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Pension Meltdown: Blame it on Wall Street?
Nicole Bullock of the FT reports, States warned of $2,500bn pensions shortfall:
US
public pensions face a shortfall of $2,500bn that will force state and
local governments to sell assets and make deep cuts to services,
according to the former chairman of New Jersey’s pension fund.
The severe US economic recession has cast a spotlight on years of fiscal mismanagement, including chronic underfunding of retirement promises.
“States
face cost pressure, most prominently from retirement benefits and
Medicaid [the health programme for the poor],” Orin Kramer told the
Financial Times. “One consequence is that asset sales and privatisation
will pick up. The very unfortunate consequence is that various safety
nets for the most vulnerable citizens will be cut back.”
Mr
Kramer, an influential figure in the Democratic party and still a
member of the investment council that oversees the New Jersey pension
fund, has been an outspoken critic of public pension accounting, which
allows for the averaging of investment gains and losses over a number
of years through a process called “smoothing”.
Using data from
the states, the Pew Center on the States, a research group, has
estimated a funding gap for pension, healthcare and other non-pension
benefits, such as life assurance, of at least $1,000bn as of the end of
fiscal 2008.Chris Christie, the Republican governor of New
Jersey, said in his state of the state speech last week that, without
reform, the unfunded liability of the state’s pension system would rise
from $54bn now to $183bn within 30 years.
Mr Kramer’s estimates
are based on the assets and liabilities of the top 25 public pension
funds at the end of 2010. The gap has risen from an estimate of more
than $2,000bn at the end of 2009.
He also used a market rate analysis based on the accounting used by
corporate pension funds rather than the 8 per cent rate of return that
most public funds use in calculations.
Pension liabilities are not included in state and local government debt figures.
Concerns about the financial health of local governments have sparked warnings of a rise in defaults for cities and towns and a sell-off in the $3,000bn municipal bond market
where they raise money. Last week, the interest rate on 30-year top
rated municipal debt rose above 5 per cent for the first time in about
two years. Amid the volatility, New Jersey had to cut the size of a
planned bond sale.
Although Mr Kramer said some local governments would experience “severe strain”, he did not foresee mass defaults.
“I
don’t assume that you will have that level of defaults just because
there are various remedies, including asset sales, that you can engage
before you have to default,” he said. “States have an interest in their
major municipalities not defaulting.”
The state of Pennsylvania, for example, last year advanced money to Harrisburg, its capital, so that the cash-strapped city could avoid a default on its general obligation bonds.
In
February, Illinois, which is facing an unfunded pension obligation of
at least $80bn, plans to sell $3.7bn of bonds to pay for its annual
contribution.
Mr.
Kramer is right to sound the alarm on public pensions, but
"smoothing" is only part of the problem. Besides, marking everything to
market, including private markets, would wreak havoc by causing
unnecessary volatility.
Some think a larger part of the blame
lies squarely with Wall Street. In an op-ed article for USA Today,
Gerald W. McEntee, president of the American Federation of State, County and Municipal Employees, writes, Opposing view on public pensions: Blame Wall Street:
With
revenues plummeting during the economic crisis, states and cities
across the country face real budget challenges. It is simply wrong,
however, to suggest that modest retirement benefits paid to public
service retirees are a cause, or even a part, of the budget problems
facing governments.
Pension payments account for less than 4% of the average state's spending, while the annual pension for AFSCME
retirees averages $19,000. Critics of the pension system conveniently
ignore the fact that our members contribute to their pensions with
every paycheck, and that more than 85% of their pension benefit is a
result of those contributions and investment income.
Current
challenges are not a result of excessive benefits. For every story
about someone who gamed the system to obtain an unfair payout, there
are tens of thousands of workers whose annual pensions are $10,000 or
less.
Let's be
clear: Underfunded pension systems resulted from unprecedented losses
of asset values caused by reckless behavior on Wall Street and the
refusal of some politicians to make their required payments. As
recently as 2007, pension funds had, collectively, 96% of the assets
required to meet future expenditures. But Wall Street drove America's
economy and retirement security into a ditch. And now both pension and
401(k) accounts alike must be rebuilt.
Pension
funds can be replenished over time at a modest cost. It is projected
that states must increase pension spending from about 4% of their
budgets to just 5% in the future. Surely, this is manageable.
The
"401(k) solution" promises cost-savings that just don't materialize. A
recent study in Nevada concluded that conversion to a 401(k)-style
system would cost $1.2 billion more over the next two fiscal years.
401(k) plans are not less expensive, just less efficient and less
secure than traditional pensions.
Most
public pension systems have been in existence for 60 years or more.
They have persevered during market downturns and enjoyed surpluses when
the good times rolled. They predated public employee bargaining
rights, and few plans are subject to the bargaining process today. They
have traditionally enjoyed broad support as a cost-effective
compensation and retirement security policy.
That support deserves to continue.
Mr.
McEntee is right, Wall Street's reckless behavior and politicians
foregoing pension payments significantly contributed to the huge pension
deficits, but that too is only part of the problem. The other problem is
that public pensions were using rosy investment rates of returns to
discount their liabilities, which we now know are much higher than what
is publicly stated.
There is plenty of
blame to go around. It's not just Wall Street. Poor governance, rosy
investment assumptions, and bad political decisions all played a role
too. But Wall Street's reckless behavior remains one of the biggest
factors behind the pension meltdown. This behavior hasn't changed much
post-crisis, which means private and public pensions remain very
vulnerable in this wolf market.
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Is Wall Street to blame? This is childish. It appears that practically every pension scheme (I like that term better) is underfunded. Sounds to me like a systemic failure born out of a set of assumptions that were generated during an optimal time for pyramid schemes to flourish. Pensions are not time tested ways to provide for retirement. They are a flash in the pan and now that those rosy assumptions are not manifesting themselves the finger is pointing in every direction but at themselves. Enough of the denials and childish trust in the money handlers. Everyone relying on any pension scheme would be wise to stop using ignorance, stupidity, and lack of time to think for themselves. I continually point out the flaws in the pension schemes to my teacher friends and they either don't believe me or they refuse to accept the very possibility that their trust was misplaced and the promises they accepted will not be honoured. Sadly, I feel they that they feel any shortcomings will be offloaded onto taxpayers, like me and they don't have a shred of concern about the effect that has on my family's life. The hypocrisy coming from these folks who are in the business of learning, caring, and improving the lives of children is lost on them. Hey, as long as they get their piece first all is well with the world.
Interesting analysis and perspective. I'd have some empathy for my teacher friends, who can't get it because, being the feeling-driven people they predominantly are, misplaced trust is just the kind of obstacle they will not be able to clear, regardless of your boost. Given that the world takes all kinds of people, I'd say that, having almost no real choice over what kind of people they are, they have been exploited.
Actually, having performed under contracts that defined the business relationship in which they were acting, I'd say they've been exploited as well if they don't receive the promised "compensation." You'd be fixed upon that idea too if you had given 30 years of your life in good faith reliance upon a contract.
You may in turn be exploited to cover for them, but I don't think that's what they really want. I've known hundreds of teachers. Don't particularly like them, but I do know them.
Was this written by a Wall Street guy? He wants the states to increase contributions - to Wall Street? What a joke. Didn't the states learn anything. Never send money to the banksters. Pension funds should invest in their own states and cities.
I thought Greed was good:
http://www.youtube.com/watch?v=vscG3k91s58 Circa 1986
http://www.youtube.com/watch?v=l95dIwOJOm0 Circa 2010
Bondholders should acquaint themselves with this concept of austerity, too.
If the the citizenry experiences a 20% cut in services, retirees a 20% cut in pension benefits, government a 20% cut in headcount, it's only reasonable that bondholders should take a 20% haircut as well.
But, of course, this is a states' rights issue at the core of state sovereignty. Why should a state with a well-funded pension system like, say, North Dakota or North Carolina, cast its lot with a state such as Illinois that made highly questionable investment decisions?
Is anyone really surprised here? Its perfect, the outcome would have been the easiest of all to predict. Not only that, we've seen plenty of examples of how this will work out...not sure what everyone is fretting about?
1. Its perfect: Lots of money, lots of commish for brokers/managers, decision by committee of totally untrained people driven by politics at every turn, with the biggest interest (union concerns) locking in profit through weak politicians with years of experience doing things without any economic consequence. Perfect.
2. What happens next? Taxes get raised, politicians work hard to find a way out and reach a Risk Sharing Mechanism' with the latest Wahsington crew and ultimately they get a check written to them. End of story. Hmmm, anyone think that GM, AIG and even Soc Gen can get bailed out and NOT CALPERS?
YOU FUCKEN BABY BOOMER TRASH ARE LUCKY YOU GOT RETIREMENTS, IN MY AGE GROUP (20z) RETIREMENT, OR EVEN HOME OWNERSHIP IS NOT EVEN ON THE FUCKEN RADAR.
i will gladly pay you TUESDAY , for your vote TODAY
Who to blame? The Federal Reserve. They are the bubble blowers, the ones who enabled the Ponzi Debt schemes that made everyone believe we could afford all of this crap. I mean, the welfare / warfare state. Of course, we can't afford it, and we never really could, and only now is that truth becoming apparent. The historic returns on which everyone's pensions are based are a sham, a ghost, a canard. 11% annualize returns? In an economy that experiences 2% productivity gains per year? It's positively fucking laughable.
Leo, either public pension benefits are too lavish or there are too many public employees. It's that simple. Sure pensions have done OK for the last 50 years preceding 2008 but now that the public sector employee/private sector taxpayer ratio is higher than ever, they won't do OK.
I don't care if Wall St. said so or not but no one is entitled to 8% returns forever and such (inflation adjusted) performance, decade after decade is impossible anyway.
The government, especially state and local governments, are too big and they are simply unsustainable. Start with diversity counselors and the Environmental police and crank up the pink slip machine. Welcome to the recession boys.
Woohoo...more foreclosures and higher unemployment!
Yeah, that's pretty much how reality works...
The blame for 'the pension debacle' lies at the feet of Wall Street? Is that because if Wall Street had not been greedy, noone else would have been? All booms and busts are obviously the fault of Wall Street banksters. It has always been the case and always will be the case. Right...
Surely, there is no possibility of any problem resulting from a) bad asset management, b) overly optimistic assumptions (what is the "expected equity return" and expected bond return" embedded in public pension accounting?), aided by c) overly generous politicians, and d) lack of transparency, and it would be impossible that there would be any issue whatsoever from changing demographics (i.e. any change in the existing worker vs retired worker ratio, or any increased liabilities arising from greater longevity risk borne by pension funds). Surely all these factors have nothing to do with any of it...
The expected level of returns has been unreasonably high for many years in pension plan management, and this has caused plan managers to 'chase' risk by allocating more to equities, which they have subsequently had cause to regret.
Eventually, there will have to be some adult conversations had. Just like there will be with social security, drug payments for the elderly, and eventually health care. It may be easier to have some of these conversations during a deleveraging cycle, but until people admit that everyone's expectations were a bit too high, there will be too many toys thrown from the pram to come to any serious conclusions.
Probably need a significant third (centrist) political party as well, but somehow I don't think the 'Hard Choices Party' starts to pick up any support until the Republicans start to make absolute fools of themselves (actually, they started long ago, but they just haven't been caught at it).
All parties involved have to share the blame for the mess.
Individuals kept on spending even in face of declining incomes by using the cheap and easily available loans handed over to them by the bankers.
The bankers kept on lending to the individuals, who they knew would never be able to repay their loans, because they were getting commission and charging exhoribitant interest on the loans. Moreover they were able to sell the poor loans (after getting them fraudently rated as AAA) to Freddie Mac and Fannie Mae. The bankers also sold these toxic products to the pension funds and fixed income investors for commissions knowing very well that the government would route tax payers collections to them in case of any mishap as they had become too big to fail.
The politicians around the world are nothing more than auction items which can be sold to the highest bidder. They will do whatever they can for the lobbyist paying them the maximum amount of money or votes, be it the unions, the banksters, the richest corporations or individuals. They are in the power seat to extract maximum advantage for themselves in the small time frame they occupy the seat of power.
The rest of the population is least of their concerns. The only activity they do is pacify the majority of the population using false statistics and promises of a better future so that they do not lynch them and their masters while they are robbing the taxpayers.
http://www.marketoracle.co.uk/Article24581.html
Pension plans and Social Security are much the same; the money is not set aside, not invested prudently, and is not overseen by responsible adults.
Both pension plans and S.S. are slush funds for private minority interests used to manipulate the masses.
Greed, malfeasance, and most importantly a locus of control on the pension money that is far removed from the individual.
How well would your child be raised with 100 other kids in a home run by pedophiles, philanderers, drunks, gamblers, and megalomaniacs? About as well as your pension or S.S. funds.
...the hookers, the lavish vacations, the mistresses and their penthouses, the ferraris, the yachts, the big shiny jet planes, the cocaine, the strippers, the $150 cheeseburgers, the $1000 bottles of champagne, the second and third mansion, the expensive divorces, the call girls, the political contributions, the SEC out-of-court settlements...
until the "clawback" kiss your retirements goodbye.
How do you get a pension like that?
1. Run a pension fund or be in top management for pension funds
2. Be a politician
3. Be a banker
4. Invent something really cool
5. Drug dealer/Crime lord/Moarlly derpraved narcissist (see 1, 2, or 3 above)
Americans are to blame. They are to blame because the majority chooses, freely, to be passive. They choose with their own free will to let currupt politicians and a failed economic matric bleed their children and grandchildren dry. The majority is to blame for allowing a tiny minority to destroy the country their forefathers/mothers created for them. We are to blame.
And instead they should...?
Get some balls?
Get smarter?
Wake up?
"Wall Street" had little to do with the shortfall in pensions. (I know that isn't the popular view) Let's look at the facts:
1. State and local government officials captive to the powerful employee unions promised ever larger benefits packages, that are now far and away the most generous retirement benefits in America.
2. Pension fund accounting rules allow governments and pension managers to set expected returns to whatever they liked. That's why they appeared fully funded in the middle of the last decade. Were they required to use more conservative private pension accounting rules, they would have looked much, much worse.
3. Pension fund managers took ever greater risk chasing return. Wall Street has some responsibility here. But, who is to blame, the drunk or his bartender?
4. Governments made pension funds appear funded by floating general obligation bonds and using the proceeds to make contributions. This is what will ultimately kill Illinois.
5. Governments never modernized plans to require employee contributions, again, because powerful unions blocked any reforms.
There is no such thing as a platonic "sophisticated investor". Only sophisticated morons, many of whom could not get a job on Wall Street and wound up managing your pension, running AIG or being analysts at Moody's.
I believe so too...probably the most incompetent people in managing money sit in positions to make important decisions.
When an individual's personal pay & bonus is not tied to long term performance in what they are paid for...this is what you get. In Fla. we had the same thing. The public employees raised so much hell about the vaporization of their retirement assets the lead dogs in this dog & pony show were forced to take action.
What action was taken you ask?
No one lost their job. No one had their pay cut. No one had their entire bonus taken back for the year. All they did was lower the payout on a few of the bonuses. That's right. They all still got bonuses.
As a 401k & IRA owner, I was able to step out in the summer and fall of 2007 when the double top presented itself. I didn't & don't have to, participate in anything...my only loss being the devaluing of the dollar over the year or so that I was out, that is...in cash.
What Leo continually insinuates is that public employees are too stupid to do what many like myself have done on the private side. He & others like him advocate for public workers retirement money to be piled into these pension funds like cattle being put through a chute and loaded onto a truck at a ranch...everyone knows the destination of the truck...the slaughter house...and he wants the public to not only purchase the cattle but pay for the diesel that runs the truck.
Furthermore, it's a hopelessly rigged game.
Pension funds & company sponsored 401's can't be short the market. In a market who's trajectory is obviously down, they do not allow participation in that direction. If you want to do this as an "investor" you must do it on the taxable side. Why is it you have to sit there and take an ass whipping day after day, month after month, to the long side?
I'll tell you why. Because they consider you cattle.
Mooo!...LOL.
Promises were made that can't be kept. Time for an adult conversation.
GM bondholders are available for counseling the public union members.
Fraud-based systems are doomed to failure. Adult conversations? You're kidding, right?
You mean Santa Clause isn't real.....
Bullshit, Santa Clause can fix this, he can fix anything!
Here's an answer: your pension fund gambled in the market and lost like everyone else. Your $19,000 pension payment average will be $17,500 instead.
Now how about working after age 55, bitches? Sorry, I meant pretending to work.
Exactly. Why are public employee pensions so sacred? The pension funds experienced losses, ie: your pensions experienced losses.
Join the club.
Sure, someone may have told you otherwise. But your fellow taxpayers never agreed to double taxation to top up your underfunded pensions.
And besides -- who are we kidding. Teachers have the cushiest work hours in the world. And firemen...don't even get me started. Get over yourselves.
Join the club?
http://www.truth-out.org/pension-envy66760
Perhaps it's time to finally question our club memberships. If it's not too late, i.e., if the oligarchs, their minions and their useful idiots can be stirred to acknowledge the full range of possibilities.
Fat chance of that, I suppose.
+1
it does not matter whose fault it is because no one who truly deserves punishment for financial crimes in this country is ever punished. however, we (the innocent) will all be punished as our private retirement accounts are nationalized for the 'good of the country'. just like taxpayers are bailing out large banks for their misdeeds and losses, private pension funds will bail out public pensions funds.
Leo, pension fund managers share a big part of the blame for the meltdown, as they enabled Wall Street, and they participated in what they should have known was collusive fraud, yet didn't complain UNTIL it hit their bottom line.
But then again, they are also playing with other peoples' monies, right?
"Pension meltdown, blame it on Wall Street?"; sure, why not. will just decide not to consider the complete lack of knowledge and the herd mentality that actually believed that there was some kind of "magic" that made "values" go up some percentage every year.
Hope and Change - Leo.