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?