With the holes laid bare, public pension funds scrambled to find some way to fill them without making politicians do something ridiculous, like raise taxes to pay for all the promises they'd made. Many of them seem to have hit on the notion of pulling the money out of boring old bonds and putting them in something that paid a nice, high return--not just equities, but hedge funds and exotic securities.
Since the public pension funds were rarely able to pay top dollar for financial wizards, and had a number of political constraints on both membership of the boards, and the investments they made, you can just about imagine what they look like now. But if you can't, the FT lays it out:
In the past year the funds, whose collective $2,000bn-plus in assets make them key investors in every asset class, have lost about 40 per cent of their value through investment losses.
The 2,600 pension plans provide retirement savings for 22m public employees in towns and cities across the US, and range in size from the giant Calpers, with $120bn (€91bn, £81bn) in assets, to tiny small town funds which pay pensions for local garbage collectors and police.
Phillip Silitschanu, a senior analyst at Aite Group, a consultancy, says the pensions "could face a cash flow collapse, they are liquidating assets to meet their monthly cash flow needs . . . instead of selling positions that are down 10 per cent, they are being forced to liquidate positions down 40 per cent. It is a firesale liquidation of assets to have the cash on hand to meet obligations".
Bill Atwood, the executive director of the Illinois State Board of Investments, says: "Right now it's very bad. For the full year 2009 (ending in June) we will have $270m negative cash flow on $8.5bn in assets."
State pension benefits are protected by law, and must be paid even if the fund is making a loss. Calpers, the largest fund, has lost $70bn in value in the past eight months, but still has to pay $11bn in benefits this year. Unless the fund starts recouping its losses soon, the California state government, which is already mired in a huge deficit, will have to lift contributions to Calpers starting from next year.
This is not, it should be emphasized, exclusively a problem of public sector pensions; private firms are also underfunded. But the scale is vastly different. According to the Pension Benefit Guaranty Corporation, which regulates and insures pensions, the total deficit in private plans covering about 34 million workers was a little over 10 billion as of September 2008. That's almost certainly multiplied quite a bit since then. But the current underfunding in public plans, which cover about 22 million workers, seems to be something north of a trillion dollars. And they're not insured.
If that's not enough to worry you, keep an eye on Social Security. The trustee's report is due out in a few weeks, and I can virtually guarantee that the estimated date when the "trust fund" will be exhausted will move at least a year closer. In bad times, tax revenues fall, and age discrimination means that older displaced workers are prone to apply for early benefits rather than looking for another job--especially if their 401(k) has kind of evaporated. The release of the annual report used to feature a festival of complaining from bloggers that the Social Security Trustees were far, far too conservative in their estimates of future growth. I don't think we'll be hearing that this year.
Update: The PBGC emails
Actually, the PBGC was reporting on the shortfall in its own insuranceThe problem in the public funds is still bigger, but not as much bigger as I'd initially thought--which makes sense, since a bunch of funds, like the airlines, have been chronically underfunded since the 2000 stock market crash. It's hard for any entity to keep promises made forty years in the future.
program. The private sector pension plans insured by the PBGC are in
reality underfunded by hundreds of billions of dollars. A recent
Milliman study for instance shows the shortfall among the largest 100
corporate pension plans to be $217 billion. Calculated on a
termination basis (that is assuming the pension plans were ending today)
the underfunding number is much higher.
So while the two systems (public and private pensions) are vastly
dissimilar (one with taxpayers as guarantors of last resort, the other
with the PBGC backstop), neither currently has assets sufficient to keep
its benefit promises.
How many government entities will go bankrupt because of this? Maybe the feds will ship out another couple trillion dollars to float them until they can turn a profit. Or will the printing presses have melted by that point?
The release of the annual report used to feature a festival of complaining from bloggers that the Social Security Trustees were far, far too conservative in their estimates of future growth.
I assume those would be the same bloggers -- all on the left -- who kept insisting that Social Security was in great shape, and that efforts to reform it were necessarily bad-faith and heretical?
Wait, leftists not understanding anything about economics? Thank goodness we didn't do something stupid, like elect them to run the country while they also embarassed us on the world stage and killed children with our tax dollars. We'd sure be in trouble there!
This commbox gets classier and classier.
Great. So all of us in the private sector get to work to rebuild our 401Ks while, during the same time, paying higher taxes to top back up the pension funds of unionized government employees, who will take no hit at all. Sweet...for them (obviously not for the rest of us).
"Since the public pension funds were rarely able to pay top dollar for financial wizards, and had a number of political constraints on both membership of the boards, and the investments they made, you can just about imagine what they look like now."
Would this imply that top dollar financial wizards actually bring some value?
I'm actually more inclined to think that the incentive structures in public funds are simply even more screwed up than in private funds (remember that next time someone points out the myriad of ways in which private asset managers get their incentives wrong [and, oh boy, there are a lot of them] and, therefore, don't trust the private sector).
Calpers was pressured not to invest outside of California, for example. What a way to build a pro-cyclical position. The same is true of many other funds.
Humor me for just a second.
There is a large bubble in population, the boomer generation. When this bubbles retires, stop working, the ratio of workers to retirees will decrease. This should cause a lower standard of living.
But the boomers protected themselves against this, by saving money. W ether its 401k, pensions, houses, whatever.
So now, when the boomer generation retires, they will have money. But there will still be less workers who will be willing to do work for this money. So their work has to be worth more, or to put it another way, the savings have to be worth less.
Can that be what we are currently seeing? Is it possible that the true reason for this crisis is all about the devaluing of money to match a shrinking workforce?
Anyone?
This is only plausible if and only if the US is the only country you look at. It is also not true. The boomers have largely not saved at very high rates.
The crisis came about for a variety of reasons, none of which were over-saving in the US.
The biggest impetus was massive amounts of money from rapidly developing economies attempting to invest in a relatively saturated US market which allowed and encouraged firms to lever up beyond all belief and propel a bubble in tech into a bubble into housing into a craptastically huge explosion of the whole thing.
Is it possible that the true reason for this crisis is all about the devaluing of money to match a shrinking workforce?
I don't know whether that is the "true reason for this crisis," but I've been arguing for a long time that absent major productivity increases, boomer retirement is a problem. And it would be a problem even in the absence of any government pensions, Social Security, or Medicare. Simply put, somebody has to produce our stuff, and if there are fewer workers, there's less stuff to go around (absent productivity improvements).
Put another way, ALL forms of savings other than literal hoarding of goods you intend to personally consume are functionally equivalent to debt.
The quality of your retirement depends not only on how much you saved, but on how much more you saved than everyone else.
I don't worry over much about this, though because the solution is quite simple and unavoidable- most people will simply be unable to retire.
I don't worry over much about this, though because the solution is quite simple and unavoidable-most people will simply be unable to retire.
I'm sure it won't occur to any of them to demand money from the government.
Rob,
It has diminishing returns to do so. Those who produce hold the upper hand always.
I'm thinking those who vote and do so frequently in a block hold the upper hand.
So while the younger producers may one day wake up and decide its in their interest to vote they'll likely be splitting their votes over all manner issues while the elderly will vote in one block and single interest only.
"It's hard for any entity to keep promises made forty years in the future."
It'd be a lot harder to make these false promises in the first place if the various pension accounting games were prevented.
"It's hard for any entity to keep promises made forty years in the future."
So I should have gotten a 40 year mortgage then...
Yet another reason for putting people in control of their own destiny instead of nanny-stating them, especially when the nannies we've hired belong in prison, and that's putting it kindly. They probably "deserve" to be strung up on a rope...
401(k) plans are worth mentioning here. They've come in for a lot of flak lately, including a foolish book, the name of which I've forgotten, arguing that the decline in their value shows the superiority of defined-benefit plans. The nice thing about a 401(k) is that it's never underfunded; it's worth whatever it's worth. This is true of other plans too, including Social Security, but the decline in the value of those plans can be kept hidden for a long time. Especially if Congress creates an imaginary trust fund.
I suspect you're talking about Professor Teresa Ghilarducci, who wrote a book called "When I'm Sixty-Four", where she denigrates 401k plans and pushes pensions and her plan for "Guaranteed Retirement Accounts."
In her interview on Fresh Air with incredibly-accomodating-to-liberals Terry Gross, the good professor goes on and on about the professionals who manage pensions. While I don't doubt pension investment professionals, I do doubt the folks who fund them. If my 401k is underfunded (it's not), it's my own damn fault.
"Since the public pension funds were rarely able to pay top dollar for financial wizards..."
Would that be those "top dollar financial wizards" that were working at BofA, AIG, Citi, Countrywide, WAMU, etc., etc., etc.????
http://www.financialpost.com/opinion/columnists/story.html?id=534b22a4-82d7-4c4c-9f64-098d85a6f45c
In Canada the pension regulations (maybe not the right word) assume a high return on investments, which push the pension into risky investment strategies.
Hence the losses.
Money for nothing and chicks for free.
Derek
Further on the above.
>Under the actuarial models on which they are based, these big government plans must not only expose their pensioners and funding governments to high risk equity markets, they must also go out and find investment strategies that will generate even higher returns. At OMERS, the annual report puts it this way: "To fulfill the pension promise to our current and future retirees, we must produce investment returns that exceed the benchmarks for the asset classes in which we investment within an acceptable risk tolerance."
http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/04/06/pension-fix-up-needed.aspx
points to an article by Jeremy Gold and Lawrence Bader who contend that the actuarial models that regulate these funds pushes them into high risk to meet the high return requirements.
During the last few years high returns have been possible, at high risk as everyone is finding out.
The odd thing about anything government regulated is that it ends up working as designed.
Derek
In the aggregate, both DC and DB plans are captive to the underlying asset classes. With DC plans, the worker, of course, assumes the risk of stupid investing (rampant) and undercontribution (pandemic).
With DB plans, in THEORY, the PBGC insures the worker against the pension manager's stupid investing and undercontributing. But that only works when they don't have to bail out huge numbers of pensions within a short period of time.
The PBGC is not meant, and never was meant, to handle a massive SYSTEMIC shift in asset class prices, where CMOs and equities simultaneously took a huge hit, all in a dry period for liquidity.
The EMT guys will tell you, you cannot diversify away investment risk. And in the aggregate, you cannot simultaneously insure all parties against it either.
Oh, the top dollar financial wizards were never working at BofA, AIG, Citi, Countrywide, and WaMu. Those guys are snot-nosed punks.
The REAL adults in the financial industry are managing portfolios at mutual insurance companies, like NY Life, NorthWestern, Guardian, Mass Mutual, and a few others.
Take a look at the hits those portfolios took compared to everyone else. There's a reason.
This problem, like so many others, could be solved by mulching baby boomers.
Which is why Obama & co. are so hot on single payer nationalized universal health care. They know we desperately need to quit giving cadillac care to elderly people and they need to die sooner and in greater numbers. It's part of the strategy to bring social security and medicare under control. Bring on the waiting lists. Like Canada and UK.
Yes, it's too bad that we've massively overinvested in housing for decades instead of in nonhousing fixed capital that might usefully increase productivity.
I disagree with Yancey, though. The story of American domestic policy since the 1930s has been ever larger transfers of wealth from young to old. Why should this change now? As long as there is one employed 23 year old somewhere in the country, there's someone who can pay more in taxes to let someone else retire at 62.
Bring on the waiting lists. Like Canada and UK.
If the Republicans had a better solution to Medicare then I'd like to hear it. Otherwise, I have no idea what we'll do but start rationing government provided care much more heavily than we do now.
I haven't heard of a proposed solution to Medicare from the Democrats, either. Seems to me that, before they enact a solution to all our medical problems, they ought to show what they can do by fixing Medicare, if they can.
Ah... but don't you see, it can't be fixed until they convert everything over to government run.
Just like gun control can't work until you can get the next county, next state, federal government and even the nations next door to fall in line.
Just like communism can't work until you keep spreading it to the next country.
We can always fix these problems if we just get the economies of scale right and limit the variation across space and time.
Don't you get it? Sheesh... :)
Sam identifies the argument that is always used when you question, "Why not fix Medicare/Medicaid's cost problems first?"
Megan
off topic but I encourage you to publicize to your readership this debate re"soaking the rich" and the vote on the Economist's website:
http://www.economist.com/debate/overview/142?source=most_commented
re: the MediCare/-Caid deal, Oregon has, already, gone through that 'conversation'--in the '90s..those 'studies', reports, results, reactions, are all over yon' Web..
MM,
as well, if you'd like to do a service to your Readership, as well as yourself, you'd do well to note the Gens X&Y v. BBoomer hostility that is beginning to evidence itself, and Write, Research, and Write some more, about it..
LSS: it will be a major Societal Schism in the years ahead..
"elderly people ... need to die sooner and in greater numbers. ....Bring on the waiting lists. Like Canada and UK."
One problem: according to the CIA, life expectancy in Canada and the UK is longer than in the USA.
Two problems. First, you need to review whether Canada and the UK are counting infant mortality the same way as the US. Second, you need to determine whether the life expectancy is coming from access to healthcare, or lifestyle choices.
Having a longer life expectancy on average is a small comfort if, at age 73 and otherwise fairly healthy, your social healthcare system puts you at the back of a long queue for prostate cancer treatments because you're too old. Contrawise, if you suffer a heart attack at age 57 and die, and the root cause was a sedentary lifestyle and too much McDonalds, then access to healthcare wasn't the real problem.
Yes, it's too bad that we've massively overinvested in housing for decades instead of in nonhousing fixed capital that might usefully increase productivity.
I dunno. If you count the imputed income from a paid-off house occupied by oldsters, it probably works out well because they don't need to rely as heavily on debt to fund their retirement and are therefore more able to absorb economic shocks.
As to whether society "should" live in little apartments and put the savings into factories, I like the house and yard I will hopefully own in 2 weeks, and I'm willing to forgo quite a bit of current and future consumption for it. You can have it when you drag my bullet-ridden body out, or alternatively when you offer me enough to by a comparable one somewhere else.
I have no idea what we'll do but start rationing government provided care much more heavily than we do now.
The choice is between "controlling" costs by rationing, discovering miracle productivity increases in medicine, or not controlling costs. There is a large opportunity cost to delivering excellent care, and you have to pay for it one way or another.
My gripe about the PBGC is that it doesn't function like insurance: premia aren't proportional to risk. It functions more like Social Security in which the rate rises as the draws on the system increase.
Anybody who says there is a "social security trust fund" to exhaust in the first place is either an idiot or a liar.
The minute SS turns cash-flow negative, the additional cash needed to fund the program will immediately start coming out of the Treasury general fund.
It is exactly equivalent to not having even an imaginary, notional trust fund at all.
Any moron who tells you that the "trust fund won't be exhausted until 2042" or whatever year he pulls out of his heiney needs a size 12 combat boot shoved in his ear.
There ain't no trust fund. It's a fiction, like the tooth fairy.
The difference between Democrats and small children, however, is that children are more willing to give up their belief in fictions like the tooth fairy.
The answer is obvious - soak the producers that much more. When that's not enough, soak em dry!
Megan:
With the holes laid bare, public pension funds scrambled to find some way to fill them without making politicians do something ridiculous, like raise taxes to pay for all the promises they'd made.
You say that sarcastically, but it is ridiculous. When a private corporation makes promises it can't keep, its creditors have to suck it up and accept less than they were promised. Likewise, when politicians make promises they can't keep, the reasonable thing to do is to tell the retirees that they're going to have to accept less than what they were promised. There's no reason taxpayers should be bled dry just so former government employees can get a bigger pension than is justified by their past contributions.