RandomGuy
02-25-2011, 03:46 PM
Hidden Pension Fiasco May Foment Another $1 Trillion Bailout
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alwTE0Z5.1EA
LONG article. Here are the highlights from this 2009 article:
Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy.
The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.
30 Percent Shortfall
The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.
With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.
That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years -- more than half of them since 1997 -- public records show.
The quick fix for pension funds becomes a future albatross for taxpayers.
...
By law, states must guarantee public pension fund debts.
“What appears to be a riskless strategy is actually very risky,” says David Zion, director of accounting research for New York-based Credit Suisse Holdings USA Inc. “If the returns on the pension bond-financed assets don’t exceed the cost of servicing the debt, the taxpayers bear the brunt.”
With the recession that started in December 2007, cities and states are running huge deficits, which they’re closing by cutting services and firing employees. The economic downturn gives state legislatures another reason to cut back on funding pensions.
Government retirement plans nationwide don’t calculate their shortfalls based on market values of their assets and liabilities, says Orin Kramer, chairman of the New Jersey State Investment Council, which oversees that state’s pension fund.
Paper Over Losses
Fund accountants resort to a grab bag of tricks to get by. They set unrealistically high expected rates of return to reduce governments’ annual contributions. And they use smoothing techniques to paper over investment reverses so they make losing years look like winners.
Accountants do that by averaging gains and losses, usually over a five-year period -- sometimes for as long as 15 years of investment returns.
That means actual results of any one year aren’t used to calculate how much a state legislature contributes, which can delay governments catching up with losses for more than a decade.
This ruse can pass the buck to future taxpayers, who will pay for the retirement benefits of today’s government workers.
“There are accounting gimmicks in pension land which create economic fictions and which disguise the severity of the real problem,” Kramer says. “Unfortunately, pension board members don’t have much of an appetite for disclosing inconvenient truths.”
...
Actuaries consistently permit public pension funds to report artificially high expected rates of return -- most often 8 percent and as much as 8.75 percent. That’s more than the 6.9 percent billionaire investor Warren Buffett sets for his Omaha, Nebraska-based Berkshire Hathaway Inc.’s pension fund.
“Public pension promises are huge and, in many cases, funding is woefully inadequate,” Buffett wrote in his 2008 letter to shareholders. “Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed.”
Determining how much expected rates of return should be isn’t complicated, says Rowe, who oversees Texas pension funds.
“Why do they choose high expected rates of return?” he says. “The only reason is to sneak through promising a lot to pensioners -- which means worrying about it later. It’s madness.”
I left out a lot.
Read it.
Be afraid.
You think people are pissed off now about debt, deficits and taxes.
You have not seen but the tip of the iceberg.
Yes, I fully agree that entitlements like Medicare have to be cut, as will Social Security.
I also know that these pension funds, both government and private corporate, will not pay near what they promise. Neither governments, nor companies have put enough money in.
If you aren't saving money now, and think your SS or pension will save you, you are well and truly fucked, if you will paron my choice anglo-saxonism.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alwTE0Z5.1EA
LONG article. Here are the highlights from this 2009 article:
Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy.
The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.
30 Percent Shortfall
The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.
With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.
That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years -- more than half of them since 1997 -- public records show.
The quick fix for pension funds becomes a future albatross for taxpayers.
...
By law, states must guarantee public pension fund debts.
“What appears to be a riskless strategy is actually very risky,” says David Zion, director of accounting research for New York-based Credit Suisse Holdings USA Inc. “If the returns on the pension bond-financed assets don’t exceed the cost of servicing the debt, the taxpayers bear the brunt.”
With the recession that started in December 2007, cities and states are running huge deficits, which they’re closing by cutting services and firing employees. The economic downturn gives state legislatures another reason to cut back on funding pensions.
Government retirement plans nationwide don’t calculate their shortfalls based on market values of their assets and liabilities, says Orin Kramer, chairman of the New Jersey State Investment Council, which oversees that state’s pension fund.
Paper Over Losses
Fund accountants resort to a grab bag of tricks to get by. They set unrealistically high expected rates of return to reduce governments’ annual contributions. And they use smoothing techniques to paper over investment reverses so they make losing years look like winners.
Accountants do that by averaging gains and losses, usually over a five-year period -- sometimes for as long as 15 years of investment returns.
That means actual results of any one year aren’t used to calculate how much a state legislature contributes, which can delay governments catching up with losses for more than a decade.
This ruse can pass the buck to future taxpayers, who will pay for the retirement benefits of today’s government workers.
“There are accounting gimmicks in pension land which create economic fictions and which disguise the severity of the real problem,” Kramer says. “Unfortunately, pension board members don’t have much of an appetite for disclosing inconvenient truths.”
...
Actuaries consistently permit public pension funds to report artificially high expected rates of return -- most often 8 percent and as much as 8.75 percent. That’s more than the 6.9 percent billionaire investor Warren Buffett sets for his Omaha, Nebraska-based Berkshire Hathaway Inc.’s pension fund.
“Public pension promises are huge and, in many cases, funding is woefully inadequate,” Buffett wrote in his 2008 letter to shareholders. “Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that the problems will only become apparent long after these officials have departed.”
Determining how much expected rates of return should be isn’t complicated, says Rowe, who oversees Texas pension funds.
“Why do they choose high expected rates of return?” he says. “The only reason is to sneak through promising a lot to pensioners -- which means worrying about it later. It’s madness.”
I left out a lot.
Read it.
Be afraid.
You think people are pissed off now about debt, deficits and taxes.
You have not seen but the tip of the iceberg.
Yes, I fully agree that entitlements like Medicare have to be cut, as will Social Security.
I also know that these pension funds, both government and private corporate, will not pay near what they promise. Neither governments, nor companies have put enough money in.
If you aren't saving money now, and think your SS or pension will save you, you are well and truly fucked, if you will paron my choice anglo-saxonism.