to spend nearly €35,000 in 2013 to buy the same quantity of goods and services that €31,711 would have bought in 2008. But instead of going up by 9.5%, household spending dropped by 14.5%. After allowing for inflation, Spanish households spent very nearly 22% less in 2013 than they did five years earlier.

Averages, of course, are not necessarily very informative. They capture a huge range of data from the wealthiest families to the poorest, and churn out a middle-ground figure that reflects everybody to some extent and nobody completely. But when an average falls that far that fast, it is a safe bet that very large numbers of people are cutting their spending to the bone. And when we consider that, thanks largely to the collapse of its construction boom, Spain now has adult unemployment of about 25% – three times the level in 2007 – and joblessness among the under-25s of nearly 54%, it comes as no surprise.

Very similar things are happening right across the southern part of the Eurozone, but nowhere more brutally than in Greece, where adult unemployment stands at about 27% and youth unemployment is double that. Again, however, those figures do not tell the whole story, according to financier Andreas Zombanakis.

“You have to look at the 1.5m ­headline unemployment number in a ­different way because you have a theoretical workforce of about 4.5m people in Greece, of which the wider public sector including the electric company, for example, makes up about 1 million. The public sector has had no redundancies, none, zero. So the private-sector workforce is about 3.5m people, and out of that 3.5m you’ve got 1.5m unemployed – you’re looking at almost one in two. And then you’ve got the other mind-blowing statistic, which is that 400,000 families today in Greece have no one in employment.”

Shocking though such statistics are, they are not new. People across the southern Eurozone have been feeling the economic screws tightening on them for a long time. The biggest falls in output and sharpest rises in unemployment were in fact a couple of years ago when the Eurozone crisis was at its most acute. Back in 2012 and early 2013, retail sales in Spain were falling at up to 10% year-on-year. Now the decline has slowed to less than 1%.

But even as the pace of collapse has moderated during 2014 and perhaps even bottomed out, something else has changed. Inflation rates have fallen steadily across Europe and, more recently, attention has focused increasingly on a new threat: deflation.

The prospect of inflation turning negative for any length of time is one that alarms the great and good of the world economic order, so much so that few of them like to speak openly about it. In January, Christine Lagarde, managing director of the International Monetary Fund, broke ranks, warning that the threat was growing. “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery,” she told an audience at the National Press Club in Washington DC. “If inflation is the genie, then deflation is the ogre that must be fought decisively.”

The Genie and the Ogre

When Lagarde made those comments, inflation in the Eurozone had already fallen to 0.8%, well below the European Central Bank’s target of “below but close to 2%”. Since then, it has more than halved to 0.3%. If deflation really is the ogre that Lagarde suggests, its footsteps seem to be getting louder.

In some places, it has already arrived. Greece’s inflation rate has been slightly negative for more than a year; in Portugal inflation has been negative for 10 of the past 12 months; inflation in Spain weakened significantly about a year ago and has been bouncing around zero ever since, with the most recent monthly readings the weakest so far. Italy, meanwhile, now seems to be heading down the same path, recording its first ­negative year-on-year inflation figure in August, at -0.09%.

Why does the prospect of deflation get policymakers so worried? The explanation is that deflation is a symptom of extremely weak demand. This leads to a slowdown in economic activity and less investment by companies, which see no point in expanding and creating jobs. Profitability and wages therefore remain subdued and the result is lower trend rates of economic growth that have, in the past, proved extremely hard to reverse.

So far, so gloomy. The real problems, however, stem from the effect that this process has on our ability to deal with our debts. When prices are rising at more normal rates incomes usually follow suit with the result that, over time, our ability to support a given level of debt – whose value is fixed – gradually improves. By the same token, periods of very high inflation can quickly erode the “real” value of debt, making it much easier to repay.

Deflation puts that process into reverse. Prices and incomes decline and this means that, relative to our income, the value of our debts gradually goes up. Where inflation lightens our burden, deflation makes it heavier.

Philippe Legrain, who was independent economic adviser to the former president of the European Commission, José-Manuel Barroso, argues that it is Europe’s debt levels that make the present situation particularly worrying.

“The existential threat is the huge debt, both private and public,” he says. “The focus tends to be almost exclusively on public debt but, actually, everywhere apart from Greece and Italy private debt is much more substantial. If you look at the combined figures for public and private debt, there’s been a significant reduction in the US and some in the UK, but there’s basically been none at all in the Eurozone and in fact in some cases there’s higher debt now than there was seven years ago.

“So we’ve had seven years of crisis and no progress in tackling the underlying problem, which is why I laugh when officials say the crisis response is working.” Their error, he says, is to highlight the current, slower, rate at which debt is accumulating, rather than concentrating on the huge pile that has already been accumulated. “Until you’re in a position to bring down that debt Europe is going to be in big trouble and vulnerable to much worse.”

Deflation is part of “a continuum of problems”, says Legrain. “If you have very low inflation it makes it much harder to bring down debt and if you have deflation it’s harder again, but I wouldn’t fixate on whether inflation is plus 0.2% or minus 0.2%,” he says. “With the huge mountains of debt we have now even very low inflation makes it extremely difficult to grow out of the problem.”

The Mileuristas

To many people, Legrain’s analysis accords with the reality they are experiencing – fractions of a percent either side of zero makes no difference to everyday life. Ximo Barranco teaches economics in a Spanish secondary school and, even though he’s aware that Spain’s inflation data suggest prices are falling, he hasn’t noticed any obvious signs of this for himself. What he has experienced, however, is one of the harbingers of deflation – wage cuts. His salary has been cut twice over the past couple of years, once by 8% and once by 5%. When people are learning to live on significantly less income, the cost of living will still feel prohibitive even if the official data says prices have stopped rising. Ximo says that even though he is earning less than before, he is now making greater efforts to save and that many more people he knows are doing unpaid overtime than used to be the case.

Like many others, however, he is happy just to have a job. Working for less money beats unemployment in a country where, once unemployed, the chances of staying that way are high. At the end of 2007, less than one in five of Spain’s unemployed had been jobless for more than a year, according to the Organisation for Economic Co-operation and Development. By the end of 2013, it was more than 50%. In Greece, it was more than 70%.

Between 2009 and 2013, “real wages” (i.e. after taking inflation into account) fell 2% a year in Spain, just over 2% a year in Ireland and Portugal, and 5% a year in Greece. The OECD recently warned that this trend posed a growing threat. “Any further reduction of wages risks being counter-productive because then we would run into a vicious circle of deflation, lower consumption and lower investment,” said Stefano Scarpetta, the organisation’s director for employment. One telling sign of the shift can be found in the Spanish term mileurista. Back in Spain’s boom times, this was a slightly disparaging label for someone who earned €1,000 a month, implying pity that they couldn’t get a better job. Nowadays, people tend not to use the word in that way – many Spaniards today would be happy to be called a mileurista.

Anthem For Doomed Youth

Conditions like these are prompting pronounced shifts in behaviour and attitudes in the “crisis countries” that make it more likely they will continue on the path they seem to be on. Jorge Martin, an analyst covering Spain for the consumer research company Euromonitor, argues that one of the surprising things about the country’s downturn has been the relative lack of social unrest that has accompanied the crisis. The buffer in Spain and elsewhere has been the strength of family ties, which have seen most young people give up on the idea of moving out of their parental home and many older offspring move back in. And the young are not the only ones returning, says Martin.

“A lot of people are taking their elderly relatives from retirement homes and bringing them back to live with them in order to be able to live on their pension and to support the expenses of that household.” State pensions, he points out, offer a guaranteed source of income to families that are struggling.

Andreas Zombanakis says that in Greece similar things are happening, although, because urbanisation was a more recent phenomenon, the process has brought with it an added layer of dislocation and disillusion. “The generation that hit adulthood in the 1960s and 1970s probably did six years of school and then went to work on farms but as they got wealthier they wanted a better life for their children.” Many of these youngsters remained in education and progressed to trade schools or university, but, since the crisis, huge numbers of the jobs they went into have disappeared.

“Suddenly these people are returning to the land because they’re unemployed,” says Zombanakis. “They’re going back to their villages in order to survive because in the village you can eat so at least you won’t go hungry. Now that generation is being forced to take on jobs as farmers, so you have two generations that have had their dreams and their efforts come to nothing. You have the electrician or the carpenter or the bank employee who is now back doing what his parents did. And you have his parents, who made all these sacrifices to educate their kids and who suddenly see that all this effort was for nothing. You’ve shattered the dreams of two ­generations.”

For many younger and better qualified people, moving back in with their parents is only a stopgap. Ultimately, a growing proportion of them will leave the country in search of better pay and greater opportunity.

Felipe Rueda graduated from a Spanish university in summer 2013 and, like almost all his contemporaries, found it impossible to land full-time work of any sort. Along with several of his friends, he registered as self-employed and found that this enabled him to start earning, albeit at very low rates.

“It seems to open more doors than if they have to give you a contract and pay your social security,” he says. “A lot of the people in my year, on my degree course, are self-employed for that reason. You have to be a bit cunning. There are people who won’t give contracts to friends of mine but they tell them, ‘Look, register as self-employed, invoice us for half and we’ll pay you the other half on the black.’ I know of several cases like that. They’re getting €6 or €7 an hour but they’re happy because they’re working.”

Rueda has set his sights on escape. He is attending language school to improve his English and says his girlfriend has already looked into securing visas for the US. “I accept it as a positive thing, like an adventure,” he says. “If my country won’t offer me work, well maybe there are other countries that want me.”

Emigration from Spain is rising quickly. Having seen an enormous inflow of immigrants mainly from South America in the decade or so to 2010, the country’s population is officially forecast to shrink by about 5% over the coming decade largely as a result of immigrants returning to their countries of origin. Leaving alongside them, however, will be a growing number of younger Spaniards like Rueda and, unfortunately for the Spanish economy, they will often be university graduates with high earning potential – the next generation of ­middle-class professional taxpayers.

If large numbers of unemployed migrants leave, that may be a blessing in the short term if it eases the burden on overstretched welfare systems. But losing well-qualified members of their workforce will naturally make it harder for crisis-hit economies to return to the kind of growth rates that will help them to stabilise, and eventually reduce, their huge debt burdens. Even before the financial crisis, Europe was facing a looming problem thanks to low birth rates and a growing number of elderly citizens who will rely on the taxes paid by a shrinking band of younger workers to fund their pensions. The economic disaster that hit countries such as Greece, Spain and Portugal has tilted the balance further towards the danger zone.

No More Babies

The statistics on numbers of live births tell a worrying story across all these countries. Between 2008, when the number of live births reached a short-term peak in Italy, Greece, Portugal and Spain, and 2013 the number of babies being born each year went into a dramatic decline. In Italy, the total dropped nearly 11% and it looks likely that within the next year or two, fewer than 500,000 babies will be born per year in Italy for the first time since reliable records began. Spain saw its total number of live births drop 17.9% over the same period, Greece fell 20.4% and Portugal 20.8%.

“Most of my friends don’t think they will be starting families in the near future because they don’t have stable jobs. They’re worried and they think they will have to wait for a long time,” says Cathy Camarasa, a 32-year-old Valencian with a four-month-old daughter. She expects to return to work shortly, since her maternity pay runs out after 16 weeks.

The collapse in birth rates across the southern Eurozone stands as the clearest indicator of how profoundly the economic crisis has changed the way people think and behave. “It’s a sign of a sick society when people are afraid and don’t want to take on the financial burden of a baby,” says Legrain. “I think it’s quite a rational reaction. You saw the same thing with the break-up of the Soviet Union.” And this change is likely to have a long-term effect on these countries, further reducing the potential of their economies to grow and escape their debt burdens, and deepening the problems that lie in wait within their pension systems.

The Informal Economy

People’s belief in the ability of the state to help and support them has already been severely undermined, partly because governments have cut services and pushed up taxes in order to repair their own threadbare finances. To some degree, increases in taxes such as VAT temporarily pushed up the rate of inflation by increasing the prices of goods and services, in the process ratcheting up the pressure on stretched household budgets.

By common consent, this has increased the size of the black market in these countries. Money that should go to the state to finance public services instead goes under the table – ­employers are only willing to take on people like Rueda and his friends if they can hire them as self-employed contractors, thereby avoiding employers’ social security contributions, and can pay half their wages in cash. That makes the financial position of governments worse but it helps to cushion the austerity for some people at least.

“If they thought tax evasion was bad before the crisis it’s worse today and that in a way for me explains why life on the streets is better than the official statistics show, because the black economy is still big,” says Zombanakis. “And the reason I say that is when you’ve got a country where the vast majority of businesses are very small, tax evasion is high because it’s in the nature of the small trader. So when the plumber comes to your house to fix your toilet cistern and he asks for €100 in cash or €123 with VAT, you’ll give him €100 in cash. That’s a rational response. He saves money on his income tax and you pay less VAT.”

Similarly, Yannis Palaiologos, an ­Athens-based journalist and author of The 13th Labour of Hercules, a recent book on the Greek crisis, says that many Greeks who are able to get away with it, avoid paying pension contributions.

People have more immediate uses for their cash and, in any case, there’s a widespread assumption that the Greek pension system is bust and therefore will not be able to support them when the time comes. However, he adds that over the past 18 months government efforts to improve collection rates and reduce levels of black market employment have been making inroads.

‘Goldilocks Deflation’

Of course, a major part of the reason that governments in the Eurozone’s ­crisis countries have been pushing up taxes such as VAT is that they are under acute pressure from the authorities in Brussels to cut their borrowing and bring their huge budget deficits under control despite the obvious risks of increasing taxes at the same time as wages are falling and unemployment is high. This, however, is part of the Eurozone’s policy for dealing with its problems.

In January, the president of the ­European Central Bank, Mario Draghi, wrote to the Dutch MEP Auke Zijlstra, that “very low or negative inflation rates for some countries reflect the necessary temporary adjustment and rebalancing processes”, assuring him that deflation “is not something we see or expect to see at the euro area level”. Others, particularly in Germany, are even more candid. Hans-Werner Sinn, head of Germany’s influential Ifo Institute for Economic Research, wrote recently that “deflation is not a danger for southern Europe but an essential precondition for restoring competitiveness”.

Draghi’s letter, however, begs some crucial questions. How can anyone be sure that this period of ultra-low ­inflation in southern Europe will turn out to be a “temporary adjustment” and that things will pick up again once the “rebalancing processes” are complete? And how can they be certain that it won’t spread northwards and encircle the Eurozone?

In the years before the financial ­crisis, economists used to talk about a Goldilocks economy that was neither too hot and therefore at risk of excessive inflation, nor too cold and at risk of recession. Implicit in the remarks of figures such as Draghi and Sinn is the idea that it is possible to have “Goldilocks deflation” – enough to cure the patient without killing him – and that it will be possible to reverse the process when they judge it has gone far enough.

This belief lays bare perhaps the greatest risk to the future of the Eurozone economy – that officials trying to guide its course are subject to the “illusion of control”, a well-documented psychological bias that leads us to believe we can shape processes that are in fact immune to our influence.

And they may be encouraged in this belief by the strange phenomenon of so-called “inflation expectations”. In judging the risks of inflation or deflation, economists tend to rely on indicators of what people expect inflation to be in future, derived either from prices in the bond markets or from surveys of consumers.

The problem is that both are proving extremely unreliable.

Anchors Away

Bond market measures of inflation expectations have provided no early warning of the steady fall in inflation that the Eurozone is now witnessing. Instead, they have continued to signal a belief that prices will rise at around 2% a year. The consistency of this message has been important to Eurozone officials and has been taken to indicate that there is little imminent threat of deflation. Inflation expectations are said to remain “well anchored”, in the jargon, although recently market forecasts have belatedly started to weaken.

Surveys of consumers give very ­similar results. For example, an inflation expectations survey carried out quarterly across several countries for M&G, a UK asset manager, consistently shows that consumers expect inflation to be roughly what it has been over the past few years. In August 2013 consumers in Spain said they expected inflation one year ahead to be 2.8%. In fact, Spanish inflation in August 2014 was -0.4%. When asked the same question in August 2014, they forecast that inflation in a year’s time would be 2%.

All in all, putting any degree of faith in inflation expectations to tell us whether we’re on the right track looks pretty unwise.

“The fall in inflation over the past year happened without anyone expecting it,” says Philippe Legrain. “Obviously, if people start expecting deflation and that shapes their behaviour then it is harder to get out of it, but you can still get stuck in deflation without people anticipating it in the first place.

“Expectations can be lagging – they don’t need to anticipate. If you’re an economist you think they anticipate but that’s because economists take a different view of the world than most people.”

In effect, that means that by the time people start saying that they expect deflation it will already be well advanced because their expectations are shaped by the recent past, not by any particular insight into what is going to happen.

One possible – even likely – future for the Eurozone, according to many commentators, is that it will follow the path that Japan has trodden for the past 20 years, since the aftermath of its own financial bust in 1989.

“My baseline scenario is Japanese-style stagnation – i.e. a prolonged period of very low growth, very contained price rises and bouts of deflation, and underlying that a failure either to write down excessive debts or to tackle once and for all the problems in the banking system, which of course are linked to the extent that those debts are owed primarily to the banking system,” says Legrain. The worrying aspect of this parallel is that once deflation set in, Japan has found it all but impossible to bring it to an end and even decades later is still struggling to escape it.

Rather than paying attention to what people think will happen to ­inflation, anyone looking for clues about the immediate future in the Eurozone should take a look at what people say when asked about matters rather closer to home – what they expect to happen to their own net income over the next 12 months. Everywhere we turn the vast majority think they will be getting the same or less a year from now. The most recent data for France is particularly striking: 48% of people are expecting a pay cut in the coming year, by far the highest proportion in the M&G survey.

Confining the ogre to southern Europe might turn out to be harder than we thought.

TIPS breakevens have been collapsing since early August. In the last three weeks, following the Fed's most recent meeting and an unexpected monthly drop in the benchmark U.S. Consumer Price Index on the same day in mid-September, the downward momentum in breakevens has been at its most intense since the financial crisis.

"The CPI definitely set the tone. The stronger dollar and weaker energy prices are definitely having a major impact," said Martin Hegarty, co-head of inflation-linked bonds at BlackRock, the world's largest asset manager with $4.3 trillion under management.

Last week, for instance, 10-year breakevens, a gauge of where inflation will be in a decade, fell to their lowest since late 2011. They dropped below the key 2 percent level targeted by the Fed at the end of last month. On Friday, they ended at 1.97 percent.

"The market is readjusting its global growth expectations," said Gemma Wright-Casparius, who oversees Vanguard's $26.1 billion TIPS fund, the biggest U.S. fund of its kind.

Only last week, the International Monetary Fund downgraded its forecast on global growth this year to 3.3 percent from the 3.4 percent it previously expected, and gave worryingly high probabilities for recession and deflation in Europe.

Canadians who don’t have a pension often cast an envious eye at their friends and family who work in the public sector, maybe as nurses and hospital technicians, teachers, firefighters, police or municipal workers.

This is because 76 per cent of private sector workers don’t have a pension of any kind. But 86 per cent of public sector employees do. Most public sector pensions are the best kind — defined benefit plans paying a monthly amount for life. Many are adjusted for rising inflation.

If you were one of the have-nots, a diligent saver socking away all you could in a Registered Retirement Savings Plan, the 2008-09 stock market crash made you worth up to 40 per cent at the bottom. Markets have recovered — the current plunge notwithstanding — but even so, public sector pension envy has been on the rise. Safe. Secure. Indexed.

A recent Toronto conference on pension reform sponsored by Canada’s Public Policy Forum, took a closer look at the divide. Critics say public sector plans are unaffordable and unfair, and should be wound up. But would it really be cheaper and fairer to do so?

Billionaire investor Warren Buffett said this spring that public pension plans threaten the financial health of U.S. cities and states. He said everyone has underappreciated “the gigantic financial tapeworm” created when the pension promises were made..

Former provincial Conservative party leader Tim Hudak brought the debate out of the shadows in the recent Ontario election. He pledged to grandfather the current defined benefit model for public servants and move to defined contribution plans which shift a lot of the risk onto employees.

Defined benefit plans guarantee that monthly payment and you can sleep easier because professionals manage the money and your company has to ante up if there’s not enough in the pot.

A defined contribution plan is one where employer and employee contribute, but the size of the pension pot varies with market conditions. When you retire it’s up to you to invest and manage the money. The risk is yours.

About 12 per cent of private sector workers have a defined benefit plan, a number that has been steadily declining. Companies don’t like these plans because investment returns are hard to predict and whatever happens to markets the risk is all theirs.

Robert Brown, a retired professor of actuarial science at the University of Waterloo, told the conference that pension envy aside, it’s a bad, bad idea to wind up these public sector plans. Brown co-wrote a paper with colleague Craig McInnes that looked at the cost of conversion.

Brown summarized the finding by saying it will cost us a lot of money to cap the plans. Going forward, retirees would end up with a smaller pension and at the end of the day taxpayers would foot the difference with income supplements.

“It is a lose-lose,” Brown said.

Here are some of Brown’s other conclusions:

• Private and public sector goals are different. It’s in the best interests of companies to cut costs and focus on profits. But when they off-load costs, they don’t care who picks them up. When the public sector does it, they offload the costs onto themselves, or another government.
• Large, well-run defined benefit plans are efficient. They keep fees low and reduce risk by spreading their costs over a large number of plan members. They have a long time horizon which smooths out market ups and downs. These things help a defined benefit plan produce up to 77 per cent more income than a defined contribution plan with equal contributions, Browns said.
• The risk of a public pension failing is far less likely than a private one.
• The only way a defined contribution plan can lower costs is by decreasing benefits. In Nebraska and West Virginia where state plans were converted, they’ve partially switched back.
• If public sector funds are capped and new ones set up, governments will have to run two funds in parallel for decades. If a legacy plan is underfunded the government is on the hook to cover the gap.
• The conversions would carry a big political risk for governments in the form of job action and legal challenges. They would be seen as breaking contracts negotiated in good faith.

In the end the message wasn’t so much that public sector pensions are too rich, but that workers in private sector have been abandoned. Their employers are leaving them to make retirement decisions they are often ill-equipped to make, in an increasingly complex and unpredictable world.

...while shifting to defined-contribution plans might make perfect rational sense for a private company, the state ends up paying the higher social costs of such a shift. As I recently discussed, trouble is brewing at Canada's private DB plans, and with the U.S. 10-year Treasury yield sinking to a 16-month low today, I expect public and private pension deficits to swell (if the market crashes, it will be a disaster for all pensions!).

Folks, the next ten years will be very rough. Historic low rates, record inflows into hedge funds, the real possibility of global deflation emanating from Europe, will all impact the returns of public and private assets. In this environment, I can't underscore how important it will be to be properly diversified and to manage assets and liabilities much more closely.

And if you think defined-contribution plans are the solution, think again. Why? Apart from the fact that they're more costly because they don't pool resources and lower fees --  or pool investment risk and longevity risk -- they are also subject to the vagaries of public markets, which will be very volatile in the decade(s) ahead and won't offer anything close to the returns of the last 30 years. That much I can guarantee you (just look at the starting point with 10-year U.S. treasury yield at 2.3%, pensions will be lucky to achieve 5 or 6% rate of return objective).

Public pension funds are far from perfect, especially in the United States where the governance is awful and constrains states from properly compensating their public pension fund managers. But if countries are going to get serious about tackling pension poverty once and for all, they will bolster public pensions for all their citizens and introduce proper reforms to ensure the long-term sustainability of these plans.

Finally, if you think shifting public sector DB plans into DC plans will help lower public debt, think again. The social welfare costs of such a shift will completely swamp the short-term reduction in public debt. Only economic imbeciles at right-wing "think tanks" will argue against this but they're completely and utterly clueless on what we need to improve pension policy for all our citizens.

The brutal truth on defined-contribution plans is they're more costly and not properly diversified across public and private assets. More importantly, they will exacerbate pension poverty which is why we have to enhance the Canada Pension Plan (CPP) for all Canadians allowing more people to retire in dignity and security. These people will have a guaranteed income during their golden years and thus contribute more to sales taxes, reducing public debt.

The Federal Reserve should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations, said St. Louis Federal Reserve Bank President James Bullard.

Bullard, who helped lay the intellectual groundwork for the Fed’s quantitative easing program, said U.S. economic fundamentals remain strong, and he blamed recent financial-market turmoil on downgrades in the outlook for Europe.

“Inflation expectations are declining in the U.S.,” he said in an interview today with Bloomberg News in Washington. “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.”

Bullard is the first Fed official to publicly suggest the central bank should extend its asset-purchase program when policy makers meet later this month. U.S. stocks erased losses and Treasury yields rose on expectations the Fed will take action to insulate the U.S. from global economic weakness.

“We are watching and we’re ready and we are willing to do things to defend our inflation target,” Bullard said.

Fed officials are scheduled to next gather on Oct. 28-29 and have said they expect to end asset purchases after that meeting. The program has already been wound down to combined monthly purchases of $15 billion of Treasuries and mortgage backed securities, from $85 billion in December 2012.

Committee Intentions

“Fifteen billion by itself is not that consequential,” Bullard said. “But what is consequential is committee intentions on future QE, and we have certainly seen through the taper tantrum how important those can be.”

He was referring to an episode last year when Treasury yields shot up after then-Chairman Ben S. Bernanke said the Fed would start slowing bond-buying sooner than expected.

Bullard said he continues to forecast the first Fed interest-rate increase at the end of the first quarter, based on the expectation that the current global market turmoil won’t affect U.S. prospects. Economic growth could be bolstered by declines in oil prices and long-term interest rates, he said.

A pause in tapering would protect against “downside risk” and bolster inflation expectations, he said. “We could react with more QE if we wanted to.”

The Standard & Poor’s 500 Index (SPX) rose 0.4 percent to 1,870.25 at 1:37 p.m. in New York after dropping as much as 1.5 percent. U.S. 10-year Treasury yields rose two basis points, or 0.02 percentage point, to 2.16 percent.

Bullard Paper

Bullard, who doesn’t vote on policy this year, has been seen as a bellwether because his views have sometimes foreshadowed policy changes. He published a paper in 2010 entitled “Seven Faces of the Peril,” which called on the central bank to avert deflation by purchasing Treasury notes. That was followed by a second round of bond buying.

“Bullard is a very practical voice at the Fed, and changes in his views often reflect the swing in the balance of risks in the economy,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

“The Fed is highly attentive to the outlook for the economy, and the outlook for the global economy has deteriorated,” Vitner said. “Inflation looks like it has decelerated and may decelerate further.”

Stocks, Oil

The 10-year Treasury yield fell below 2 percent yesterday for the first time since June 2013 as weaker-than-forecast economic data added to concerns that economic growth is slowing. That worry has helped push down stocks, oil prices, and measures of inflation expectations, while increasing the value of the U.S. dollar relative to trading partners.

The Fed aims for 2 percent inflation, as measured by the personal consumption expenditures price index, which was 1.5 percent in August and hasn’t exceeded 2 percent since March 2012. Expectations of future inflation, which are important because they can affect spending by businesses and households, have dipped in recent months alongside a decline in oil prices.

A Bloomberg measure of market forecasts for average inflation over the next five years was 1.49 percent at 1:41 p.m. in New York, compared with 2.1 percent in June.

The Fed has said its policies are dependent on evolving economic data as it seeks to steer the economy to full employment and stable prices.

“I am saying today that maybe we should invoke the data dependent clause on the tapering,” Bullard, 53, said. “I think that is our simplest step that we can take in this circumstance.”

On the other hand, he said U.S. economic fundamentals remain strong, and he hasn’t downgraded his forecast for growth of 3 percent or more in the second half of 2014 and 2015.

“The hard data on the U.S. is good,” he said. “The last jobs report was quite strong.” The jobless rate fell to 5.9 percent in September, and payrolls expanded by 248,000.

Back in August, I wrote a piece called “Why Cash is Not a Strategy.” I confessed then that like many people, I was sitting on more cash than I knew was good for me. Well, here’s an addendum: I’ve started moving off the sidelines.

Yesterday I rode the market roller coaster with countless other investors, wondering how low it would go and how to react. Shock set in when the 10-year Treasury yield – a key economic indicator – dipped below 2%. Practicing what I preach, I decided to take the cash I’d been keeping on the sidelines and bought in when I saw the Dow drop 245 points. But it wasn’t easy particularly as I watched the images of red faced traders trying to make it through what turned out to be one of the worst days in the market in the last 4 years. My stomach flipped again when I saw the market had dipped further down 460 points and I thought should I have waited a little bit longer? When all was said and done, however, I felt secure in my decision to take action and I know I’ll hold what I bought for the next 20 years. Not a bad result for a three-hour emotional roller coaster.

Of course, investing is an intensely personal decision, based on your own goals, age, risk tolerance, and so forth. But I do think that bursts of volatility are “teachable moments” about your emotional motivators and ways to potentially overcome them. Here are a few ideas to think about:

This is what buying low feels like

Buying when the market is dropping can be intimidating. It requires jumping in when everyone is selling. This is especially daunting for an investor just starting to test the waters and getting acquainted with the market. But think of it this way: buying on market dips is similar to buying something on sale. You’ve wanted it for a while, you know it is worth more than the sticker price and you’re getting a big discount. If we apply this principle to the market, it is the working definition of “buying low, selling high”. Taking a contrarian action is essentially what buying low means.

It’s a good time to start moving your cash

For those of you (or us) sitting in cash, a selloff may be the perfect opportunity to dive in at the right price. We can take an example from the playbook of savvy investors. BlackRock data indicates that when the market dipped yesterday, a number of them bought in, putting their money into core exchange traded funds (ETFs) to the tune of more than $2B. These key players know how and where to seek value – you may want to follow their lead.

Be prepared for more

Getting into the habit of buying in when the market hits a bump may be a good idea. My colleague Russ Koesterich highlights in a recent Blog post that volatility is likely here to stay for a while. We can see yesterday’s tumultuous ride as a lesson for the next dip. Stick to your long term view and don’t worry so much about the right now. Take advantage of discounted stock prices and hold on for the long haul.

For the first time in three years, stocks have sold off big, with the Russell 2000, the small cap index, falling over 10% and the Dow Industrials plunging as much as 450 points in one session.

It's been a rocky few weeks that has left investors shaken and on edge.

But that's the thing about stock market corrections. They create buying opportunities.

During bull markets, it's fairly easy to post solid numbers year-after-year in a portfolio. But who is still standing when the stuff hits the fan?

Great Investors Are Made Through Adversity

When market sentiment turns negative, those with the guts to get in are rewarded. Two of the greatest investors in the last 75 years, both value investors, were tested in both bear and bull markets.

Was it always easy? Heck no.

John Templeton, the founder of Templeton mutual funds, was shaped by the stock market of the Great Depression. In the same vein, Warren Buffett made his fame by going on a buying binge during the Super Bear Market of 1972-1974.

Great investors emerge when the going gets tough because that's when the greatest profits can be made.

Do You Have What It Takes?

Looking at the careers of Buffett and Templeton, three criteria for being a great investor emerge:

1) Be a contrarian 2) Timing is everything 3) Patience

Be a Contrarian: Buy When Others Are Not Buying

The classic definition of a value investor is someone who buys companies that are not on everyone else's radar. They are out of favor or, frankly, mocked. Both John Templeton and Buffett are known for being value investors.

John Templeton put himself through college during the Great Depression and then set out to start his career on Wall Street during the worst possible time.

It was the late 1930s and stocks, which had crashed during the Great Depression in 1929, still hadn't fully recovered.

In 1939, with the world going to war, he decided to buck the convention that stocks stunk. He borrowed money to buy 100 shares each of 104 companies that were selling at $1 a share or less.

Some might have thought he was crazy as 34 were in bankruptcy at the time.

But the risk paid off.

Ultimately, only 4 of the companies ended up being worthless and the rest went on to large profits.

Timing is Everything

Warren Buffett hasn't always been 100% invested in stocks.

In 1969, as stocks were heating up, Buffett cashed out of all of his holdings, telling Forbes Magazine in 1974: 'When I got started the bargains were flowing like the Johnstown flood; by 1969 it was like a leaky toilet in Altoona.'

But by 1974, after two years of stock market carnage during the super bear market of 1972 and 1973 which made stocks cheap, Buffett was back in the game.

Forbes asked him what he felt about the markets that year: 'Like an oversexed guy in a harem,' he shot back. 'This is the time to start investing.'

By the time the interview was set to run in the magazine, the markets had rallied 15% and Forbes asked him if he was still feeling the same way.

'I don't know what the averages are going to do next,' he replied, 'but there are still plenty of bargains around.' He told Forbes that the situation reminded him of the early 1950s.

Sound familiar?

Recently, Buffett was back to his predicting ways, telling CNBC on Oct 2, 2014 that he had just bought stocks after they sold off big the day before.

'The more it goes down, the more I like to buy,' he said.

Patience is a Virtue for Great Investors

Patience is also critical to being a great investor because market conditions don't always change on a dime. You have to be prepared to stand by your convictions, which can mean waiting a long time for sentiment to move your way.

Buffett added to his positions in 2009 in the middle of the doom and gloom of the financial crisis and he just added to his positions again this month.

Templeton held his 1939 investments on average for 4 years, despite a World War.

Do You Dare to Be a Great Investor?

Volatile markets are opportunities to elevate your investing game.

The investing lessons of John Templeton and Warren Buffett are there for the taking.

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Inflation expectations, as shown by the TIP/TENZ ratio, now sits at support. If they break down from there, the Fed may be in trouble, as it suggests domestic deflationary fears would be rising. Small-caps could continue to outperform purely because of how oversold they are relative to large-caps this year, but there have been plenty of instances historically where equities fall even though small-caps are outperforming into the decline. Credit spreads on both the sovereign level and in the corporate space are the canaries in the coal mine. A continuation of their widening means the current correction is likely not over, could result in a panic, and bring a thematic change to how investors perceive not only the future, but central bank power to direct it. Should that occur, that would be the real correction to be afraid of.

Michael, I agree with you, too many people are ignoring eurozone's deflation crisis and its potential impact on inflation expectations in the United States. I happen to think that inflation expectations are going to drop significantly and that's why the Fed is prepping markets for more QE.

Interestingly, Dallas Fed president Richard fisher was on CNBC this morning scoffing at the idea of more QE but he's a hawk and is underestimating contagion effects.

One area where I disagree with you is on timing. I believe the real risk is the stock market right now is another melt-up, especially in biotech, small caps and technology. Once we get through this liquidity rally, then deflation will set in and hammer all risk assets. But this could be a few years away, imho. 

Gretchen Morgenson of the New York Times reports, Behind Private Equity's Curtain:

From New York to California, Wisconsin to Texas, hundreds of thousands of teachers, firefighters, police officers and other public employees are relying on their pensions for financial security.

Private equity firms are relying on their pensions, too. Over the last 10 years, pension funds have piled into private equity buyout funds. But in exchange for what they hope will be hefty returns, many pension funds have signed onto a kind of omerta, or code of silence, about the terms of the funds’ investments.

Consider a recent legal battle involving the Carlyle Group.

In August, Carlyle settled a lawsuit contending that it and other large buyout firms had colluded to suppress the share prices of companies they were acquiring. The lawsuit ensnared some big names in private equity — Bain Capital, Kohlberg Kravis Roberts and TPG, as well as Carlyle — but one by one the firms settled, without admitting wrongdoing. Carlyle agreed to pay $115 million in the settlement. But the firm didn’t shoulder those costs. Nor did Carlyle executives or shareholders.

Instead, investors in Carlyle Partners IV, a $7.8 billion buyout fund started in 2004, will bear the settlement costs that are not covered by insurance. Those investors include retired state and city employees in California, Illinois, Louisiana, Ohio, Texas and 10 other states. Five New York City and state pensions are among them.

The retirees — and people who are currently working but have accrued benefits in those pension funds — probably don’t know that they are responsible for these costs. It would be very hard for them to find out: Their legal obligations are detailed in private equity documents that are confidential and off limits to pensioners and others interested in seeing them.

Maintaining confidentiality in private equity agreements is imperative, said Christopher W. Ullman, a Carlyle spokesman. In a statement, he said disclosure “would cause substantial competitive harm.” He added: “These are voluntarily negotiated agreements between sophisticated investors advised by skilled legal counsel. The agreements and other relevant information about the funds are available to federal regulators and auditors.”

Mr. Ullman declined to discuss why Carlyle’s fund investors were being charged for the settlement. But at least one pension fund supervisor is unhappy about the requirement that municipal employees and retirees pay part of that settlement cost.

“This is an overreach on Carlyle’s part, and frankly it violates the spirit of the indemnification clause of our contract,” said Scott M. Stringer, the New York City comptroller, who oversees the three city pension funds involved in the Carlyle deal. Mr. Stringer was not comptroller when the Carlyle investment was made.

Private equity firms now manage $3.5 trillion in assets. The firms overseeing these funds borrow money or raise it from investors to buy troubled or inefficient companies. Then they try to turn the companies around and sell at a profit.

For much of the last decade, private equity funds have been a great investment. For the 10 years ended in March 2014, private equity generated returns of 17.3 percent, annualized, according to Preqin, an alternative-investment research firm. That compares with 7.4 percent for the Standard & Poor’s 500-stock index.

More recently, however, a simple investment in the broad stock market trounced private equity. For the five years through March, for example, private equity funds returned 14.7 percent, annualized, compared with 21.2 percent for the S.&.P. 500. One-year and three-year returns in private equity have also lagged.

Nonetheless, pension funds have jumped into these investments. Last year, 10 percent of public pension fund assets, or $260 billion, was invested in private equity, according to Cliffwater, a research firm. That was up from $241 billion in 2012.

But the terms of these deals — including what investors pay to participate in them — are hidden from view despite open-records laws requiring transparency from state governments, including the agencies that supervise public pensions.

Private equity giants like the Blackstone Group, TPG and Carlyle say that divulging the details of their agreements with investors would reveal trade secrets. Pension funds also refuse to disclose these documents, saying that if they were to release them, private equity firms would bar them from future investment opportunities.

The California Public Employees’ Retirement System, known as Calpers, is the nation’s largest pension fund, with $300 billion in assets. In a statement, Calpers said it “accepts the confidentiality requirements of limited partnership agreements to facilitate investments with private equity general partners, who otherwise may not be willing to do business with Calpers.”

But critics say that without full disclosure, it’s impossible to know the true costs and risks of the investments.

“Hundreds of billions of public pension dollars have essentially been moved into secrecy accounts,” said Edward A.H. Siedle, a former lawyer for the Securities and Exchange Commission who, through his Benchmark Financial Services firm in Ocean Ridge, Fla., investigates money managers. “These documents are basically legal boilerplate, but it’s very damning legal boilerplate that sums up the fact that they are the highest-risk, highest-fee products ever devised by Wall Street.”

Retirees whose pension funds invest in private equity funds are being harmed by this secrecy, Mr. Siedle said. By keeping these agreements under wraps, pensioners cannot know some important facts — for example, that a private equity firm may not always operate as a fiduciary on their behalf. Also hidden is the full panoply of fees that investors are actually paying as well as the terms dictating how much they are to receive after a fund closes down.

A full airing of private equity agreements and their effects on pensioners is past due, some state officials contend. The urgency increased this year, these officials say, after the S.E.C. began speaking out about improper practices and fees it had uncovered at many private equity firms.

One state official who has called for more transparency in private equity arrangements is Nathan A. Baskerville, a Democratic state representative from Vance County, N.C., in the north-central part of the state. In the spring, he supported a bipartisan bill that would have required Janet Cowell, the North Carolina state treasurer, to disclose all fees and relevant documents involving the state’s private equity investments. The $90 billion Teachers’ and State Employees’ Retirement System pension has almost 6 percent of its funds in private equity deals.

The transparency bill did not pass the General Assembly before it adjourned for the summer. Mr. Baskerville says he intends to revive the bill early next year.

“Fees are not trade secrets,” he said. “It’s entirely reasonable for us to know what we’re paying.”

Reams of Redactions

It might help investors to know the fees they are paying, but when it comes to private equity, it’s hard to find out.

Consider the Teachers’ Retirement System of Louisiana, which holds the retirement savings of 160,000 teachers and retirees. It invested in a buyout fund called Carlyle Partners V, which was Carlyle’s biggest domestic offering ever, raising $13.7 billion in 2007. Companies acquired by its managers included HCR ManorCare, a nursing home operator; Beats Electronics, the headphone maker that was recently sold to Apple for $3 billion; and Getty Images, a photo and video archive.

Earlier this year, The New York Times made an open-records request to that pension system for a copy of the limited partnership agreement with the Carlyle fund. In response, the pension sent a heavily redacted document — 108 of its 141 pages were either entirely or mostly blacked out. Carlyle ordered the redactions, according to Lisa Honore, the pension’s public information director.

The Times also obtained an unredacted version of the Carlyle V partnership agreement. Comparing the two documents brings into focus what private equity firms are keeping from public view.

Many of the blacked-out sections cover banalities that could hardly be considered trade secrets. The document redacted the dates of the fund’s fiscal year (the calendar year starting when the deal closed), when investors must pay the management fee to the fund’s operators (each Jan. 1 and July 1), and the name of the fund’s counsel (Simpson Thacher & Bartlett).

But other redactions go to the heart of the fund’s economics. They include all the fees investors pay to participate in the fund, as well as how much they will receive over all from the investment. The terms of that second provision, known as a clawback, determine how much money investors will get after the fund is wound down.

In the Louisiana pension fund’s version of the partnership agreement, that section was blacked out. But the clean copy discloses an important provision reducing the amount to be paid to investors.

In order to calculate their total investment returns generated by private equity deals, outside investors must wait until all the companies held in these portfolios have been sold. Any profits above and beyond the 20 percent taken by the general partners overseeing the private equity firms are considered excess gains and are supposed to be returned to investors.

But the Carlyle agreement includes language stating that general partners must return to investors only the after-tax amount of any excess gains. Assuming a 40 percent tax rate, this means that if general partners in the fund each received $2 million in excess distributions, they would have to repay the investors only $1.2 million each. That’s bad news for the funds’ investors: They would lose out on $800,000 in repayments for each partner.

Mr. Ullman of Carlyle declined to comment on this provision.

Also blacked out in the Carlyle V agreement is a section on who will pay legal costs associated with fund operations. First on the hook are companies bought by the fund and held in its portfolio, the unredacted agreement says. That essentially makes investors pay, because money taken from portfolio companies is ultimately extracted from the funds’ investors.

But if for some reason those portfolio companies cannot pay, the Carlyle V document says, investors will be asked to cover the remaining expenses. This may require an investor to return money already received — such as excess returns — after a fund has closed, the agreement explains. One way or another, the general partners are protected — and the fund investors, who included tens of thousands of retirees, are responsible for paying the bill. (By contrast, in mutual funds, which are required to make public disclosures and have independent directors, investors are far less likely to be stuck with such costs.)

The Ohio Public Employees Retirement System holds $150 million in investments in each of the Carlyle IV and V funds. Asked about the requirement to pay the legal settlement costs, a spokesman, Michael Pramik, said he understood why such a question would be raised, but declined to comment.

Another blacked-out section in the Carlyle V agreement dictates how an investor, like a pension fund, also known as a limited partner, should respond to open-records requests about the fund. The clean version of the agreement strongly encourages fund investors to oppose such requests unless approved by the general partner.

Some pension funds have followed these instructions from private equity funds, even in states like Texas, which have sunshine laws that say “all government information is presumed to be available to the public.”

In mid-September, after receiving an information request about a private equity investment, the Fort Worth Employees’ Retirement Fund denied the request. Doreen McGookey, its general counsel, also sent a letter to the buyout firm, Wynnchurch Capital, based near Chicago, notifying it of the request and instructing Wynnchurch how to deny it by writing to the Texas attorney general, according to a document obtained by The Times.

“If you wish to claim that the requested information is protected proprietary or trade secret information, then your private equity fund must send a brief to the A.G. explaining why the information constitutes proprietary information,” Ms. McGookey’s letter states, adding that the pension “cannot argue this exception on your behalf.” Then the letter warned the private equity firm that if it decided not to submit a brief to the attorney general, that office “will presume that you have no proprietary interest or trade secret information” at stake.

In an email, Ms. McGookey said Texas law required her to notify the private equity firm of the information request.

The Fort Worth pension is not alone in opposing open-records requests for private equity documents. Calpers has also done so. A big investor in private equity, with more than 10 percent of its assets held in such deals, it has put $300 million into the Carlyle IV fund — the fund that is levying investors for the $115 million legal settlement reached by Carlyle executives.

Earlier this year, Susan Webber, who publishes the Naked Capitalism financial website under the pseudonym Yves Smith, asked Calpers for data on the fund’s private equity returns. After a legal skirmish, Calpers said last week that it had fulfilled her request. But on Friday, Ms. Webber said Calpers had provided only a small fraction of the data.

Karl Olson is a partner at Ram Olson Cereghino & Kopczynski and the leading lawyer handling Freedom of Information Act litigation in California. He has sued Calpers several times, including a successful suit for the California First Amendment Coalition, in 2009, forcing Calpers to disclose fees paid to hedge fund, venture capital and private equity managers.

“I think it is unseemly and counterintuitive that these state officials who have billions of dollars to invest don’t drive a harder bargain with the private equity folks,” he said. “A lot of pension funds have the attitude that they are lucky to be able to give their money to these folks, which strikes me as bizarre and certainly not acting as prudent stewards of the public’s money.”

‘Not Open and Transparent’

Regulations require that registered investment advisers put their clients’ interests ahead of their own and that they operate under what is also known as a fiduciary duty. This protects investors from potential conflicts of interest and self-dealing by those managers. This is true of mutual funds, which are also required to make public disclosures detailing their practices.

But, as a lawsuit against Kohlberg Kravis Roberts shows, private equity managers can try to exempt themselves from operating as a fiduciary.

The case involves Christ Church Cathedral of Indianapolis, which contends that it lost $13 million, or 37 percent, of its endowment because of inappropriate and risky investments, including holdings in hedge funds and private equity deals. The church sued JPMorgan Chase, its former financial adviser, for recommending those investments.

JPMorgan Chase said in a statement that despite market turmoil, “Christ Church’s overall portfolio had a positive return for 2008-2013, the time period covered by the complaint.”

Christ Church’s private equity foray included a small interest in K.K.R. North America Fund XI, a 2012 offering that raised around $6 billion. K.K.R., the fund’s general partner, can “reduce or eliminate the duties, including fiduciary duties to the fund and the limited partners to which the general partner would otherwise be subject,” the fund’s limited partnership agreement says. Eliminating the general partner’s fiduciary duty to investors in the private equity fund limits remedies available to the church if a breach of fiduciary duty should occur, the church’s lawsuit said.

Kristi Huller, a spokeswoman for K.K.R., initially denied that it could reduce or eliminate its fiduciary duties. But after being presented with an excerpt from the agreement, she acknowledged that its language allowed “a modification of our fiduciary duties.”

Linda L. Pence, a partner at Pence Hensel, a law firm in Indianapolis, represents the church’s endowment in the suit. She said she had been shocked by the secrecy surrounding some of her clients’ investments. “On one hand they say they don’t owe you the duty,” she said, “but everything is so confidential with these investments that without a court order, you don’t have any idea what they’re doing. It’s not open and transparent, and that’s the kind of structure to me that’s ripe for abuse.”

Some investors who are privy to the confidential agreements have walked away from these deals. A recent survey of institutional investors by Preqin, the research firm, found that 61 percent indicated that they had turned down a private equity investment because of unfavorable terms.

“It is apparent that private equity fund managers are not doing enough to appease their institutional backers with regards to the fees they charge,” Preqin said.

Irish workers cannot be sure of receiving a State pension in retirement in future generations, according to a report published this morning.

The cost of existing hidden state pension liabilities are estimated by the Pensions Authority to be €440 billion – more than double the €203 billion national debt estimate for the end of this year, a figure that already amounts to 111 per cent of GDP and requires significant reduction under European budgetary rules.

That raises doubts about the sustainability of the State pension promise, the Irish Association of Pension Funds annual benefit conference will hear today.

A study of 25 state pension systems by the Australian Centre for Financial Studies and Mercer finds that Ireland’s State pension is among the best in the world in terms of adequacy. However, Ireland’s overall score is dragged down by doubts over its sustainability, where it is ranked just 20th of 25 countries.

It is the first time that Ireland has been included in the study.

Overall, Ireland is ranked 11th of the countries surveyed in the Melbourne Mercer Global Pension Index (MMGPI) with a “score” of 62.2.

This compares to the 82.4 awarded to Denmark, which is seen as having a well-funded system, giving good coverage, a high level of assets and contributions, adequate benefits and a parallel private pension system with developed regulation.

Australia and the Netherlands are seen as having the next best state pension provision.

Ireland scores well above Denmark on adequacy - second best overall behind Australia – but dramatically poorer for sustainability, a measure that assesses the likelihood that the system will be able to provide promised benefits into the future. It ranks 15th in terms of system integrity.

Ireland is seen as on a par with Germany’s state pension system and ahead of the United States, but behind Britain.

“The Melbourne Mercer findings highlight that future generations cannot be sure of receiving a State pension [in Ireland] in line with current levels,” said Peter Burke, DC consultant at mercer who presented the findings.

“Now is the time to reform the pension system so as to reduce the risk of future pensioners facing poverty,” he said, urging the introduction of an auto-enrolment system for current workers.

Alongside suggestions that Ireland might increase occupational pension scheme coverage and introduce a minimum level of private sector pension saving, the Melbourne Mercer study says working age adults in Ireland should enjoy greater protection for their pension savings in the event of company insolvency. It also proposes that companies should be restricted more tightly in the level of in-house assets held by occupational pension schemes.

The index attributed a 40 per cent weighting to adequacy, 35 per cent to sustainability and 25 per cent to issues around integrity.

Theodore Economou, the CEO and CIO of the CERN Pension, sent me an announcement a few weeks ago from Europa, New pan-European pension fund to boost researcher mobility:

Mobility of researchers in Europe received a boost today with the launch of a consortium that aims to establish a new pan-European pension arrangement. Once put in place, the RESAVER initiative would mean that researchers could move freely without having to worry about preserving their supplementary pension benefits.

The consortium plans to set up the pension arrangement in 2015. It will enable researchers to remain affiliated to the same pension fund, even when changing jobs and moving between different countries. The European Commission will cover the initial set up costs through a four-year framework contract that will be awarded before the end of 2014.

The consortium will be working as an international not-for-profit association registered in Belgium. The founding members are: Central European University Budapest; Central European Research Infrastructure Consortium (CERIC-ERIC); Elettra - Sincrotrone Trieste S.C.p.A; Fondazione Edmund Mach; Istituto Italiano di Tecnologia; Technical University of Vienna; and the Association of universities in the Netherlands (VSNU).

European Commissioner for Research, Innovation and Science Máire Geoghegan-Quinn said: "We have worked hard to boost the free movement of knowledge in Europe. Our €80 billion research and innovation programme Horizon 2020 was built with this in mind. Pensions are a serious barrier to free movement, but today that barrier has begun to crumble. I strongly encourage research organisations across Europe to join the consortium."

By participating in RESAVER, employers will be able to sponsor one single pension arrangement. It will be a highly flexible retirement savings product that corresponds to the specific needs of the research community, and is capable of delivering:

• cross-border pooling of pension plans;

• continuity of the accumulation of pension benefits as professionals move between different organisations and countries during their career;

• lower overhead costs (and therefore improved member benefits) through economies of scale;

Things were looking grim last week, especially on Wednesday, when the Dow Jones Industrial Average was at one point down by 460.

The CBOE VIX indicator soared to the mid-20s for the first time in two years. Fear was palpable as investors had a classic panic attack.

But then, like the cavalry in those classic John Ford westerns, the Federal Reserve rode to the rescue.

James Bullard, president of the Federal Reserve Bank of St. Louis, said inflation far below its 2% target could lead the Fed to “go on pause on the taper… and wait until we see how the data shakes out into December.” The Fed is on track to finish “tapering” its extraordinary bond buying, or quantitative easing (QE3), at next week’s meeting.

But, he added: “If the market is right and it’s portending something more serious for the U.S. economy, then the committee would have an option of ramping up QE [in December].”

Boston Fed President Eric Rosengren later said QE3 should end next week, but he could “easily imagine” not raising rates until 2016.

Translation: We’ve got your back. Don’t fight the Fed.

Investors got the message. The S&P 500 Index advanced for three straight days and the VIX fell under 20 again.

Bullard was only the latest Fed official whose words or actions “just happened” to boost the stock market when it was down.

“They are definitely in the market-manipulation business, and nothing has changed,” said James Bianco, president of Bianco Research LLC in Chicago and a longtime student, and critic, of the Fed.

Called the “Greenspan/Bernanke put,” the Fed’s willingness to jump in when stocks fall dates back a quarter-century.

“The put option is back. If the market sells off enough, they will give us QE4,” Bianco told me.

Conspiracy theorists have pinned it on a government “Plunge Protection Team” that wants to keep stocks from crashing at all costs.

But conspiracy or no, consider these actions:

Aug. 31, 2012: In his annual speech in Jackson Hole, Wyo., Fed Chairman Ben S. Bernanke all but announced the third round of QE, extraordinary bond buying of $85 billion a month. The S&P 500, which had languished after a nearly 10% decline, rallied from 1,399 points and hasn’t corrected substantially until now.

Sept. 22, 2011: Following a 19.4% stock sell-off amid a debt crisis in Europe and the U.S., the Fed launched Operation Twist, in which it sold short-term and bought long-term securities to push down long rates. After first slipping, the S&P 500 resumed a multiyear take-off that, with a little help from the Fed, ultimately drove it 80% higher.

Aug. 27, 2010: In another famous Jackson Hole speech, Bernanke vowed the Fed would “do all that it can” and would “provide additional monetary accommodation through unconventional measures if … necessary.” After a 16% correction in the S&P 500, the Fed’s purchase of $600 billion in securities through QE2 would help push stocks 22.8% higher, according to Bianco Research.

Nov. 25, 2008: In the heat of the financial crisis, Bernanke announced the Fed’s first bond-buying program in which it wound up purchasing $1.7 trillion worth of securities. QE helped launch the new bull market and drove the S&P 500 up 50%.

“Three times they put down markers they were going to end QE,” Bianco said. “In all three cases — 20%, 17%, 10% down in the stock market — they reversed.”

As this terrific chart shows, Bianco Research estimates that during all the QEs, stocks rose by 147.5%. Subtracting periods of QE, they lost 27.5%.

Back in the fall of 1998, Alan Greenspan cut rates three times during the Asian/Russian financial crisis and after the bailout of Long-Term Capital Management. That set the stage for the 1990s bull market’s final blow-out phase.

And after the 1987 stock market crash, when the Dow fell 22.6% in a single day, Greenspan’s Fed bought $17 billion worth of bonds (a lot in those days) and declared the central bank ready “to serve as a source of liquidity to support the economic and financial system.” The panic eased and the bull continued for years.

As in 1987, the specter of 1929 still haunts the Fed. “They are afraid of the market going down and they will be blamed,” explained Bianco. If that means “guiding” the stock market, so be it.

Problem is, Congress gave the Fed a mandate to “promote maximum employment, production, and price stability”; it never explicitly authorized propping up stocks. Yet through a remarkable theoretical stretch called the “wealth effect,” that’s exactly what the Fed is doing.

Don’t get me wrong: This bull market reflects a genuine, albeit below-normal, recovery, and the U.S. is much stronger than the rest of the world. The Fed helped by giving the economy time and breathing room.

But the emergency is over and once accumulated, power is not easily shed. If this pattern continues, the U.S. economy and markets will never stand on their own feet again.

This may be the ultimate test for Janet Yellen and could determine whether she’s remembered as a great Fed chair or just another caretaker of a dead-end course if there ever was one.

We've had stock bubbles, high-tech bubbles and a real estate bubble. We believed central banks could solve all our problems. But now that last great bubble — faith in central banks — is bursting.

That's what Michael Gayed, chief investment strategist at Pension Partners, argues in an article for MarketWatch.

"Twenty years ago, I'm fairly sure people said 'don't fight the Bank of Japan.' Two months ago, you could have said 'don't fight the European Central Bank,'" Gayed states. "Now, with the Federal Reserve ending quantitative easing as worldwide economic data falters, it appears the time to 'fight the Fed' has come."

Conventional wisdom holds that stock markets collapsed because the Ebola virus scare and stagnant growth in Europe. But this, he says, is not a typical correction.

"Something fundamental has changed in the market's perception," he says, stressing the stocks have fallen and inflation expectations have collapsed even in the face of trillions of dollars of central bank stimulus. "So, what happens if my belief is right that the last great bubble is bursting? It likely means a significant reset could soon occur unless reflation hope kicks in with gusto. Hard to imagine."

Economic growth and a bull market coincide with rising inflation expectations. Yet central banks have been unable to prevent disinflation.

"Fight the Fed? You sure they are going to get that inflation target when the market itself is screaming they won't, at the same time quantitative easing is ending?"

The Treasury Inflation Protected Securities (TIPS) market does indeed suggest that disinflation, which can smother economic growth, may be looming, Reuters reports. Investors have been unloading TIPS, which provide protection against inflation, in recent months, due slowing global economic growth, most notably in Europe, as well as falling oil prices and a strong dollar.

The Consumer Price Index (CPI) dropped unexpectedly last month, setting off disinflation alarm bells and causing TIPS breakevens, which indicate inflation expectations, to sink.

"The CPI definitely set the tone. The stronger dollar and weaker energy prices are definitely having a major impact," Martin Hegarty, co-head of inflation-linked bonds at BlackRock, tells Reuters.

Although the world economy is currently slowing, John Williams, president of the San Francisco Fed, tells Reuters he expects the Fed to raise interest rates in mid-2015. However, it might delay a rate hike if inflation is significantly below its 2 percent target and wages remain stagnant.

"If we don't see any improvement in wages," he explains, "that would be a sign that we still have a lot of slack in the economy and we are not getting any inflationary pressure to move inflation back to 2 percent."

The Fed is basically telling Europe's big banks: "Don't worry about Angela Merkel, Wolfgang Schäuble, and the lack of major QE from the ECB. If they don't act, we will act in a forceful manner allowing you to use our balance sheet to shore up yours."

And that ladies and gentlemen is huge news for markets because it sends a strong message to short sellers salivating at the prospect of a eurozone collapse that the Fed isn't about to stand by and let it happen. Why? Because a eurozone collapse will unleash those deflation demons and ensure the U.S. and rest of the world are heading for a protracted period of debt deflation.

Even the threat of more QE from the Fed is enough to send shivers down short sellers' spines which is why you will likely see risk assets rallying during the second half of October and into year-end. Pay attention here to the ten-year Treasury yield (^TNX), the euro/USD exchange rate, crude oil prices, and small cap stocks (IWM) which have led the rally out of the selloff earlier this week.

As far as stocks, I've said it before, the real risk in the stock market is a melt-up, not a meltdown. We're going to get a massive liquidity rally unlike anything you've ever seen, then you'll need to worry about the massive hangover and protracted debt deflation, which remains my ultimate endgame.
....
What's the biggest risk to my scenario? A significant crisis of confidence if the Fed actually does engage in more quantitative easing and market participants think it's way behind the deflation curve. That's the scenario that keeps James Bullard and Janet Yellen awake at night but for now, I wouldn't worry about any deep crisis of confidence. 

The average middle class American has only $20,000 in retirement savings, according to a new survey that shows large swathes of the public are aware of those shortfalls and feeling anxious about their golden years.

Wells Fargo surveyed more than 1,000 middle class Americans about the state of their savings plans. Roughly two-thirds of respondents said saving for retirement was “harder” than they had anticipated. A full one-third of Americans said they won’t have sufficient funds to “survive,” a glum assessment that flared out among the older respondents. Nearly half of Americans in their 50s shared that concern.

But perhaps the most startling response came from the 22% of Americans who said they would prefer to suffer an “early death” than retire without enough funds to support a comfortable standard of living.

Saving for retirement is a formidable challenge for middle-class Americans, with 34% not currently contributing anything to a 401(k), an IRA or other retirement savings vehicle, according to the fifth annual Wells Fargo Middle-Class Retirement study. Forty-one percent of middle-class Americans between the ages of 50 and 59 are not currently saving for retirement. Nearly a third (31%) of all respondents say they will not have enough money to “survive” on in retirement, and this increases to nearly half (48%) of middle-class Americans in their 50s. Nineteen percent of all respondents have no retirement savings. On behalf of Wells Fargo, Harris Poll conducted 1,001 telephone interviews from July 20 to August 25, 2014 of middle-class Americans between the ages of 25 and 75 with a median household income of $63,000.

Sixty-eight percent of all respondents affirm that saving for retirement is “harder than I anticipated.” Perhaps the difficulty has caused more than half (55%) to say they plan to save “later” for retirement in order to “make up for not saving enough now.” For those between the ages of 30 and 49, 59% say they plan to save later to make up retirement savings, and 27% are not currently contributing savings to a retirement plan or account.

Sixty-one percent of all middle-class Americans, across all income levels included in the survey, admit they are not sacrificing “a lot” to save for retirement, whereas 38% say that they are sacrificing to save money for retirement.

“Saving for retirement isn’t easy. It requires sacrifice, and it’s not something people can push off and hope to achieve later in life. If people in their 20s, 30s or 40s aren’t saving today, they are losing the benefit of time compounding the value of their money. That growth can’t be made up later, so people have to commit early in life to make savings a regular discipline year after year – it is the only way most people will achieve their financial goals to carry them through retirement,” said Joe Ready, director of Institutional Retirement and Trust.

While a majority of middle-class Americans say that they are not sacrificing a lot to save for retirement, 72% of all middle-class Americans say they should have started saving earlier for retirement, up from 65% in 2013. When respondents were asked if they would cut spending “tomorrow” in certain areas in order to save for retirement, half said they would: 56% say they would give up treating themselves to indulgences like spa treatments, jewelry, or impulse purchases; 55% say they’d cut eating out at restaurants “as often”; and 51% say they would give up a major purchase like a car, a computer or a home renovation. Notably, fewer people (38%) report that they would forgo a vacation to save for retirement.

What Have They Saved?

According to the survey, middle-class Americans have saved a median of $20,000, which is down from $25,000 in 2013. Middle-class Americans across all age groups in the study expect to need a median savings of $250,000 for retirement, but they are currently saving only a median amount of $125 each month. Excluding younger middle-class Americans who may be earning less money, respondents between the ages of 30 and 49 are putting away a median amount of $200 each month for retirement, whereas those between the ages of 50 and 59 are putting away a median of $78 each month for retirement.

Twenty-eight percent of all age groups included in the survey report that they have a written financial plan for retirement. That number is slightly higher, 34%, for those between the ages of 30 and 39. People with a written plan for retirement are saving a median of $250 per month, far greater than the median $100 per month that is being saved by those without a written plan.

“People who have a written plan for retirement are helping themselves create a future on their own terms, with a foundation built on saving, and hopefully, investing.As evidenced by the difference in monthly savings amounts for those with a written plan and those without, it is clear that a plan makes a sizeable difference,” added Ready.

The Power of the 401(k)

Middle-class Americans value the 401(k) as a way to create a retirement nest egg. Seventy percent of respondents have a 401(k) or equivalent plan available to them through their employer, and a majority of them (93%) are currently contributing to their plans. Approximately 67% of those in a plan contribute enough to maximize their company’s 401(k) match, and the median contribution rate for those between the ages of 30 and 59 is 7%.

Eighty-five percent of those with access to a 401(k) or equivalent plan from their employer affirm they “wouldn’t have saved as much for retirement” if they did not have a 401(k). Moreover, 90% say the 401(k) or equivalent plan “makes it easy to save for retirement.”

“The 401(k) makes a significant difference for people in that it gives them the ability to save in a regular, systematic way. It conditions people to think that saving money is paying themselves first and is just as important as paying day-to-day bills,” said Ready.

Examining retirement savings by age, the median amount saved by those in their 40s is $40,000, for those in their 50s is $20,000, and those in the age range of 60 to 75 is $25,000. The median amount saved by those who have access to a 401(k) plan is much higher than that saved by those without access to a plan, particularly for those who are younger. Middle-class Americans between the ages of 25 and 29 with access to a 401(k) plan have saved a median of $10,000 versus a median of zero savings for those without access. Respondents between the ages of 30 and 39 with access to a 401(k) have saved a median of $35,000 versus those without access who have saved a median of less than $1,000, and those between the ages of 40 and 49 with access to a 401(k) have saved a median of $50,000 versus the $10,000 saved by those without access.

Having access to a 401(k) also seems to positively impact a sense for what is possible. More than half (58%) of non-retirees without access to a 401(k) plan say “it is not possible” to pay bills and “still” save for retirement, compared to a third (32%) of those who have access to a plan, but say they can’t save and pay bills at the same time.

Those who have access to a 401(k) are more likely to say they would give up certain expenses, big purchases or expenditures like eating out in order to save for retirement, at a rate approximately 10 percentage points higher than those without access to a 401(k).

The Retirement Picture

Across all age groups, almost half (48%) of non-retirees are not confident that they will have saved enough “to live the lifestyle they want” in retirement. This lack of confidence jumps to 71% for non-retirees between the age of 50 and 59.

A quarter of all middle-class Americans say they “get depressed” when thinking about their financial life in retirement. However, the rate of those who feel down about retirement increases to one in three for those in their 40s and 50s. In a new survey question, 22% of the middle class say they would rather “die early” than not have enough money to live comfortably in retirement.

Working longer or into traditional retirement years appears to be a predicted reality for a third of middle-class Americans who say they will need to work until they are “at least 80 years old” because they will not have enough retirement savings, holding steady from a year ago. Half of those in their 50s say they will need to work until age 80. In another new question asked this year, a quarter (26%) of middle-class Americans say working into their 80s is something they plan to do even if it’s not a financial necessity.

The majority (70%) of middle-class Americans do not think Social Security will be their primary funding source for retirement, but the perception varies greatly for those based on age. Almost half (46%) of non-retirees in their 50s think Social Security will be their primary source of income, as do 56% of non-retirees between the ages of 60-75.

This week, the Internal Revenue Service announced that people under age 50 in 401(k) and similar workplace retirement plans will be able to deposit up to $18,000 in 2015, an increase of $500 from this year. Those 50 and over can toss in as much as $24,000, a $1,000 increase.

Which is all fine and dandy for the well-heeled and the frugal. But one of the biggest problems with these accounts has nothing to do with how much we can put in. Instead, it’s the amount that so many people take out long before they retire.

Over a quarter of households that use one of these plans take out money for purposes other than retirement expenses at some point. In 2010, 9.3 percent of households who save in this way paid a penalty to take money out. They pulled out $60 billion in the process; a significant chunk of the $294 billion in employee contributions and employer matches that went into the accounts.

These staggering numbers come from an examination of federal and other data by Matt Fellowes, a former Georgetown public policy professor who now runs a software company called HelloWallet, which aims to help employers help their workers manage their money better.

In a paper he wrote with a colleague, he noted that industry veterans tend to refer to these retirement withdrawals as “leakage.” But as the two of them wrote, it’s really more like a breach. And while that term has grown more loaded since their treatise appeared last year and people’s debit card information started showing up on hacker websites, it’s still appropriate. Millions of people are clearly not using 401(k) plans as retirement accounts at all, and it’s a threat to their financial health.

“It’s not a system of retirement accounts,” said Stephen P. Utkus, the director of retirement research at Vanguard. “In effect, they have become dual-purpose systems for retirement and short-term consumption needs.”

How did this happen? Early on in the history of these accounts, there was concern that if there wasn’t some way for people to get the money out, they wouldn’t deposit any in the first place. Now, account holders may be able to take what are known as hardship withdrawals if they’re in financial trouble. Moreover, job changers often choose to pull out some or all of the money and pay income tax on it plus a 10 percent penalty.

The breach tends to be especially big when people are between jobs. Earlier this year, Fidelity revealed that 35 percent of its participants took out part or all of the money in their workplace retirement plans when leaving a job in 2013. Among those from ages 20 to 39, 41 percent took the money.

The big question is why, and the answer is that leading plan administrators like Fidelity and Vanguard don’t know for sure. They don’t do formal polls when people withdraw the money. In fact, it was obvious talking to people in the industry this week and reading the complaints from academics in the field that the lack of good data on these breaches is a real problem.

Fidelity does pick up some intelligence via its phone representatives and their conversations with customers. “Some people see a withdrawal as an opportunity to pay off debt,” said Jeanne Thompson, a Fidelity vice president. “They don’t see the balance as being big enough to matter.”

Or their long-term retirement savings matter less when the 401(k) balance is dwarfed by their current loans. Andrea Sease, who lives in Somerville, Mass., is about to start a new job as an analytical scientist for a pharmaceutical company. She was tempted to pull money from her old 401(k) to pay down her student loan debt, which is more than twice the size of her balance in the retirement account. “It almost seems like they encourage you,” she said, noting that the materials she received from her last retirement account administrator made it plain that pulling out the money was an option. “It’s an emotional thing when you look at your loan balance and ask yourself whether you really want to commit to 15 more years of paying it, and a large sum of 401(k) cash is just sitting there.” So far, she’s keeping her savings intact.

Another big reason that people pull their money: Their former employer makes them. The employers have the right to kick out former employees with small 401(k) balances, given the hassle of tracking small balances and the whereabouts of the people who leave them behind. According to Fidelity, among the plans that don’t have the kick-them-out rule, 35 percent of the people with less than $1,000 cashed out when they left a job. But at employers that do eject the low-balance account holders, 72 percent took the cash instead of rolling the money over into an individual retirement account.

This is unconscionable. Employers may meekly complain about the difficulty of finding the owners of orphan accounts, but it just isn’t that hard to track people down these days. Whatever the expense, they should bear it, given its contribution to the greater good. Let people leave their retirement money in their retirement accounts, for crying out loud.

Account holder ignorance may also contribute to the decision to withdraw money. “There is a complete lack of understanding of the tax implications,” said Shlomo Benartzi, a professor at the University of California, Los Angeles, and chief behavioral economist at Allianz Global Investors, who has done pioneering research on getting people to save more. “And given that we’re generally myopic, I don’t think people understand the long-term implications in terms of what it would cost in terms of retirement.”

In fact, young adults who spend their balance today will lose part of it to taxes and penalties and would have seen that balance increase many times over, as the chart accompanying this column shows.

But Mr. Fellowes of HelloWallet, interpreting the limited federal survey data that exists, says he believes that people raid their workplace retirement accounts most often because they have to. They are facing piles of unpaid bills or basic failures of day-to-day money management. Only 8 percent grab the money because of job loss and less than 6 percent do so for frivolous pursuits like vacations.

What can be done to change all of this? Mr. Benartzi thinks a personalized video might be even more effective than a boldly worded infographic showing people the money they stand to lose. He advises a company called Idomoo that has a clever one on its website aimed at people with pensions. If you want to see the damage that an early withdrawal could do, Wells Fargo has a tool on its site.

Fidelity has recently begun calling account holders to talk to them about cashing out, and it has found that people who get on the phone are a third as likely to remove some of their money as they are if they receive written communication. Here’s hoping more people will get such calls when they leave for another job.

Mr. Fellowes has a bigger idea. Given that so many people are pulling money from retirement savings accounts for non-retirement purposes, perhaps employers should make people put away money in an emergency savings account before letting them save in a retirement account. It’s a paternalistic solution, but some of the large employers he works with are considering it.

It’s surprising that regulators haven’t taken more notice of the breaches here. The numbers aren’t improving, but more and more people are relying on accounts like this as their primary source of retirement savings. “This is a problem that industry should solve,” said Mr. Benartzi, pointing to the unsustainability of tens of billions of dollars each year leaving retirement accounts for non-retirement purposes.

He says he thinks that there’s a chance that a company from outside the financial services industry could come in and solve the problem in an unexpected way before regulators take action. “If we don’t solve it, someone is going to eat our lunch, breakfast and dinner and drink our wine too.”

The other subject I broached with  Pam is how the governance at the large Canadian public pension funds explains why they make most of their decisions internally. Public pension fund managers in Canada are better compensated than their global counterparts and they are supervised by independent investment boards that operate at arms-length from the government.