Public and Corporate pension funds have gone berserk. Pension Fund Reform hopefully is imminent.
The outlay of public funds by public bodies to their public employee constituency no longer uses actuarial criteria; rather, cronyism, nepotism and cultism has replaced financial methodology. Pension Fund Reform is resisted by legislators, in part due to past “insider” legislation.
Unions are worse because they do not receive the scrutiny public bodies may warrant. Union funds have become the purpose of union – the worker is almost irrelevant.
_______
About half of all private-sector workers have no retirement plan other than Social Security, according to figures from the Employee Benefit Research Institute, a nonprofit that studies pensions. About 16 percent are in plans similar to the federal system, which guarantees payouts based on workers’ earnings. Some private employers offer defined-contribution plans, including 401(k) plans, in which benefits depend on employees’ contributions and how they are invested.
The federal retirement system has emerged as a cost-cutting target as the government faces a budget deficit exceeding $1 trillion. A 2010 Congressional Research Service study reported that US government pension programs had a shortfall of $674.2 billion, mostly due to insufficient funding for workers hired before 1984.
The Treasury pays about $4.9 billion every month for about 1.8 million retirees, an average of $31,633 annually. Federal employees contribute $1 of every $14 toward retirement, according to the National Commission on Fiscal Responsibility and Reform, a bipartisan panel created by President Obama.
Public employees at the state and local levels already have faced moves to cut future benefits, as officials seek to address a cumulative pension gap that exceeds $4 trillion. Dallas Salisbury, president of the benefits institute, said in an interview that federal pensions might be “richer than we can now afford. Something’s going to have to give.’’
The number of federal employees eligible to retire and collect a pension will grow to 956,613 by the end of the 2016 budget year, a 35 percent increase from the 707,750 who could have retired at the end of September, according to the Office of Personnel Management.
Source: BostonGlobe
______
The budgetary math is irrefutable: generous pensions end up draining money from schools, social services and other programs that progressives naturally applaud.
In California, which is in a $19 billion budget hole, Calpers is forcing hard-pressed localities to cough up an extra $700 million in contributions. New York State, more creatively, has suggested that municipalities simply borrow from the state pension fund the money they owe to that very fund.
Such transparent maneuvers will not conceal the obvious: for years, localities and states have been skimping on what they owe. Public pension funds are now massively short of the money to pay future claims — depending on how their liabilities are valued, the deficit ranges from $1 trillion to $3 trillion.
Pension funds subsist on three revenue streams: contributions from employees; contributions from the employer; and investment earnings. But public employers have often contributed less than the actuarially determined share, in effect borrowing against retirement plans to avoid having to cut budgets or raise taxes.
They also assumed, conveniently enough, that they could count on high annual returns, typically 8 percent, on their investments. In the past, many funds did earn that much, but not lately. Thanks to high assumed returns, governments projected that they could afford to both ratchet up benefits and minimize contributions. What a lovely political algorithm: payoffs to powerful, unionized constituents at minimal cost.
Except, of course, returns were not guaranteed. Optimistic benchmarks actually heightened the risk, because they forced fund managers to overreach. At the Massachusetts pension board, the target was 8.25 percent. “That was the starting point for all of our investment decisions,” Michael Travaglini, until recently its executive director, says. “There is no way a conservative strategy is going to meet that.”
Travaglini put a third of the state’s money into hedge funds, private equity, real estate and timber. In 2008, assets fell 29 percent. New York State’s fund, which is run by the comptroller, Thomas DiNapoli, a former state assemblyman with no previous investment experience, lost $40 billion in 2008. Most funds rebounded when the market turned, but they remain deep in the hole. The Teachers’ Retirement System of Illinois lost 22 percent inthe 2009 fiscal year. Alexandra Harris, a graduate journalism student at Northwestern University who investigated the pension fund, reported that it invested in credit-default swaps on A.I.G., the State of California, Germany, Brazil and “a ton” of subprime-mortgage securities.
The financial crash provoked a few states to lower their assumed returns. This will better reflect reality, but it will not repair the present crisis. Before the crash, retirement systems were underfinanced (they did not have sufficient funds to pay promised benefits), but the day of reckoning was distant. Moreover, the pain was indirect. Taxpayers were not aware that pension debts caused teachers to be laid off — only that schools had fewer teachers.
Postcrash, the horizon has condensed. According to Joshua Rauh of the Kellogg School of Management at Northwestern, assuming states make contributions at recent rates and assuming they do earn 8 percent, 20 state funds will run out of cash by 2025; Illinois, the first, will run dry in 2018.
What might budgets look like then? Pension obligations are a form of off-balance-sheet debt. As funds approach exhaustion, states will be forced to borrow to replenish them. Some have already done so. Thus, pension obligations will be converted into explicit liabilities (think of a family’s obligation to pay for grandma’s retirement being added to its mortgage). According to Rauh, if the unfinanced portion of all public pension obligations were converted to debt, total state indebtedness would soar from $1 trillion to $4.3 trillion.
Source: NYTimes, Roger Lowenstein
______