If you believe what the Pew Foundation or Brookings Institution has to tell you or The New York Times or The Wall Street Journal, unfunded pension liabilities threaten to sink state and local governments nationwide. Liabilities are painted as the issue the public needs to know about when it comes to retirement.
Estimates of the debt facing public sector pension plans range from $2 trillion to $4 trillion. Those seem like big numbers — and they are — but those obligations are to be paid out over the next 30 years. It’s for good reason that only one public sector pension fund has run out of money since the Great Depression. Yet editorial pages across the country use the unfunded liability argument to advance a right-wing agenda of cutting people’s benefits.
In Detroit, public sector retirees have lost cost-of-living adjustments, meaning that they will get poorer as they age. In San Jose, California, pension reform there has led to massively increased turnover as experienced public sector workers depart for parts of the state where their pensions will be secure.
What the obsession with unfunded liabilities misses, however, is the actual and current emergency facing pension funds: Wall Street grifting. Valued at more than $5.3 trillion, public pension funds have for decades been a cash cow for finance. Pensions buy up shares in private equity and hedge funds, complex derivatives and foreign currency at prices higher than what they are worth — earning Wall Street billions in profits, according to Edward Siedle, a leading expert on public pensions. Leading banks have recently been caught in scandal for manipulating foreign exchange prices for their pension fund clients.
The most underreported data point in this regard is a 2007 dispatch from the Governmental Accountability Office (GAO), Congress’ investigative arm. It examined 24 pension investment consultants, by far the most influential actors when it comes to where pension assets are invested.
The report found that 13 of the 24 — including the largest players in the business — had significant conflicts of interest, largely consisting of accepting fees and other considerations from investment firms the consultants recommended. Those 13 had, at the time, over $4.5 trillion in assets under advisement. The GAO found that the average return by the pension funds advised by conflicted consultants was 1.3 percent lower than other plans.
The report’s enduring salience prompted Rep. George Miller, D-Calif., the top Democrat on the House Education and Labor Committee, to request in June that the Department of Labor further investigate conflicts of interest among investment consultants.
Besides underperformance caused by conflicted investment consultants, management problems are widespread. The mortgage-backed securities and complex derivative products that caused the financial crisis were bought in massive quantities by public pension funds, which were left holding the bag when the schemes imploded.
There’s also the problem of overcharging. The top 25 hedge fund managers make an average of $1 billion annually, much of that drawn from the outsize fees paid by public pension funds. Fees for hedge funds, private equity and real estate managers are typically 2 percent of assets committed and an additional 20 percent on profits earned, as opposed to fees as low as 0.01 percent on assets for index funds. Yet hedge funds typically fail to offer superior performance, and most of the studies that show good results for private equity suffer from significant problems.
A slew of scandals has hit public pension funds, from the former comptroller of the state of New York, who was sent to prison, to the former CEO of the country’s largest state-based public pension fund, the California Public Employees’ Retirement System. Both were implicated for their roles in placing investments in highly opaque alternative investments such as private equity and hedge funds at the pension funds they oversaw.
Yet not even these scandals have drawn sufficient attention to the problem. The New York Times, despite having multiple reporters on the pension and investment beat, declined to cover Miller’s campaign. Pew, which has a huge pension practice (much of it funded by hedge fund manager John Arnold), has never written anything about conflicts of interest among investment consultants — or any of the other issues facing pension investments. Brookings crows about unfunded liabilities but likewise has not published anything about public pension funds’ abusive relationship with Wall Street.
And of course, the politicians most eager to cut pension benefits — notably Illinois Gov.-elect Bruce Rauner and Rhode Island Gov.-elect Gina Raimondo — have clear conflicts of interest when they clamor about the necessity of addressing their states’ unfunded pension liabilities. Rauner and Raimondo have large holdings in the private equity firms they previously managed, and the firms — GTCR and Point Judith Capital, respectively — manage millions for public pension funds in the two states.
Wall Street wants public discussion on pensions to focus on unfunded liabilities to deflect attention from the real problem: Nearly every major bank, hedge fund and private equity firm makes big money off pension funds. For a fund to run out of money is exceedingly rare. It is the mother of all red herrings — a carefully crafted plan to keep the public distracted while Wall Street walks to the bank.
The bludgeon of unfunded liabilities is then used to cut retirement benefits to teachers, firefighters and transit workers.
Pushing to cut benefits to public sector workers would be counterintuitive for Wall Street if that led to less money in the pension funds that managers make so much money on. But moves to cut benefits almost always coincide with manipulations to make pension funds seem worse funded than they are. In Detroit, the first major city to cut pension benefits in bankruptcy, the emergency manager lowered the assumed rate of return, which made the pension funds appear less funded, and mandated an additional infusion of cash from the city.
This double movement of lowered assumed rates of return and cutting benefits means that Wall Street can have its cake and eat it too, with more money in pension funds for managers to grift from and less paid out in benefits.
Fundamentally, by obsessing over long-term obligations, the corporate media and influential foundations distract from the core of the problem: Wall Street has its hand in the pension kitty. Hard-won benefits are not the problem; Wall Street is.