Via Meadia has argued that there is a perverse linkage between public sector unions, state pension funds, and Wall Street investment banking; a new study from two Maryland think tanks confirms it, finding that not only are state pension funds grossly underperforming, but much of the returns are also going to Wall Street firms rather than pensioners:
According to the findings, state public pension funds spent over $7.8 billion in fees last year alone—a 15-percent increase over three years—despite the consistent failure of money managers to hit target returns or outperform passive equity index funds, which charge lower fees.“The vast majority of public pension systems in the United States contract with Wall Street firms to select the publicly traded stocks and bonds that comprise the bulk of the systems’ investment portfolios,” says the study. “The firms’ typical ‘sales pitch’ is that they can ‘outperform’ a given section of the stock or bond market; therefore, the system should pay them a fee for their stock — or bond — picking prowess.”Over the last 10 years, annual returns for large public funds averaged 5.9 percent versus expected target returns of 7 to 8 percent, according to the report. […]With the average Wall Street fee ratio of 0.41 percent paid by state pension systems, nearly half of those returns were eaten by the fees.
The story is always the same. Public sector unions press for fat pension promises. Politicians cave, but refuse to raise taxes or cut spending to pay for their promises, instead assuming high rates of return to keep up the fiction that workers’ pensions are secure. Pension fund managers chase high returns from aggressive and risky investments—exactly the kinds for which Wall Street management firms can charge the highest fees. True blue Democrats thus piously denounce Wall Street while simultaneously feeding the beast.Unions, politicians, Wall Street: all are in it together. The victims are the very workers and taxpayers they claim to support.