Money Stuff: Everyone Wants a Pension

The basic situation is that people work for about 40 years, during which they earn more money than they spend, and then they retire and don’t work for about 30 years, during which they spend more money than they earn. [1]  That’s a very broad statement, you could quibble with the numbers, and it is certainly not true of everyone: Some people retire early, some retire late, some die young, some live a long time, etc. [2]  But as a rough statistical average, most people get some decades of saving in the workforce and then some decades of spending in retirement.

At that rough statistical level, you could model out how much the people need to save in the first 40 years to be able to afford their lifestyle in the next 30 years. The model is of the form “if you invest X% of your income during your working years, and your investments return Y% per. year, then in retirement you can draw down Z% of your investments each year to continue to live a similar lifestyle,” something like that. (Popular numbers include 15% for X, 7 or 8% for Y and 4% for Z, though this is not investing advice.)

If you do this in your own life, and calibrate the model exactly right, and all of your assumptions work out, then you will maintain a consistent lifestyle for the whole 70-year period and run out of money on the day that you die. But almost nobody will actually achieve that, or probably even want to. Some people will save more or less, some people will get higher or lower investment returns, some people will live longer or shorter than expected, etc. Also, of course, lots of people won’t calibrate the model exactly right, or model this out at all, or save money. So a lot of people will die with money left over, and a lot of other people will run out of money too soon. 

But at a level of statistical aggregates, it’s easier to get things right: Some people will have too much, some people will have too little, but they will cancel each other out and there will be enough money in aggregate. In other words, this problem is one that is natural to address with risk pooling: If everyone saves the same share of their income in the same pot, they can all replace the same share of their working income during retirement, and people who for whatever accidental reason have too much will subsidize the people who for whatever accidental reason have too little.

This is of course the theory behind defined-benefit pension funds; it is also loosely speaking the theory behind Social Security in the US. But retirement saving in the US has been privatized over the years, and now the normal way for US workers to save for retirement is with “defined contribution” plans, 401(k) plans or individual retirement accounts or other private investments. Those don’t pool risk: You’re on your own, and at risk of saving too much or too little.

It used to be conventional to say that the shift to 401(k) and IRA retirement savings was a huge victory for Wall Street: It turned tens of millions of people into investors, which means that it turned them into customers of Wall Street, and Wall Street wants customers. Of course pension funds are customers of Wall Street too; replacing pensions with 401(k)s added some customers and subtracted some others. But broadly speaking you could imagine — and people did imagine, and it was probably true — that converting 100 pension funds into 10 million individual investors would be a net gain for Wall Street. Presumably the 100 pension funds were run by smart professinal managers who would do things like negotiate lower fees for their clients, or say “no” when brokers came to them with stupid investment ideas. Whereas the 10 million individuals will pay full fees and say “yes” to all sorts of dumb ideas.

I want to argue that this intuition is less true than it used to be, and in fact seems to be moving in reverse. A central theme of US finance in the 2020s might be that big financial institutions don’t like 401(k)s. Oh, they don’t put it like that, or probably even think it explicitly. What they say is that the structure of retirement savings needs to change to create more opportunities for individual investors to get better investments. 

Why? Here are, I think, two salient features of 401(k)s:

1. They pay low fees! It turns out that, for a variety of cultural and regulatory but mainly litigation reasons, 401(k) plans tend to invest mostly in very low-cost passive funds (index funds and target-date funds made up of index funds).
2. They do not pool actuarial risk: Each person’s 401(k) account is separate from everyone else’s; each investor makes her own decisions about how much to save and what to invest in and when to retire and how much to withdraw. Some people will want their money back tomorrow; some will move money frequently between investments; some will ignore it forever. 

If you want to know what “Wall Street” wants to sell to individual retirement investors in 2026, the answer is quite obvious: Wall Street wants to sell them private equity and private credit investments. Why does Wall Street want to do this? Well:

1. For a variety of structural reasons, a lot of cool stuff is happening in private markets, and the public stock and bond markets are less representative of total economic activity than they used to be. A lot of high-growth companies, and a lot of high-return investments, are in the private markets. To the extent Wall Street is looking out for the best interests of individual retirement savers, Wall Street wants to get those savers access to the good private investments.
2. The fees in private markets are much higher than the fees in public markets. If Wall Street is selling index funds to retirement savers, it’s making a few basis points in fees. If it is selling private equity and private credit, it can make a few percentage points. To the extent Wall Street is looking out for itself, Wall Street wants to get paid 100x as much for private investments as it does for public investments.

But there is a problem, or rather there are two problems. One is a boring obvious legalistic problem, which is that you’re not really supposed to sell private investments to millions of individual investors; that’s what “private” means. (And, relatedly, you’re not supposed to sell risky high-fee investments to 401(k) plans, because 401(k) plans have fiduciary obligations that are often interpreted to mean that they shouldn’t pay high fees.) The solution to this problem is mostly lobbying, and that seems to be going very well. Everyone assumes that private assets will become a bigger part of retirement savings, and that regulators in the Trump administration will be fine with that.

The other problem is what I guess you would call “people are worried about private market liquidity.” The nice thing about selling private investments to a pension fund is that the pension fund has a really good idea of when it will need its money back: Some of its beneficiaries will retire each year and start drawing pensions, some of its beneficiaries will die each year and stop drawing pensions, and all of this is, at a level of statistical aggregates, pretty predictable. So if you go to a pension fund and say “hey I have a cool private equity or private credit investment for you, but you will need to lock up your money for seven years,” the pension fund will say “sure, we won’t need most of this money for seven years, so we can lock it up if that will earn us a higher return.”

And private investments do need to be locked up for long periods. That’s the other thing that “private” means: They don’t trade continuously in public markets. If you are investing in OpenAI equity or data-center loans, you can’t easily get your money back tomorrow, so you don’t want your own investors to ask for their money back tomorrow. If all your investors ask for their money back, you will have to sell those data-center loans in an opaque and restricted market, and you’ll probably get a bad price. 

But when you sell private investments to thousands of individual investors, they don’t have the actuarial risk pooling that a pension fund has. Some of them are 45 years old, don’t plan to retire for 20 years, have plenty of money and really should be able to lock some of it up for seven years — but are they sure? What if they have a medical emergency tomorrow and need their money back? The individual retirement savers have to manage their own risks, so they want liquidity; they don’t want to lock up their money the way a big pooled institutional investor would.

And so if you sell private investments to thousands of individual investors, you have to make them some promise like “you can get your money back whenever you want.” Or perhaps you make a promise like “you can get some of your money back sometimes,” but the investors hear “I can get my money back whenever I want.” 

As an actuarial matter this isn’t that bad, because after all you are doing some pooling: If you raise money from 10,000 individual retirement savers, most of them won’t need their money back for 20 years, so you can safely invest 95% of it in long-term private investments and keep 5% to meet a few withdrawal requests. In fact a lot of retail-oriented private-market funds offer liquidity in a form like “we will let people withdraw money every quarter, but capped at 5% of the fund’s assets each quarter.” Should be fine for most people’s needs.

But the problem is not “some of my investors have medical emergencies and need their money back.” The problem is “there are bad headlines about private credit and all of my investors want their money back.” If you offer your retail investors liquidity, they will use it, in a correlated way and at the worst time: not when they need the money for retirement, but when they see some bad news on television and panic.

And then — as Blue Owl Capital Inc. indicated recently — you have a problem. If you let them all take their money out at once, then you have a “run on the bank,” you have to sell your private assets, the whole point of those assets is that you can’t sell them quickly or efficiently, the market is nervous anyway, and so your investors lose money. If you don’t let them all take their money out at once, then you have a marketing problem: They all want liquidity, and if you can’t give it to them then they will go back to their low-cost index funds and never invest in private markets again. 

What you want, in other words, is a pension fund for a client. What you want is one big client who pools the funds of a bunch of retirement savers, locks up their money, tells them “don’t you worry about this but in 20 years, when you retire, you’ll have income,” and then is able to make its own investment decisions, take long-term risk and earn a liquidity premium.

And so for instance Apollo Global Management Inc. has Athene. Athene is often described as an “insurance company” owned by Apollo, but I tend to think of it as an “annuity company,” and Apollo describes it as a “retirement services company.” The business model of Athene is that individual retirement savers give it money and it promises them a steady income in retirement. That is: It pools people’s money and gives them pensions. It has reasonably predictable cash needs, so it can lock up a portion of its money in long-term illiquid investments. (With, for instance, Apollo.) Other big private equity and private credit firms also have life insurance/annuity companies as clients, and/or own those companies themselves, because those are the ideal retirement-savings clients. Taking money directly from individual investors creates liquidity risk, but taking money from individual investors through annuity providers mitigates that risk. Not entirely — annuity policies can typically be canceled — but psychologically “I have locked up this money to be a pension” makes cancellation less likely than “this is my investment account that I check every day.”

It would be interesting if the story of the next decade in retirement investing is a move back to something like pensions, an increasing emphasis on pooled guaranteed-income vehicles rather than atomistic individual self-managed lump-sum investment accounts, because those vehicles are better for private-market investing, and everyone is solving for private-market investing. Bloomberg’s  Silla Brush and Suzanne Woolley report today:

BlackRock Inc. called for more active management and the inclusion of private assets in 401(k)s, contending index investing alone is no longer sufficient to manage risk and fund retirements that can now stretch for decades.

“There needs to be an evolution away from this being indexed only,” Nick Nefouse, global head of retirement solutions at the firm, said in a phone interview, adding that increased volatility and concentration in stock market indexes necessitates more active management. “The markets are evolving to a point where there needs to be more of an oversight.”

The world’s largest asset manager published research on Tuesday arguing that a defined-contribution plan such as a 401(k) should no longer be considered a “nest egg” but rather a “paycheck for life” that potentially includes a guaranteed income. The firm is looking to include actively managed and private assets alongside index funds.

As an arithmetic matter it’s not that hard to toggle between viewing a 401(k) as a “nest egg” and a “paycheck for life.” (Just spend 4% of the nest egg per year.) But as a psychological matter, you might want your “nest egg” — a lump sum whose value you track — to be liquid; if your “nest egg” is invested in stuff with scary headlines, you will want to move it somewhere safer. Whereas if BlackRock is offering you a guaranteed “paycheck for life” then BlackRock can generate that paycheck however it wants, private credit, go nuts. And:

The firm plans to debut target-date retirement funds this year that include alternative assets. Private credit is a likely place to start because private equity deals are less liquid and there have been fewer of those opportunities in recent years, according to Nefouse. ...

BlackRock would add private debt slowly to actively managed target-date funds that hold a variety of stocks, bonds and other assets, according to Nefouse.

Again, “10% of my target-date fund is in private credit” is psychologically a bit different from “10% of my retirement portfolio is in private credit.” If you are managing your own portfolio, and you get worried about private credit, you’ll (try to) move your money out of it. If your retirement portfolio is in the “I plan to retire in 2050 and I’ll let BlackRock figure out how to get there” product, then there’s a better chance you’ll ignore the news and wait until 2050 to take your money out. So BlackRock might as well take some liquidity risk with that money.

Elsewhere in this stuff:

• “Wealthy investors who ploughed hundreds of billions of dollars into private credit are pulling back, cutting off a key source of funds that investment giants including Blackstone, Blue Owl and Ares Management have used to fuel their growth. … This ‘will really freeze the retail channel,’ said the head of one private credit firm. ‘I think you’ll have really high bars to invest. This will put a headwind on the retail channel — not just for Blue Owl, but for everyone.’”
• “Blue Owl’s crisis isn’t the result of a souring credit cycle. So far, most of its borrowers are paying their loans. Instead, the troubles stem from the firm’s big bet on technology lending, its heavy marketing of funds to individual investors—who tend to be flightier—and a series of missteps that snowballed out of control.”
• “Blackstone Inc. is allowing investors to redeem a record 7.9% of shares from its flagship private credit fund, the latest sign of unease in an industry that’s faced a wave of withdrawals.”
• “One of Goldman Sachs Group Inc.’s private credit chiefs said limits on fund withdrawals are ‘features and not bugs,’ as the $1.8 trillion market comes under increasing pressure from investors looking to exit. … Gating allows ‘the fund to actually protect the investor and the fund from the kind of value degradation that can happen in the context of fire sales,’ Vivek Bantwal, Goldman Sachs Asset Management’s global co-head of private credit, said at the Bloomberg Invest conference Tuesday in New York.” That is completely correct, but just telling people that doesn’t do any good. You want some structure so that people don’t all ask for their money back at once, or at least don’t get mad if you don’t give it to them.
• “Capital Group and KKR & Co. are taking the next step in their push to sell retail investors on private equity, launching a fund that combines bets on private companies with US stocks.”
• “Blackstone Inc.’s $55 billion real estate fund for wealthy individuals last month took in more money from investors than it paid out for the first time since 2022, a sign of rebounding sentiment in the commercial-property sector.” BREIT was gating individual-investor redemptions long before Blue Owl made it cool, but eventually things improved.

Sure:

The US attack on Iran was preceded by a number of unusually large and well-timed bets that made a combined profit of $330,000 and were placed by 12 suspicious accounts in the days before Saturday morning’s air strikes.

The FT has identified wallets on online prediction market Polymarket that collectively placed $66,993 in wagers that an attack would come by Saturday. About half of the bets made by these accounts came in the six hours before the strike.

This is going to happen any time any country is bombed for the rest of human history, isn’t it? Every time bombs are dropped, someone will make money on it in the gambling markets. Doesn’t that seem distasteful? As we discussed yesterday, US prediction-market regulation (which does not quite apply to Polymarket) halfheartedly bans betting markets on war, but it seems like they are here to stay anyway.

Also of course US regulation probably bans insider trading on these markets, but ask yourself if the Trump administration wants to prosecute anyone who might have used inside information about the attacks on Iran to bet on Polymarket.

People like to gamble on the results of random number generators. Usually they don’t like to bet on things that are explicitly random number generators; usually it is more appealing if things are dressed up a bit. So people will generate randomness with a shuffled deck of cards, to play blackjack or baccarat or poker, or with a pair of dice, to play craps.

Or, at a slightly higher level of abstraction, they will get random outcomes from sports scores or the stock market: The S&P 500 index is not exactly a random number generator the way random.randint is, [3]  but for most people’s purposes it might as well be. Professional traders understand this: Liar’s poker was once big on Wall Street, and its source of random numbers (dollar-bill serial numbers) is barely dressed up at all; Jane Street and Susquehanna employ people who have apparently put a lot of thought into betting on coin flips. They know that they are betting on probability distributions in their day jobs, too.

With the advent of computers it became a lot easier to generate random numbers, and casinos have a booming business of letting people sit at computers and bet on random number generators. Again, they dress this up a bit, so the computers are called “slot machines” and the numbers they generate look like cherries and bars and whatever.

But if your computer is generating the numbers, they don’t have to be that random, and you might adjust the distributions to make the game as fun as possible. With slot machines, I gather this means mostly that (1) the house wins in the long run but (2) the player gets some wins and apparent near-wins along the way to keep her hooked.

But of course as computers get better people don’t want to schlep to a casino to sit at the casino’s computers and pull levers; they want to sit at home and push buttons on their own computers to get random numbers and win or lose money. Or that is the natural conclusion here though I personally don’t want that or even entirely understand it. But anyway there are online slot machines.

And with online slot machines, I guess you can set the payoffs however you want? Subject to whatever regulation you’re subject to in whatever regulatory haven you’ve chosen to set up shop? In particular you might want the payoffs to be very good (player-friendly) when Drake is playing and livestreaming his play, because that will attract lots of other people, because Drake is famous and I guess seeing Drake win at online slots will attract other players? (Why does anyone do anything?) And then worse otherwise. Bloomberg Businessweek has a story about, uh, maybe that:

Drake’s hot streak had been hot, though. He’d won big—1,000 times or more his base bet, a common goal in the crypto gambling community—four times in just one hour playing Easygo-owned slots. That kind of luck is far outside the norm, according to a Bloomberg Businessweek analysis of 500 hours of live slots gameplay by 25 Stake gamblers. And that session wasn’t a one-off for Drake. When he played Easygo slots, he won big four times as frequently as the average rate—the equivalent of once every 2,500 spins, compared with every 10,000 spins, according to Businessweek’s investigation. Yet on games operated by third parties, his win rate was average. And Drake wasn’t the only influencer getting very, very lucky while broadcasting Easygo games on Kick.

Stake is the most popular crypto casino in the world, offering convenient access to slots, roulette, sports betting, poker with live dealers and more. It’s almost entirely unregulated, based in Australia and registered in the Dutch Caribbean island of Curaçao. Stake’s main site and affiliated domains get at least 127 million visits every month, according to analytics provider Similarweb. The casino estimates it takes 10 billion monthly bets and accounts for about 4% of all Bitcoin transactions annually.

This success has been accelerated by influencers on Kick, which since its debut in December 2022 has helped boost Stake’s traffic more than fivefold. …

The streamers’ seemingly infinite balances, splashy jackpots and social media virality have led some viewers to question the legitimacy of their wins. [Stake co-founder Ed] Craven has repeatedly denied that Stake’s influencers get more generous odds, stating in one blog post that “despite certain widespread notions of odds being rigged in some people’s favors or money not being real, we have no direct control of the odds of any of our games.”

Here’s the blog post. I mean … why wouldn’t you control the odds to make Drake’s play look good?

Trump’s War on Iran Has Traders Staring Down an Energy Crisis. Biggest energy traders use windfall gains to tighten grip on market. AI dispersion trade. Musk’s X, xAI to Repay $17.5 Billion Debt as SpaceX IPO Nears. Trump Administration to Drop Defense of Law Firm Sanctions. Justice Department Seeks to Reverse Course and Defend Law Firm Sanctions. A ‘Fight About Vibes’ Drove the Pentagon’s Breakup with Anthropic. OpenAI makes changes to ‘opportunistic and sloppy’ Pentagon deal. Elliott Invests $1 Billion in Pinterest to Fund Share Buybacks. Stablecoin Issuer Tether Uses Deloitte for USAT Reserve Report. Some of the Fiercest Activist Investing Is Coming From a Small Shop in Ohio. Apollo’s Rowan Says Epstein ‘Wasting My Time’ From the Grave.

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