The Great Pension Fund Hoax
When Bernie Madoff cheated thousands of investors out of their life’s savings, he went to jail. Michael Milken went to jail for ten years and paid a $600 million fine for failing to file necessary securities reports about his high yield bond trading. So, what should happen to public officials who have engaged in fraudulent management of pension funds for millions of government employees?
Bernie Sanders and Hillary Clinton almost daily call for throwing “Wall Street” scammers in jail. They have been silent about government officials who have perpetrated much larger and more obvious scams—not on voluntary investors, but on public employees and taxpayers who usually had no choice but participate in the public retirement plans. Both candidates, of course, are beneficiaries of public pensions and of donations from the public officials who run the pension scams.
Hundreds of counties and municipalities, maybe thousands, will not be able to pay the pensions that they promised their workers or which they created to win the money and votes of employee unions. The simplest part of their fraud is very easy to understand.
In order to promise public employees comfortable to luxurious pensions, many governments simply chose a return on the invested funds that would yield the required pension benefits. They also made assumptions about how long pensioners would live. Requiring pensioners die early and requiring unrealistic rates of return on investment, allowed governments to claim that 10 or 20 years from now, they could support present workers in a style to which the rest of us are not accustomed. That includes most private sector workers.
In 2009 New York City had about 275,000 retired workers on pension. They received $6.7 billion in benefits. The city didn’t have the money in the retirement fund. It took the money from general revenues. That means they took it from money that could have paid for schools, homeless shelters, hospitals, or roads. How did this happen?
The city estimated a 7% return on its pension funds. It received 3.4%, less than half. Depending on how one estimates, the city was $70 to $150 billion short on pension funds. The rosy 7% return on investment that helped create the shortfall was like those Madoff returns, a hoax to keep the members happy and ignorant. Federal Reserve and bank deposit interest rates were below 2%. Prudent stock investors considered 3-4% the best they should hope for.
This past week Chicago, the President’s hometown run by his former chief of staff, reported a pension liability of $18.6 billion, more than double from the year earlier. The fraud was uncovered by new rules that have long been used by the private sector. The city plan had to apply realistic rates of return for the growth of the pension funds. The city had been using 7.5%.
States and cities have also been investing billions of dollars of retirement funds through hedge funds. Those are the very Wall Street financiers that are the most heinous villains in Bernie Sanders’ campaign—the people he wants to send to jail. A teachers’ union analysis recently found that the hedge funds investments cost way more in commissions and returned less than funds invested outside the hedge funds. Nevertheless, CNBC reported earlier this month, “Large public pensions planning or considering an increase to their hedge fund allocation are the California State Teachers Retirement System, and the general state pensions of Massachusetts and North Carolina.” One is almost tempted to conclude that liberal states love Wall Street hedge funds.
The fraud is everywhere. The average rate of return used by state and local governments is 7.62%. According to the National Association of State Retirement Administrators only 10% of public funds estimate rates of return at less than 7%. The Administrators say 51% use rates over 8%. In other words, almost all public employees are being duped by the kind of promises that put Madoff in jail. They are being duped by accounting gimmicks far worse than those that sent Milken to jail.
The pension problem has been aggravated by the artificially low interest rate experiment that the Federal Reserve, with government support, has been running since 2009. Because the yields on government bonds has been kept below 2%, investors, including pension fund managers, have been desperate to chase higher yielding investments in stocks and corporate bonds. As they bid up the price of a stock or bond, its yield decreases. (I.e. a $10 return on a $100 stock or bond is 10%. If investors hungry for such a return bid up the price to $150, the return is 6.6%.)
How can politicians and public employee unions avoid this disaster that is building as certainly as pressures on the San Andreas fault? Tax the rich is the quick answer. Also a fraud. No conceivable tax on the rich would make the pension funds solvent again—even if the rich had no loopholes (like giving to the Clinton Foundation), and even if all the revenues went to pension funds. (Many rich people are already moving out of high tax cities and counties.) The only other answer is for the federal government to print trainloads of new money. That would cause inflation—the ability to pay promised pensions with dollars that buy far less transportation, food, clothing, housing, or medical care than anyone planned for.
Inflation, of course, would bring higher interest rates on government debt at a time when the national debt of some $19 trillion has almost doubled in the last 8 years. Washington and all other governments with debt would face soaring interest expenses.
Why aren’t the candidates talking about some fuzzy thing called “Wall Street” but not about this massive and widespread scam in state and local governments with names? As present and future benefits are taken back and more and more cities go bankrupt taxpayers will join beneficiaries in revolt. But that won’t happen before the November elections. Or are the beginnings of that revolt already energizing the Trump campaign?
Chicago's imploding economy leads to requests for the Illinois legislature to bail it out. The reasoning? It's too big to fail. Doesn't this situation which has already played out in Detroit and California cities suggest that the real problem with "too big to fail" handouts is not in the private sector but with governments and politicians? Hello, Senator Sanders? Mrs. Clinton? Boss Trump? Occupy Wall Street?