Public Pension "Reform"

Buster (never a government employee) is acquainted with quite a few public-sector workers, both current and retired.  The insightful article from the great Matt Taibbi linked below is quite good.  What follows are bits and pieces.  Hope your pension is doing well! 

[Excerpts from "Looting The Pension Funds" by Matt Taibbi, published in the 10/10/13 issue of Rolling Stone.]
http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926
_______________________________________________________

There's $2.6 trillion in state pension money under management in America, and there are a lot of fingers in that pie.

The Employee Retirement Income Safety Act (ERISA) of 1974 was a landmark worker-protection law that left open a major loophole:  It didn't cover public pensions.  Politicians quickly learned to take liberties, [like] illegally borrowing cash from public retirement funds to finance other budget needs, then never paying it back.  It's the governmental equivalent of stealing from your kids' college fund to buy lap dances.

In the past decade, a number of states have regularly failed to make their Annual Required Contributions to their pension funds.  New Jersey, for example, made just 33% of its required payments.  This rampant underpayment was rationalized by unwavering belief in the bull market and the assumption the good times would never end.

Then five years ago, an epidemic of fraud and thievery in the financial-services industry triggered the collapse of our economy.  The resultant loss of tax revenue plunged states everywhere into spiraling fiscal crises, and local governments suffered huge losses in their retirement portfolios -- remember, these public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its toxic mortgage-backed securities in the pre-crash years.

Suddenly states were in a real, no-joke fiscal crisis.  Somebody had to take the hit.  It was then that the legend of "pension unsustainability" -- a.k.a "unfunded liability" -- was born.  It had nothing to do with systemic problems with pensions.  It was instead a deadly combination of unscrupulous states illegally borrowing from their pensioners, and the unscrupulous banks whose mass sales of fraudulent subprime products crashed the market.  The result was that states' pension funds were out some $930 billion.  Yet the public was being told that the problem was state workers' benefits were simply too expensive.  

The two paths out of this wilderness appeared to be bankruptcy or pension "reform".  Although anyone could see that "reform" meant giving up cash, many public workers were scared enough to accept cuts as preferable to the alternative.  Beyond this, most pension reforms required states to go after higher returns by seeking out "alternative investments"*.

*(Local readers may recall that Ohio was an early experimenter in "alternative investments".  In the late 1990's, the Ohio Bureau of Workers Comp gave corrupt GOP fundraiser Thomas Noe $50 million to invest in "rare coins and other collectibles", including Beanie Babies.  Noe stole some of the money, his investment tanked, and he went to jail, but the main consequence of "Coingate" was that states stopped disclosing where public money was invested.  They didn't learn to stop doing it.  They just learned to keep it secret.)

Many states turned to hedge funds, a private pool of high-risk, highly leveraged investments.  They refuse to take a state's money without a non-disclosure guarantee.  Hedge funds promise high returns but usually produce results no better than (and often worse than) a simple index fund.  Hedge fund fees are infinitely more expensive than fees for index funds.  The typical hedge fund management fee is "two plus twenty", meaning the manager collects 2% just for showing up, then gets 20% of any profits.  Fees on a no-brainer index fund are around "one basis point", or .01% -- about 200 times less than the standard hedge fund fee.

Union leaders all over the country have started to figure out the perils of hiring a bunch of overpriced Wall Street wizards to manage the public's money.

Bottom line -- "unfunded pension liability" is, if not exactly fictional, certainly exaggerated to an outrageous degree.  The idea that benefit packages are causing the fiscal crises in our states is a fabrication crafted by the very people who actually caused the problem.  We have an unfunded pension liability problem because we've been ripping off retirees for decades -- but the solution being offered is to rip them off even more.

Asking cops, firefighters and teachers to take the first hit for a crisis caused by reckless politicians and thieves on Wall Street is low, even by American standards.