Massive Pension Fund Crisis in the US
By
Henry C.K. Liu
This article appeared in AToL on October 31, 2008 as: Balck
Hole Gapes for Pensions
More than three years
before the current financial
crisis, in a series Greenspan,
the Wizard of Bubbleland that began on September 14, 2005, I warned:
Through
mortgage-backed
securitization, banks now are mere loan intermediaries that assume no
long-term
risk on the risky loans they make, which are sold as securitized debt
of
unbundled levels of risk to institutional investors with varying risk
appetite
commensurate with their varying need for higher returns. But who are
institutional investors? They are mostly pension funds that manage the
money
the US
working
public depends on for retirement. In other words, the aggregate
retirement assets
of the working public are exposed to the risk of the same working
public
defaulting on their house mortgages. When a homeowner loses his or her
home
through default of its mortgage, the homeowner will also lose his or
her
retirement nest egg invested in the securitized mortgage pool, while
the banks
stay technically solvent. That is the hidden network of linked
financial
landmines in a housing bubble financed by mortgage-backed
securitization to
which no one is paying attention. The bursting of the housing bubble
will act
as a detonator for a massive pension crisis.
Now in October 2008, while the US government is busy bailing out
wayward
banks, public pension funds operated by states and municipalities are
facing
their worst year of loss in history, exacerbating cumulative funding
shortfalls
of past decades of credit bubble and putting pressure on distressed
state
governments to shore them up to avoid pending default.
In the nine months to the end of September, the average state and
municipal pension
fund lost 14.8% of its market value. The loss has deepened as global
financial
markets fell sharply in October. The loss has more than double previous
highest
loss for state funds, which registered 7.9% for the full year in 2002.
Few
market analysts expect equity prices to bottom any time soon, let alone
a
recovery, and many are resigned to the prospect of years of asset
deflation and
economic stagnation.
California’s Calpers, the biggest
public pension fund in the US,
in the week ending October 24 reported a loss of 20% of its asset
value, or
more than $40 billion, in the quarter between July 1 and October 20, 2008.
State and local pension funds comprise a patchwork of 2,700 funds that
manage $1.4 trillion on behalf of 21 million public employees,
including teachers,
firefighters, policemen and other municipal workers.
About 40% of these funds are under-funded, meaning that they would not
be
able to pay the future pensions promised to public employees. State
governments
have raised pension benefits to keep up with inflation, betting on a
growing
wealth effect from fund investments to meet higher payments. It was
part of the
flawed rationale that called for the privatization of social security.
Just
like the social security trust fund, pension funds are money that
belongs to
the workers who are required to contribute into them out of their
payroll
deductions and matched by public funds as part of workers’ employment
benefits.
These funds are not charity payments from government employers. They
are
compulsory savings of public sector workers.
Richard Daley, mayor of Chicago,
hometown of Democratic presidential candidate Barack Obama, has
convened a
taskforce to address the shortfalls in Illinois
funds. For example, funding for the Police Fund has fallen to less than
50% of
requirement. The situation is actually more ominous. The calculation is
based
on an assumption of annual returns of 8%, but very few funds will reach
that level
of return in the next few years. Most funds will be lucky to escape
further
losses in the current market meltdown.
The city of Chicago would
have
to start contributing substantially more to the fund out of its general
revenue
and from Federal and state subsidy. Public employees are faced with the
prospect of being required to contribute more from their payroll
deductions.
And Chicago is not unique
in its
public pension problem. Every city and state of the union is in similar
difficulty.
A vicious downward cycle is emerging as state and local governments
face lower
tax revenue that put pressure to cut costs. Congress is pushing for a
second
fiscal stimulus package, in part to alleviate pressures on state
pension funding.
Nancy Pelosi, speaker of the House of Representatives, cited money lost
from
pension funds in her push for an additional $150 billion second
stimulus
package.
The public pension funds themselves have limited options. Many are
under
pressure to move away from the stock market into less risky
investments, but
that would mean suffering more capital loss in this market environment
and reducing
returns in the future.
Why hard-working public employees have to pay more to make
up the losses in their pension funds managed by irresponsible
professionals who
were supposed to protect their hard-earned capital when the bankers
whose greed
were responsible for the financial tsunami that caused the losses are
awarded
with obscene golden parachutes? Because, according to Republican
candidates McCain
and Palin, Joe the plumber thinks that forcing rich bankers to pay for
the
losses they engineered and put on the backs of public workers would be
to
practice “socialism”.
October 29, 2008
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