The greatest public scam may be one hardly anyone is talking about: state pension plans

How big of a mess are state pension plans in today? It’s huge. As Walter Russell Mead writes in a recent essay:

As a new report from Boston College’s Center for Retirement notes: “there is a total of $2.6 trillion of assets on [the 126 public sector pension plans tracked by the study] but current liabilities under today’s assumption that they can grow by eight percent annually are $3.6 trillion. If the investment assumption is moved down to four percent (still high when compared to current returns), then the liabilities of those plans jumps to a staggering $6.4 trillion.”

For those of you not following this story, this may all be Greek to you. However, Mead offers a helpful explanation of how the public pension fund problem is related to the recent financial crisis and how it feeds off corrupt collusion between labor union leaders, politicians, and Wall Street. Mead explains it far better than I could so I am going to quote him at length. But you should really go and read his whole essay.

The biggest scam going in American financial life may be the collusive effort by Wall Street, the political class, and public sector unions to use union retirement money to prop up Wall Street speculation.

Step One: state politicians promise big pension and health care benefits to their unionized work forces, but don’t set aside enough money to fund those benefits when the bill comes due. This makes union leaders and unions look good, because they can point to the shiny new benefits they have negotiated with the politicians. Meanwhile, it makes the politicians happy because the unions support them with contributions and volunteers at election time, but because the unions don’t insist on full funding for the benefits, the politicians don’t have to raise costs or otherwise disturb the big majority of voters who don’t work for the government.

Step Two: Make aggressive assumptions about the rate of return on pension investment funds. This has two consequences: it covers the gap between promise and reality (for a while), thereby postponing the day when the politicians have to face the voters and the union leaders have to tell their members that those beautiful benefits were bogus from the start. But the other purpose, equally important, is that it forces America’s public sector pension funds into the deep end of the financial markets, leading pension funds to be major investors in hedge funds, derivatives and various other not-for-the-widows-and-orphans investments. If these work out, great — the funds hit their investment targets and the benefits, or at least some of them, get paid. If they go awry — as many did in the last few years — then the pension problem turns into a crisis.

But whether or not the investments work for retirees, they work very, very well for Wall Street. Fees from giant public sector pension funds played a significant role in creating Wall Street’s buccaneer culture and speculative frenzy that the left claims to hate.

Looking for examples? Head to Pennsylvania:

The Pennsylvania State Employees’ Retirement System, for example, has more than 46 percent of its $26.3 billion in assets invested in riskier alternatives, including private equity funds and real estate. Over the last five years, the system paid roughly $1.35 billion in management fees – over 5 percent of the total value of the fund over a five-year period – while realizing an annualized return of just 3.6 percent, well below the 8 percent it needs to meet its financing requirements and also lagging behind the 4.9 percent median return for all public pension systems.

There’s bad news for Pennsylvania’s teachers, too:

The $51.4 billion Pennsylvania public schools pension system…which has 46 percent of its assets in alternatives, pays more than $500 million a year in fees. It has earned 3.9 percent annually since 2007.

California is also struggling:

Fees for the $242 billion in California’s giant state pension system, known as Calpers, nearly doubled, to more than $1 billion a year, after it increased its holdings in private assets and hedge funds to 26 percent of its total in 2010, from 16 percent in 2006…

Calpers…has earned 3.4 percent annually over the last five years.

Compare that with Georgia, which is at the other end of the investment risk spectrum:

In Georgia, the $14.4 billion municipal retirement system, which is prohibited by state law from investing in alternative investments, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees.

Pension reform is about more than cutting benefits to realistic levels, and ensuring that politicians and union leaders have to stop the collusive scams. It is also about enabling pension funds to invest in safer investments and stop paying huge fees to hedge fund managers and investment banks — and because public pension funds are such large pools of capital, this would be an effective way to help bring Wall Street back down to earth.

Pension funds should not be aggressively invested. Retirement funds should be conservatively managed — and that means enough has to be paid into those funds so that with moderate investment results, retirees can be sure that their promised benefits will in fact be paid.

The key to this change is stronger regulation of government pension funds, to force them to observe the same requirements that apply to private sector pension funds as well. Amazingly, the same union leaders and lefty experts who call for tough regulations elsewhere in the economy want to keep government workers chained to the roulette wheel in the Wall Street casino: they are bitterly opposed to seriously prudential regulation of government pension funds.

The debt problem in this country is not just a federal problem. You, the taxpayer, stand behind a mass of financial commitments off of which public employees, politicians, and Wall Street have been winning big time. What do you think of that?

Advertisements

About Matthew J. Tuininga

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

Posted on June 30, 2012, in Banking and Finance, Economy, Welfare State and tagged , , , , . Bookmark the permalink. Comments Off on The greatest public scam may be one hardly anyone is talking about: state pension plans.

Comments are closed.

%d bloggers like this: