Promoting freedom, innovation, and growth

Connect with IPI

Receive news, research, and updates

February 14, 2018

Public Pensions Are Bad for Employees but Such Fun for Bureaucrats

  Dallas Morning News

In the course of the Dallas pension crisis we were surprised and shocked to learn that public pension fund managers can somehow go into the office every day, drink coffee and chat with colleagues, attend a parade of meetings and investment presentations, all the while knowing that the pension fund they oversee is an underfunded and underperforming disaster in the making.

But surprise and shock is the name of the game when it comes to public pensions. Dozens of pension systems are in even worse shape than Dallas' because the derelictions of management have not been discovered, or because politicians have been unwilling to do the heavy lifting to fix things.

According to the actuarial firm Milliman Inc., the 100 largest public pension funds are under 75 percent funded to meet their projected liabilities. This is a taxpayer catastrophe in the making, since for most public pensions, taxpayers are required to make up any gaps or shortfalls in benefits to public retirees. That's why Warren Buffett calls public pensions "gigantic financial tapeworms;" they're going to end up eating everything while their municipalities wither.

The private sector has wisely transitioned away from pensions toward defined contribution systems such as 401ks and 403bs because of the benefits to both workers and employers. Workers gain from having direct control and ownership of their retirement savings, while employers avoid the liability of not sufficiently funding their pension obligations.

So why have governments not done the same? The cynic in me thinks it's because retaining the pension model creates enormous opportunities for governments and the bureaucrats who run them. After all, who doesn't like having control over gigantic pools of money? It gets you invited to fancy parties and investment conferences, and it gives you the power to award management fees to friends and cronies, who will then owe you favors.

This kind of corruption between government officials and pension management companies turns out to be common. Former Pennsylvania Treasurer Barbara Hafer is now a convicted felon because she steered $700,000 in pension management fees to Richard Ireland, who then made six-figure contributions to Hafer's campaign accounts. And, of course, the FBI and the Texas Rangers are still investigating the Dallas pension disaster.

But the greatest temptation to mischief is the opportunity pension management gives bureaucrats to push their political agenda. Increasingly, public pension managers "divest" from politically (or bureaucratically) incorrect industries. CalPERS, the nation's largest public pension system, seems to use political correctness as a primary criteria, divesting from tobacco, gun manufacturers, oil and gas companies, nuclear, private prison operators, any company involved in the building of a border wall, and any company that might compete against a state government service. A 2015 report commissioned by CalPERS found that its various divestments had cost the funds $8 billion.

Similarly, New York City pension funds have just announced they are divesting from fossil fuels, which is projected to cost the funds $3 billion in lost returns over 20 years. This while four out of every five taxpayer dollars collected by New York City are spent paying down the city's public pension liabilities, according to the American Council for Capital Formation.

Is it too quaint to suggest that fiduciary duty requires the management of public pension funds to maximize returns instead of pursuing their own political agenda?

Putting politics before returns may explain why, despite paying higher-than-average investment management fees, public pensions consistently underperform stock and bond markets. In 2016, public pension funds averaged a third of the returns of their private counterparts — again, even while paying out higher management fees. Short of moving completely to a 401k model, most public pensions would be better off firing all their investment managers and simply investing in S&P 500 or Russell 2000 index funds. Fees would go way down, returns would go up, and opportunities for corruption would vanish.

The politicization, cronyism and bureaucracy of public pension management is a recipe for disaster. If governments really want to keep their promises to their first responders and other civil employees while avoiding calamity, wresting control away from bureaucrats and turning pension management completely over to the private sector should be a priority.


 

  • TaxBytes-New

Copyright Institute for Policy Innovation 2018. All Rights Reserved Privacy Policy Contact IPI.

e-resources e-resources