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Bloomberg Sings The Pension Blues

The rosy scenarios most American public pension funds use for planning are totally out of touch, says New York mayor (and hugely successful billionaire investor) Michael Bloomberg. Most state and local pension funds in the US “assume” returns of between seven and eight percent on their investments per year. This allows politicians and union leaders to collude in the Big Pension Lie: that the pensions promised public sector unions can be paid without imposing huge service cutbacks on the poor and job crushing taxes on the middle class.

According to a genuinely excellent article by Mary Williams Walsh and Danny Hakim in the NY Times, Bloomberg calls the assumptions that pension funds will earn between seven and eight percent a year “indefensible.” How indefensible? Says the Mayor:

“If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”

That is for a seven percent return; some pension funds are still assuming eight percent, a figure which Bloomberg calls “absolutely hysterical” and “laughable.”

We’ve been warning readers for some time at Via Meadia that the politicians and union leaders in this country have been engaged in a systemic lie of epic proportions. How big and ugly is the lie?

Very. Private pension funds assume a standard of 4.8 percent return on their pension funds. As the Times notes, governments also use various tricky accounting loopholes not available to private companies to hide their liabilities. As far as we can make out at Via Meadia, if you tried to run a private pension fund the way unions and government-appointed trustees run public ones, you could go to jail for fraud.

But while lies can win elections, they can’t pay bills, and as the unsustainable commitments to municipal and state pensions come due, services will be cuts, taxes raised and benefits to retirees will be slashed as reality sets in.

Already New York City pays more than $7 billion (and more than a tenth of its total budget) towards pensions to retired workers; cutting the assumed return from the absolutely hysterical current level of eight percent to the laughable level of 7 would add almost $2 billion more to the annual bill. To make a sensible and conservative long term assumption like the one used by most private companies would cost about $4 billion more. (Walsh and Hakim identify another $2 billion plus in liabilities due to rising life expectancies and growing disability claims among public sector workers and retirees.)

This means that fully funding its pension obligations in a responsible way would mean cuts of $6 billion per year from schools, firefighting and police on top of the $7 billion they already get.  Note to retirees: that isn’t going to happen. Voters won’t stand for it — and they shouldn’t. It’s not fair and it’s not sustainable, and it’s not right.

Today we are seeing what happens when Big Lies come unglued: all over Europe people who believed those sweet delicious stories politicians told them about their pensions and their futures are waking up to one horrible shock after another. Somehow we’ve come to the point in this country also where it’s considered “liberal” and “progressive” to lie like rats to the voters and to government workers about how solid their futures are.

Listen up, blues. The mother of all wedge issues is knocking on your door: when the pension crunch comes, who will you throw to the wolves: the retirees, the unions and the producers of government services — or the schoolchildren, the poor and the consumers of government services?

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  • vanderleun

    Who will be thrown? Sort of depends on how many blue boomers there are in the state and what sort of dole they’re on. Blue boomers always vote their interest.

  • Anthony

    The truly regrettable and unfortunate aspect: municipal services may be cut, taxes/fees will increase, and benefits may be slashed (for average pensioners); perhaps at one level WRM, we may be witnessing the reality (consequence) of hack/clientele governance – one of many big deceptions.

  • Alex Scipio

    Dr Mead, the answer to your closing question is easy. Only 3 Blue States have a Total Fertility Rate over 2.1 (replacement): NV, NM, HI. Progressives do not believe in the future enough to have children. Basically their entitlement demands of today are demands to live off other peoples’ children, as they are not populating the future from which their demanded money flows.

    With this in mind – that Blues have no children – go back and re-ask your final question & tell us the answer. You wont get the answer you seem to expect

  • Kenny

    Those in the public sector are NEVER satisfied.

    They are like hogs at a trough at feeding time, and if you have even been on a farm, you know what I mean. For them, it’s never enough.

  • Eurydice

    Well, it seem this is an issue that should be discussed in conjunction with your concern about corporate corruption. As you say, lies on this large a scale would be called fraud in the private sector, but even though the damage is much than anything Madoff could have dreamt, there are no penalties for political “miscalculation.” At the end of the day I suppose one could say the voters should be punished for demanding and voting for those lies. So maybe what we need is not more ethics courses but courses on how government actually works.

  • Eurydice

    Ack! Much *more* than anything…(still wishing for an edit key).

  • Jim.

    @Alex Scipio-

    Any means testing of Social Security should only apply to those without children.

  • thibaud

    “Listen up, blues” “The mother of all wedge issues…”

    Love that swaggering, snarling punk attitude. As if the root cause of the problem – greater longevity due to improved medical technology and increased access to health care thanks in part to government subsidies such as medicare in the US – were somehow the wickedness and nastiness of the author’s ideological bugbears.

    Again, a simple fact: the “blue” countries such as Holland and Canada have far better managed, and more solvent, pension plans than are found in “red” America. Holland’s solvency ratios are far higher than America’s.

    There is no reason that honest, professional pension management cannot co-exist with a interventionist state that provides significant and generous social benefits including universal health insurance.

    Some gentle advice: less swaggering parochialism and more research, please.

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