Investors are becoming more aware of the prospect of a looming pension crisis. The question seems to be whether or not this is just another bout of fear mongering. There isn’t a day goes buy where we hear that another pension plan is in deficit position and may not be able to meet their obligations.

I think the pension problem is real and the solution will manifest in ways we can only contemplate. I am no pension expert or market guru so I will give you my two cents worth on how the pension crisis will be resolved.

Private defined benefit pension plans like those of Air Canada and General Motors will be bailed out by shareholders, government and Pensioners themselves. Let me explain. I believe most defined benefit Pensions are underwater and will not meet their commitments. To resolve this crisis most companies will divert most of their profits to their Pension plans, which is bad for shareholders. Secondly, companies who cannot turn enough profit will have their plans bailed out by governments and this will result in higher taxes and inflation (I believe Governments will monetize this problem by printing money) and lastly Pensioners themselves will have to reduce their expectations and receive less money or retire later then expected. This is not just a Canadian or American Problem but is a problem for most countries.

Public Pension plans are in worst shape then their private counterparts because they are funded on a pay as you go basis. It’s ironic that it is illegal for private pension plans to operate on a pay as you go basis (for good reason) yet all governments run a modern day version of a Ponzi scheme. The good news is that I believe that Governments will meet their Pension obligations as promised. The bad news is that they will pay their pensions with inflated currencies, as they will print their way out of this mess.

The only plans that I think are in good shape are pension plans for public employees because they are fully funded (in most cases) and the taxpayer guarantees any shortfalls. However, these pensioners will experience higher taxes as government’s claw back public pension payments and increase taxes and user fees.

The best way to prepare for your golden years in the wake of potential retirement crisis does not involve investing in stock mutual funds. It does involve building a quality income stream for the future from income trusts whose distributions will keep up with inflation. Fixed income instruments will fair poorly.

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