Catastrophe: it’s a word thrown around a lot of late. We’d prefer to tone it down a bit, with words like “crisis”, or, even better “problem.” But “catastrophe” might be the right word, in the case of pensions.
There are getting to be serious problems with pension funds.
Investors who once considered their retirements safely protected wake up to a sinking feeling of uncertainty and gloom.
Sound like the great mortgage-fueled financial crisis of 2008? Sure. But it also describes a calamity likely to hit as soon as 2009. State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.
(The Next Catastrophe, John Entine, Reason Online, 2/09)
The author is death on social responsible investing.
But leaving that aside, there’s a more fundamental problem, two actually.
The first, hardly surprising, is the decline rate of return on these investments. Declining, in fact, into the red, in large part due to the reckless investment practices of the fund managers.
Thus, Mass. pension fund off $16.1b (Boston Globe, 12/25/08); it’s down over 30% for 2008. New Jersey is in all kinds of money trouble, especially with pensions (N.J. lawmakers table bill…, Philadelphia Inquirer, 12/16/08).
The second is that these declines actually in many cases have reduced the principal amounts of these funds to levels below their ability to meet obligations; they’re “underfunded.”
As equities lose their attractiveness, public pensions may have to look to corporate bonds and real estate to get investment returns. Are these investments likely to produce historical rates of return that equities have? It’s very unlikely. Governments may be forced to conduct fire sales of their properties just to raise cash to meet their pension obligations.
Something will have to change. Without a restored boom in stock prices, public pension funds will have a very hard time meeting their obligations. Either governments will have to increase taxes – perhaps dramatically – or force public employees to endure the same risks and potentially anemic returns the rest of us may be up against. Given the size of these funds, and the enormous political power of government workers, this may create one of the major political conflicts of the coming decade.
(Public Pension Troubles Loom for State and Local Governments, newgeography, 2/5/09)
Oh yes, and there’s a third problem, but not everywhere, we hope! That’s the problem of over-generous plans (Gilt-Edged Pensions, Forbes, 1/22/09) and, of course, scams (Retired, Rehired, Hartford Courant, 2/8/09).