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pension peril
The Pension Crisis Keeps Getting Worse

The $2 trillion public sector pension shortfall created by decades of interest group bullying and political fecklessness is not going away on its own. In fact, according to a recent report from a major consulting firm, it’s getting steadily worse. The Financial Times:

The health of the US public pensions system is deteriorating. The latest figures reveal that retirement plans have less than three-quarters of the assets they need to pay current and future retirees.

… According to Wilshire Consulting, an institutional investment advisory company, state-sponsored pension plans in the US had just 73 per cent of the assets they needed in mid-2015, down from 77 per cent in 2014.

It’s important to note that the major market indices actually rose substantially over the time period covered by the report. If Wilshire assessed the solvency of public pension funds today, after months of market turmoil, the situation would likely be even more grim.

At least some state and local governments are taking steps to reform their public pension systems before it’s too late. For others, that moment may have already passed. It’s probably only a matter of time before the most indebted states and localities start going hat-in-hand to the federal government requesting massive bailouts. Time for think tanks, academics, and policymakers to start preparing for this eventuality: Should Congress be prepared to offer any assistance, and if so, on what terms?

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  • Andrew Allison

    Why should all taxpayers pay the price for the fecklessness of state and local governments? Doing it just once will not only open up the floodgates for the entire unfunded liability but encourage continuation of the behavior.

  • FriendlyGoat

    Heavy stock market risk is recommended mostly to individuals these days, but the fiduciaries of pension plans are subject to extreme criticism if they make such bets and lose. Funny how “conservatism” just ain’t what it used to be.

    • Kevin

      Really? Detroit, Puerto Rico and Illinois just got unlucky? Could happen to anyone?

      No. They systematically underinvested relative to their promises, siphoned off their principal and interest to pay off assorted cronies, and then doubled diwn on insane gambles for resurrection in the hope of of winning it like back by betting black at the roulette wheel.

      • FriendlyGoat

        The conservatism of old for pension plans was to be basically bond funds, GICs with insurance companies, and a small component of equities. If we had not blown up the financial order with tax cuts and insufficient supervision of trading, we would not now be in a situation of interest rates so artificially low that neither plans nor individuals can survive on them.

        • Andrew Allison

          Ah, ha! I finally get it. The evil Wall Street financiers forced the reluctant so-called “fiduciaries” to make reckless investments in return for pay-offs and the hope of actually being able to achieve their nonsensical return projections. Turns out they would have done much better if they’d simply done as fiduciaries should, namely be (pardon the heresy) conservative.

          • FriendlyGoat

            No, I don’t think you’ve “got it”. Nothing works for conservatively-invested pension funds or for conservatively-invested individual IRA’s when interest rates are stuck in an artificially-engineered low range for an extended period of time. I contend the reason the USA and much of the world is in this mess could be traced to races to the bottom of taxation on other kinds of “trading”. We have crises and then we try to fix those crises with low rates—–when we never should have had the crises and probably would not have them except for machinations of speculation which should have been taxed or regulated out of existence to begin with.

          • Andrew Allison

            I couldn’t agree more that Federal Reserve monetary policy is crazy. That said (more accurately, as a result), the S&P 500 has roughly doubled during the seven years of very low interest. There’s no shortage of conservative investments, the problem lies with public pension fund trustees chasing risky assets in an effort to achieve unrealistic return targets, i.e., speculation. The solution is to apply the same regulatory framework to them as to private pension funds.

          • FriendlyGoat

            It’s not just the Federal Reserve. It’s other central banks too, AND the actual free market of interest-bearing instruments. We have been in the land of rattled and abnormal since 2008.

            Meanwhile, we can find the S&P 500 index at 500 in 1995, at 1500 in 2000, at 800 in 2002, at 1500 in 2007, below 700 in 2009, and at 2000 in the 2015-2016 era. Given that virtually any pension manager would have been fired twice for having the bulk of the plan assets in these stocks—-even though they are 500 quality stocks—during catastrophic downturns, we have to understand why stocks are “conservative” investments SOME of the time and most certainly NOT “conservative” at other times.
            That’s why we’re not supposed to blame the fiduciaries for being “careful” to avoid over-allocation to equities. You’re supposed to be able to run a pension fund mostly like a Pimco bond fund and not be considered a chump for doing so.

          • Andrew Allison

            Oh, please. Your argument was that low interest rates not public pension fund trustee malfeasance was the source of the pension problem, and there was a lack of conservative options. I demonstrated that it was a ridiculous argument. To repeat, the S&P index doubled during the period of low interest. Essentially none of that gain would have siphoned off in fees and kickbacks to so-called “trustees”. What ails public employee pensions is lack of regulation, not lack of investment opportunities.

    • Andrew Allison

      What part of “fiduciary” is unclear to you? When an individual investor makes a bad bet, s/he loses. When a fiduciary does so the “client” loses.

      • f1b0nacc1

        All of it. By this time, it should be obvious….

        • Andrew Allison

          You’re right, to a progressive hammer, etc. What’s so surprising is that he does occasionally exhibit signs of rational thinking.

          • f1b0nacc1

            Hey, we both rooted for the Broncos this year….

      • FriendlyGoat

        That’s why fiduciaries were supposed to invest “conservatively” for these plans. We are now in an era when “conservative” investments have been ruined as plausible vehicles. Soooo—we just tell everyone they can’t have a pension anymore. Get your 401(k) or IRA—-go to the markets, take your chances, and with near certainty, expect to be out-traded by algorithms dodging in and out in seconds or less.

  • Fat_Man

    “Should Congress be prepared to offer any assistance, and if so, on what terms?”

    No. And None.
    The taxpayers of other states have done nothing to justify inflicting these costs on them. The feckless ones should bear the burdens they created.

  • HiawathaJones

    Missing from most of these discussions are considerations of what is happening to the liability side of the equation. The ability to meet pension obligations depends on the ability to have enough assets to meet the pension liabilities. Simple enough so far. Assets are typically portfolios of stocks and bonds. Easy enough to count. Liabilities are more tricky. Actuarial assumptions are needed and importantly interest rates effect the value. Pension health overall is basically the ratio of assets to liabilities. When rates decline, liabilities go sky-high and we look very underfunded. When rates to go five or six present, we are likely to be over funded. You can manage your portfolio so that you are not so exposed to changes in interest rates, but most jurisdictions don’t like to do for the same reason most investors used to not like index funds. We’d prefer a chance at the upside rather than settle for reality. Unfortunately reality has brought us unprecedented low interest rates that have driven pension liabilities to unheard of levels.

    • Andrew Allison

      It isn’t low interest rates which have driven pension liabilities to unheard of levels, it’s over-promising on both pensions and pension fund yields, and malinvestment. As noted below, during the period that low interest rates have been in effect, the S&P 500 has doubled.

      • HiawathaJones

        I agree that over promising has occurred, but consider that the 10-year U.S. Treasury bills were recently yielding 1.6 percent versus 4+ in 2008. Rates have fallen more than the S&P has risen, and pension liabilities are enormously sensitive to changes in rates. I’m not arguing that the numerator of the pension funding ratio has been mismanaged, but people generally underestimate the impact of declining rates on the state of pension funding.

        • Andrew Allison

          Public pension plans do not invest only, or even significantly, in T-bills. In fact, the largest positions are typically public equities, see, e.g: Unfortunately for the beneficiaries, they do make extremely costly investment decisions–roughly 25% of overall public pension funds are inappropriately invested (

          • HiawathaJones

            Hi Andrew, I’m referring to the the accounting used in determining the amount of the pension liability itself. This has a relation to interest rates. You’re talking about the assets used to pay off those liabilities. You’re right that most pension plans do not invest only in bonds. When someone says a pension plan is underfunded, they are comparing the assets on hand to the value of the liability. It’s kind of like comparing the estimated house price to the mortgage.

          • Andrew Allison

            Thank you. I confused estimated rate of return with estimated liability.

  • Robert Burke

    The answer is to defund Progressive Education in K-12, university, law and journalism schools. Replace it with Western Enlightenment.

    Then, an enlightened people can lock up Progressive Legislators on corruption charges, and eject all corruption programs.

  • Cromulent

    No bailouts.

  • Galileo2

    After the GOP takes control of the White House and gains even more seats in both houses of Congress this election, it should pass legislation that defines the terms & conditions of any future federal bailouts of the States and Territories:

    1) Their public sector union thugs have to take a haircut on their bennies…a BIG one. The bigger the bailout amount, the bigger the hair cut.

    2) Any state applying for this bailout will be required to hold referendums on dividing up the state in to smaller states. If they pass, then another rounds of constitutional conventions for the new states-to-be happen and submit their constitutions to Congress for review.

    3) Congress’ automatic acceptance into the Union of any new states formed this way is already baked into this legislation.

    New York, Illinois, Florida and California will break up into over 5 or more new states combined. Several of them will be solidly red states, too.

  • teapartydoc

    If a state government reaches the point of needing federal help to meet their pension crisis their representatives in the Federal government should not be able to vote for twenty years.

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