COMMENTARY:
Politicians put taxpayers at risk chasing gain for pension plans
Posted on February
16, 2012
By Frank Keegan | State
Budget Solutions
Politicians
are setting up taxpayers and government workers for an even bigger crash by
forcing retirement funds into risky investments, chasing gains required to pay
promised benefits. That means trillions of dollars in higher taxes to provide
no services or millions of betrayed public workers who will not get pension
checks.
The public
pension crisis just keeps getting bigger every year, as governors and
legislators fail to deal with it, and fund managers have to go after higher and
higher returns.
A recent Upjohn Institute “Analysis of Risk-Taking Behavior for Public Defined Benefit Pension Plans”
concludes: “An investment policy of increasing risk exposure on the asset side,
while liabilities continue to increase with near certainty, can be a very poor
gamble. Why would managers play this game?
“One motivation might be political decisions to make certain
investments. Another could be transferring funding shortfalls as tax burdens to
future generations. In addition, bargaining by unions could result in higher
benefits, accounting incentives tend to guide behavior, and states may feel
pressure because of fiscal constraints.”
Politicians want to project higher return rates,
because that means less money they have to put in every year. Assuming delusional
rates of return on investments lets them “balance” annual budgets by borrowing
from retirement funds. That hidden debt just gets bigger every year.
By the time it comes due, they will
be safely out of office. All state and municipal politicians have been pushing
this time bomb into the future for decades. Now the clock is ticking down. None
of them want to be holding it when it detonates.
The idea is simple. If you double the rate of return over 30
years, you only have to invest a third of the money required to pay the
benefit.
At 8 percent — which is the rate public pension plans use — you only have to invest 6 cents to pay $1 in
benefits 30 years from now.
At 4 percent return, you have to invest 18 cents this year
to pay $1 in benefits three decades from now.
Most lawmakers haven’t even been investing the 6 cents. And
what they did invest, pension fund managers recently lost after pocketing
billions of dollars for themselves and their cronies.
In just four years through 2010, 222 state pension funds
lost $1.46 for every dollar “contributed” by taxpayers through state
governments and employees.
It all adds up to trillions of dollars somebody must pay.
Sure, all investors are dealing with 30-year, 15 percent,
risk-free bonds recently rolling over into 3 percent bonds. And the Federal
Reserve Bank’s ongoing policy of keeping interest rates artificially low makes
it harder for pension fund managers to lie about how much they are going to
gain.
Thirty years ago to guarantee $1 in benefits to be paid in
2011, you had to invest less than 2 cents. Right now to guarantee a $1 benefit
in 2042, you must invest about 22 cents. Politicians do not want to do that.
So now they are shifting into riskier investments
— which puts even more billions of dollars into insiders’ pockets
— to try to claim future returns politicians can use to justify paying
even less into pension and retiree health-care funds.
It is a perfect circle of deceit, corruption and racking up
debt somebody else will have to pay.
Actuaries, the people who do the detailed accounting on
pensions, call it “moral hazard.”
The fiscal immorality is all on politicians, but all the
hazard is on taxpayers present and future.
Pension managers are betting our money that there never,
ever will be another market downturn, and overall economic growth and
investment gains will be beyond any in history.
If they are wrong, we pay the price. Even the Pew Center
on the States’ “Widening Gap” study, which showed a 26 percent
increase in state and municipal retirement debt in just one year using official
assumptions, admits the debt actually doubles when calculated realistically.
The Upjohn report cites as an example an average Ohio teacher. For that
one teacher, the State
Teacher Retirement System will have only $518,000 in the bank to
cover $1.3 million in pension checks, according to standard calculations used
by everyone but governments.
STRS admits, “… long term, there is a shortfall in the
funding …. If no changes are made, STRS Ohio
will eventually be unable to pay pensions,” and says “The current expected
long-term actuarial rate of return of 8 (percent) … cannot be raised; STRS Ohio cannot count on
higher investment returns as a solution.”
The board does not explain how they plan to get even 8
percent. But the Ohio Public Employees Retirement System last week
revealed one way it plans to get the big bucks: hedge funds.
Ohio’s five state
pension funds lost $31.4 billion, down 19.4 percent, from 2007 through 2010.
And 2011 is not exactly shaping up to be the year they got it back, plus the 8
percent a year they continue to claim they will always get every year forever
even when stark reality proves they never will.
Their solution is to double down on hedge funds, among the
riskiest and most expensive investments anyone can make.
Even using delusional accounting, Ohio state pensions are only 66 percent
funded, and politicians are not making full contributions, according to Pew.
The retirement health-care fund is even worse at 31 percent funded and only 40
percent of the already low-ball annual contribution.
This supports the Upjohn finding that “managers take on more
risk if the plan is underfunded and experienced poor
investment returns in the previous three or five years. …” and, “… higher union
membership percentages and a higher percentage of employees covered by
collective bargaining are associated with more risk.”
Of course, none of that risk is on fund managers,
politicians or government workers. It’s all on taxpayers, the only people not
invited to the table.
Frank Keegan is editor of Statebudgetsolutions.org,
a project of sunshinereview.org. The State Budget
Solutions Project is nonpartisan, positive, pro-reform, proactive and anchored
in fundamental-systemic solutions. The goal is to successfully engage political
journalists/bloggers, state officials and opinion
leaders in a new way of thinking about state government and budgets,
fundamental reforms, transparency and accountability.
frankkeegan@statebudgetsolutions.org
http://watchdog.org/13473/commentary-politicians-put-taxpayers-at-risk-chasing-gain-for-pension-plans/