The looting of public pension funds

Private pensions are becoming a thing of the past.  Very few young Americans enjoy a secure retirement as I do, based on Social Security, a company pension and personal savings.  Now public employee pensions are going the same way as private pensions.  Matt Taibbi has an excellent report on this in Rolling Stone.

He wrote that the downfall of public employee pensions came in six steps.

  1. State and local governments offered generous pensions, sometimes in lieu of pay increases.
  2. Many of them failed to make their Annual Required Contributions to the funds which, as Taibbi noted, is financial fraud if unreported, because it means that governments are less solvent than buyers of state and local government bonds are led to believe.
  3. Many of them solved short-term financial problems by borrowing from their pension funds.
  4. All this came crashing down in the financial crash of 2008.
  5. Wall Street hucksters promised state and local governments that they could get higher returns by putting the pension funds into high-risk investments.  Huge fees were paid to fund managers, but the high returns haven’t materialized.
  6. The proposed solution is to give firefighters, police officers and school teachers less than they were contractually promised.

protest-Public pension fund would be in better shape if they had simply invested in U.S. Treasury bonds or on low-fee stock index funds.  Instead pension funds were turned over to managers to charge exorbitant fees for speculative investments that in the long run underperformed the market.

Now, Taibbi wrote, public employees are being made to suffer for mismanagement by the trustees of their retirement funds.  Maybe it will have to come to that, he wrote, that should be a last resort, not a first resort.  Before that, local government should end corporate subsidies and try to claw back the excessive fees.

In 1976, Peter F. Drucker, then considered a top business thinker, wrote a book entitled How The Unseen Revolution: Pension Fund Socialism Came to America.  He said that workers in the United States in effect owned the means of production because of the stocks and bonds owned by their pension funds.

The title was an exaggeration.  Pension funds only owned about 16 percent of publicly traded stocks and bonds, measured by market value.  But Drucker thought that pension funds would become more and more important, and the interests of workers would become more and more aligned with investors and holders of financial assets.

That didn’t happen, because the workers did not in fact control the pension funds.  It is interesting to speculate what would have happened if they had leveraged their financial power to influence corporate policy.   It is interesting to speculate on what would happen if they did so now.

Click on Looting the Pension Funds: How Wall Street Robs Public Workers for Taibbi’s full article.  I didn’t do justice to it, and it is worth reading in its entirety.  Taibbi is a first-rate investigator and clear and eloquent writer.

Click on Who Rules America: Pension Fund Capitalism for a debunking of the Drucker thesis (which I admit I took seriously at the time) by G. William Domhoff.

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