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Politicians Can’t Be Trusted with Pensions

A number of plans have been proposed to help New York deal with the fallout from Hurricane Sandy. Many of them are unworkable, but there are a few gems in the mix—if it weren’t for the fact that rebuilding the city’s destroyed infrastructure will be extremely costly and New York isn’t exactly flush with cash at the moment.

New York City’s comptroller has a bright idea: Convince the state’s pension funds to invest in reconstruction projects. Reuters reports:

Possible proposals to help people recover from the storm include investments in single-family mortgages and offering small-business loans, as well as teaming up with other investors to finance multifamily residential real estate, according to a spokesman.

Liu, who is the investment adviser and custodian for the city’s five pension funds, did not disclose other details of the plan. The funds cover about 581,000 active and retired members.

“Now that there is a huge need to rebuild tens of thousands of homes in the city, the use of the city’s pension funds as capital to accelerate these projects is going to be vital and necessary,” Liu said. “It can be done in a way where we gain a good return for our pensioners and taxpayers.”

On the surface, taking New York’s pension money and investing it in mortgages, loans, and infrastructure projects after Hurricane Sandy sounds like a good idea. It might even work very well, earning good returns for pension funds while the loans help the city recover faster, generating more economic growth. This is the sort of thing people mean by “smart policy”.

But the temptations and pitfalls are huge. Let local politicians get the idea that pension funds are pots of money that can be invested in pet projects, and it won’t take long before bad things start to happen. The potential for conflict of interest is just too high for this to be a good idea.

Politicians around the country have demonstrated complete inability to manage pensions effectively. They promise big benefits, don’t tax voters enough to pay for them, and then invest the money in fly by night, risky Wall Street schemes (with big fees for their banking cronies and contributors) in the hopes that a few big wins and aggressive moves will cover the funding gap.

No doubt comptroller Liu has the highest ethical standards and seeks only the greater good, but everything we know about human nature and the past trustworthiness of politicians when it comes to pension funds screams that this is dangerous.

Here’s a better idea: subject pension funds for government workers to the same strict rules used in the private sector. And don’t let politicians dip into these funds to help political allies, however “worthy” the cause; that’s what people do in places like Argentina.

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