Just a few weeks ago, government pension fund administrators and unions officials were crowing about the latest stock market returns, prompting Paul Krugman to claim that the state and local 'pensionscare' was a "creation of right-wing propaganda."
CalPERS reported its best returns in more than a decade, prompting its chief investment officer to declare the performance "powerfully affirms our strategy,"which includes investing more heavily in risky securities like stocks than the typical private sector pension. Meanwhile, the National Conference of Public Employee Retirement Systems, a trade group that advocates on behalf of public sector pension systems, issued a report saying the buoyant returns had put public pensions in a much better position, with an average funding of 76 percent of liabilities based on the aggressive investment gains projected by the funds.
The last few days in the stock market have been a white-knuckle ride for investors, and maybe for taxpayers too. Over at CalWatchdog, John Seiler estimates that CalPERS assets have shrunk by some $17 billion, or 7 percent, since its last report. In the Sacramento Bee, Dale Kasler observed, "The past month of trading has erased more than 40 percent of CalPERS' robust investment gains from the previous fiscal year. Roughly two-thirds of CalPERS' portfolio is in stocks." Across the country in New Jersey, the actuary John Bury, who has followed the state's pension woes for years and chronicled the decline in its funds' assets, observed that like California, Jersey's pension funds justify their projections of high returns by sticking some 47 percent of their assets in domestic and international stocks, making the portfolios extremely volatile.
CalPERS reported its best returns in more than a decade, prompting its chief investment officer to declare the performance "powerfully affirms our strategy,"which includes investing more heavily in risky securities like stocks than the typical private sector pension. Meanwhile, the National Conference of Public Employee Retirement Systems, a trade group that advocates on behalf of public sector pension systems, issued a report saying the buoyant returns had put public pensions in a much better position, with an average funding of 76 percent of liabilities based on the aggressive investment gains projected by the funds.
The last few days in the stock market have been a white-knuckle ride for investors, and maybe for taxpayers too. Over at CalWatchdog, John Seiler estimates that CalPERS assets have shrunk by some $17 billion, or 7 percent, since its last report. In the Sacramento Bee, Dale Kasler observed, "The past month of trading has erased more than 40 percent of CalPERS' robust investment gains from the previous fiscal year. Roughly two-thirds of CalPERS' portfolio is in stocks." Across the country in New Jersey, the actuary John Bury, who has followed the state's pension woes for years and chronicled the decline in its funds' assets, observed that like California, Jersey's pension funds justify their projections of high returns by sticking some 47 percent of their assets in domestic and international stocks, making the portfolios extremely volatile.
Perhaps the most telling reaction came from a union-backed group, Californians for Retirement Security, whose spokesman told Seiler that the rough market ride showed that "the alternative [to public sector defined benefit plans] that reformers are pushing -- 401(k)s -- are looking even worse than before." Translation: public employees shouldn't bear the risk of a wild stock market and unrealistic projected investment strategies; taxpayers should.
I've seen enough of the market over the last 30 years to know that the losses of a week like this may disappear just as quickly as they occurred. But that's also true of the recent investment gains of public pension funds, especially when you consider the underlying weakness of the American economy.
Reports like those of the National Conference of Public Employee Retirement Systems which assure us the problem isn't as bad as news accounts suggest if we just have a few more good quarters in the market ignore the fact that even as pension administrators were reporting better returns earlier this year states and cities were getting bigger bills for contributions from the pension systems themselves. As I've written, New York City's annual pension contributions have risen from $1.5 billion a decade ago to $8.4 billion; Anaheim is already spending 22 percent of its $252 million budget on pensions, and San Francisco's comptroller has estimated that his city's pension bill will rise from $357 million this year to $422 million next year. Detroit is spending 25 percent of its annual budget on pension contributions.
The bill for inflated, underfunded government pensions is here already. Just check your local town or school budget. And don't expect the stock market to bail us out.
I've seen enough of the market over the last 30 years to know that the losses of a week like this may disappear just as quickly as they occurred. But that's also true of the recent investment gains of public pension funds, especially when you consider the underlying weakness of the American economy.
Reports like those of the National Conference of Public Employee Retirement Systems which assure us the problem isn't as bad as news accounts suggest if we just have a few more good quarters in the market ignore the fact that even as pension administrators were reporting better returns earlier this year states and cities were getting bigger bills for contributions from the pension systems themselves. As I've written, New York City's annual pension contributions have risen from $1.5 billion a decade ago to $8.4 billion; Anaheim is already spending 22 percent of its $252 million budget on pensions, and San Francisco's comptroller has estimated that his city's pension bill will rise from $357 million this year to $422 million next year. Detroit is spending 25 percent of its annual budget on pension contributions.
The bill for inflated, underfunded government pensions is here already. Just check your local town or school budget. And don't expect the stock market to bail us out.
Gains and losses are relative. Well run Public Pension Systems pulled in returns of around 20% in the first 6 months of 2011 which is a positive blip in a 30 year horizon. A weeks roller coaster ride up and down tells very little since the bills to employers are predicated on average earnings of between 7% and 8%. Badly run public systems that do not follow the rules - allowing employers to skate on payments during the good times - historically paying nothing in some good return years, is a large part of the reason for high bills now that baby boomers are retiring. To be sure, pension system abuses on the employee and union end also happen far too often and need to be stopped.
Don't throw the baby out with the bathwater. Conversion to all 401k would be a disaster for our future economy and our children. Think creatively and pull the best from all solution options available.
"Translation: public employees shouldn't bear the risk of a wild stock market and unrealistic projected investment strategies; taxpayers should."
Let me offer an alternative translation: most individuals are in no position to bear the risks of investing for retirement in the stock market, whereas collective investment trusts allow for the sharing of such risks across many thousands of individuals at different stages of their careers, with different life expectancies and income needs. In other words, pooling retirement contributions in a trust allows the system to ride out the ups and downs of the market over many years. The system allows for the pooling of longevity risk, whereas an individual has to scale back risk with increasing age and save for maximum life expectancy. The system can save for average life expectancy, since some individuals will live longer and some shorter than average lives. The truth is that 401(k)s were never intended to substitute for pensions, but only to supplement them. The virtual eradication of pensions in the private sector has decimated retirement security for working and middle class private sector workers; rather than duplicating that process in the public sector, we need to preserve public pensions and find a solution to the looming retirement crisis for private sector workers.