Grant Williams, co-founder of the popular financial news service Real Vision TV, recently spoke with Mauldin Economics about what he believes to be the greatest macro-economic challenge facing the US: the emerging pension and retirement crisis. Here at The Sounding Line, on a number of occasions, we have discussed the problems that pensions present to the US economy (and other countries), and the fact that pensions represent the second largest element of US household wealth after housing.

Grant Williams sheds further light on these challenges, as several structural and demographic trends come to a head, the implications of which are only now becoming reality:

“We have got the biggest generation in history to retire…This generation is retiring right now, and the pensions both state and private are underfunded massively. They (baby boomers) have the biggest allocation they have ever had in their lifetimes to equities, at a point in time where we are due a recession. Whether we get it this year or next year, it doesn’t matter. At the point that they are retiring, in their millions, they are going to have in some cases up to 70% of their portfolio’s in equities, and in recession bad things happen. If you look at the average recession since 1980, it’s 37% draw down in the stock market… At the 2007 highs, the average American had 1.27% of their portfolios in the bond market. Now at a time when retirees are going to be forced to sell their equities, they really need to own bonds for income: ‘A’ they have no income because the Fed has taken that away from them, and ‘B’ they are going to be forced to buy instruments at 5,000 year highs… It is a whole collision of bad things crystallizing around a generation that have had it really good their entire lives and think that they are going to go off into the sunset and canoe, and play gold, and garden. The reality is that they are not going to have enough money to retire and they could face some serious serious problems in the coming years.”

“According the US Government, the average American has $186,000 saved for retirement. If you go to BlackRock it’s $136,000, and I tend to believe BlackRock over the US Government. If you take the average boomer, they have 1.1 million dollars in retirement assets… which sounds great. That’s, I think, conducive to a happy healthy retirement. But when you strip out the number and you take the median instead of the mean, which gets rid of the 1% problem, there are a lot of very wealthy people in America, the numbers collapse, and instead of $1.1 million, the median boomer has $200,000. Now return assumptions are fixed at 7% still. People refuse to go down and say ‘you know what returns are probably 2 not 7,’ the magic of compounding makes that a big problem. Even at 7%, you are talking an income of about $9,000 a year, which is about $35,000 shy of the ideal retirement income of about $45,000 dollars.”

“When people retire, their spending collapses. So you are going to see that happen. But even once it’s collapsed, people are going to be forced to sell their homes, millennial are going to be forced to renege on student loans to help their parents out, to move in with their parents. Things are going to happen that are driven by demographics and those are long term multi-decade trends that you can’t change overnight…”

The interview with Grant Williams goes on to discuss much more so we encourage you to enjoy the full interview below: