Ponzi Schemes and Public Pension Funds: The Reckoning is Coming

Talk about Ponzi schemes. The New York Times published an excellent article yesterday on the terrible state of public pension funds across the country.

While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”

Now public pension funds across the country are facing a painful reckoning.

Local governments across the United States are something like $3 trillion short based on pensions and similar long-term commitments. Programs established based on the false assumption that the market would always perform at a high level are discovering that they have to choose between breaking those promises and pillaging the other services of government to pay them. But the first step in the process is honesty and openness about the dire state of affairs. And it turns out, that step may also be the most difficult:

Public retirement systems from Alaska to Maine are running into the same dilemma as they struggle to lower their assumed rates of return in light of very low interest rates and unpredictable stock prices.

They are facing opposition from public-sector unions, which fear that increased pension costs to taxpayers will further feed the push to cut retirement benefits for public workers.

Yes, there is an interest group here, and it is a powerful one. It just so happens that it is made up of the people who run our governments. And they do not want government to adjust its “laughable” and “absolutely hysterical” (Bloomberg’s terms) estimates of return because this will wake up the public to the real costs of these programs. Alexis de Tocqueville predicted this problem a long time ago. Thankfully, in states like Wisconsin the public-sector unions have discovered that for all the support of the mainstream media for their cause, the broader public gets what’s at stake. Governor Walker will probably win reelection on the back of his public sector reforms despite the best efforts of the unions to defeat him.

Walter Russell Mead continues to offer his excellent yet pragmatic analysis:

We’ve been warning readers for some time at Via Meadia that the politicians and union leaders in this country have been engaged in a systemic lie of epic proportions. How big and ugly is the lie?

Very. Private pension funds assume a standard of 4.8 percent return on their pension funds. As the Times notes, governments also use various tricky accounting loopholes not available to private companies to hide their liabilities. As far as we can make out at Via Meadia, if you tried to run a private pension fund the way unions and government-appointed trustees run public ones, you could go to jail for fraud.

But while lies can win elections, they can’t pay bills, and as the unsustainable commitments to municipal and state pensions come due, services will be cuts, taxes raised and benefits to retirees will be slashed as reality sets in.

America is fortunate enough to be able to watch the example of what happens when we avoid reality play out before our very eyes.

Today we are seeing what happens when Big Lies come unglued: all over Europe people who believed those sweet delicious stories politicians told them about their pensions and their futures are waking up to one horrible shock after another. Somehow we’ve come to the point in this country also where it’s considered “liberal” and “progressive” to lie like rats to the voters and to government workers about how solid their futures are.

Where there is denial about the problem, however, it is not the government employees or the middle class who will suffer most. It is precisely those that a liberal safety net is designed to protect.

Listen up, blues. The mother of all wedge issues is knocking on your door: when the pension crunch comes, who will you throw to the wolves: the retirees, the unions and the producers of government services — or the schoolchildren, the poor and the consumers of government services?

We should care about this not primarily as an instance of the age-old American struggle between the right and the left, but because when things go bad, it is the poor and the weak – not the guilty – who are likely to suffer most. We can all pad our coffers as much as we want, but when the bill comes due and we are left with our false promises and commitments, we are accountable not only for our lies and our abuses, but for all the tragic effects that bankruptcy and default brings upon those who can afford it least. These are the people government was ordained to protect. As citizens, it is our responsible to keep it accountable.

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About Matthew J. Tuininga

Matthew J. Tuininga is the Assistant Professor of Moral Theology at Calvin Theological Seminary in Grand Rapids, Michigan.

Posted on May 29, 2012, in Uncategorized and tagged , . Bookmark the permalink. Comments Off on Ponzi Schemes and Public Pension Funds: The Reckoning is Coming.

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