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A protester holds a flare during a demonstration, as part of a nationwide strike and protests for higher wages and pensions, in Paris, on Nov. 10.GONZALO FUENTES/Reuters

John Rapley is a political economist at the University of Cambridge and a senior fellow of the Johannesburg Institute for Advanced Study.

Some time ago, on one of my regular trips home to Canada, I bumped into an old school friend. He told me he’d recently retired from teaching, and was now loving his new life. The news took me by surprise – he was in his fifties, fit, spry, in excellent health. The thought of his repairing to a life of leisure struck me as premature.

With a quick run through the mental math, I worked out he’d likely spend more years collecting a pension than he had paying into it. I wondered how that worked. Although his path, which involved annual vacations in Europe and winters in Florida, was especially fortunate, it wasn’t out of the ordinary. As people live longer, healthier lives, and retirement ages edge downward, the phenomenon of people spending more time retired than working is becoming more common.

That, combined with rising interest rates and changing macroeconomic conditions, spells trouble for the funds that manage our pension plans. Canadian funds, whose total assets peaked at the end of last year, have been caught in a downdraft, and have seen their total assets fall this year. Sooner or later, pensions will become a hot political topic.

For starters, living longer wasn’t the plan. When Otto von Bismarck instituted the world’s first public pension in 1889, he set the retirement age at 70 – roughly the age Germans then lived to. When other Western countries adopted pension systems in the first half of the twentieth century, they too put retirement ages a couple years shy of the average life expectancy. Essentially, they created social-insurance programs to prevent people too old to work from falling into indigence.

This shift, from a few years of income-support, to living our best lives, happened rather suddenly – essentially, over the decades straddling the turn of the millennium. Part of what made it possible was the long bull run in asset markets of the past 40 years. Especially over the past decade, macroeconomic stability and cheap money combined to swell the value of fund assets. With central banks underwriting values, and providing a floor each time markets fell, fund managers were at liberty to dabble in high-risk investments that delivered big gains. They moved beyond bonds and listed companies to buy up commercial real estate, infrastructure and latterly, crypto, as the Ontario Teachers’ Pension Plan and Quebec’s Caisse de dépot et placement du Québec recently did.

However, we may come to look back on that time as peak pension. The past few years were an extraordinary time, but the particular confluence of conditions which made it all possible have ended. For starters, the era of cheap money is over, and markets are feeling it.

As a result, some of the income streams that pensions use to pay out their monthly dividends are losing value. The commercial real estate sector, in particular, took a big hit during the pandemic, and doesn’t look likely to recover any time soon, especially in big cities like London and New York. Until now, funds haven’t had to record these losses on their books, since leases run for several years and managers held out hope the market would bounce back. But now, as funds looking to generate cash are being forced to sell their holdings, we’ll see some substantial falls in fund assets.

Going forward, markets aren’t likely to generate the sorts of returns to which we’d grown accustomed. Developments in global labour markets reveal a structural shift under way in the economy. The future will be one of rising wages, tighter profit margins and permanently elevated interest rates. That’ll be good for the economy, but less good for asset-holders. Meanwhile, given the massive stock of public and private debt that accumulated during the days of easy money, central banks may be tempted to prolong today’s negative real interest rates indefinitely, so as to enable debt to be inflated away. This will be good for debtors but bad for creditors – pension funds especially, given that they rely so heavily on bonds for the income streams they use to pay their members.

Rising wages will boost pension contributions, which will keep the funds healthy. But if fund managers use them to support existing obligations, their active members will rebel. As the combination of an aging population with slowing population growth strains the finances of even the biggest funds, we’ll face some tough choices.

Nick Silver, a London actuary who advises pension-fund managers, says Western societies need to resume conversations around the social contract that sustains pensions. It’s not clear that a model developed in the last century will be at all appropriate in this one. But he’s also not convinced governments will want to tackle that thorny issue. In the absence of clear action to put pensions on a sustainable footing, the more likely scenario will be that fund-managers end up offering benefit rises that fall below inflation, eroding the value of pensions over time.

That recently retired friend of mine might thus be wise to engage in a bit of financial planning of his own, to ensure he doesn’t live large now only to face a more penurious late retirement.