Sunday, September 12, 2010


How to Cheat a Retirement Fund

A FEW weeks ago, at the insistence of the Securities and Exchange Commission, New Jersey agreed never again to fraudulently hide its underfunding of the state’s public pension system. Meanwhile, in Albany, Harry Wilson, the Republican candidate for state comptroller, has asserted that — if you do the math the way any ordinary financial analyst or economist would — New York’s pension system is underfunded by tens of billions of dollars and that, as a result, the state is essentially insolvent.
These little tempests are likely to soon recur in many other states and cities nationwide, because so many governments have invested far too little money in their public pension funds. Retirement promises made to public employees represent a huge hidden liability for future taxpayers — helping ensure recurrent deficit crises for state and local governments.
The S.E.C. is now making inquiries about the underfunding of other public pensions, and its assertiveness is welcome. But this effort cannot ultimately fix the problem, because all the S.E.C. can do is force states to follow the budgeting rules that are set by the Governmental Accounting Standards Board. These rules offer, at best, only the illusion of transparency, because they allow governments to base their budgets on economic fictions.
Consider, for the sake of comparison, how private corporations, in measuring the value of the assets in their pension systems, are required to use real portfolio market prices. Government accounting standards, in contrast, allow public pension systems to measure their assets based on average values looking back over a period of years. In most instances those average values add up to a figure that is much higher than the amount of money the pension plan actually has.
Public pension funds are also allowed to make assumptions about future investment returns that many of us would regard as overly optimistic. And since those assumed returns are incorporated into measurements of the fund’s status, as if they had already been realized, states that come up with the most rosy market forecasts look, on paper, to be better financed.
This government accounting mirage adds up to an enormous national problem. If you use the most recent data from government accounting standards, the collective shortfall for state and local governments nationwide appears to be about $1 trillion. If you use corporate accounting standards to estimate the value of those public pensions, however, you come up with a shortfall two and a half times as large — about $2.5 trillion. Employing a third approach that assumes, as economists generally do, that even corporate accounting standards in this area are too lenient, public pension underfunding is about $3.5 trillion, or one-quarter of gross domestic product.
To make matters worse for state budgets, hidden underfunding of public employees’ health retirement costs is even greater than that of their pensions.
Ideally, managers of public pension funds would not only work with realistic budgets but also recognize that they have intergenerational obligations — to optimize returns over decades so that the fund can responsibly pay retiree pensions long into the future. There’s a rising understanding among thoughtful pension fund leaders, for example, that sustainable investment performance must permit consideration of the environmental, human rights and other public-interest effects of investments. In practice, however, pension fund managers tend to focus on narrow economic criteria and short-term performance.
Ultimately, to respond to their fiscal imbalances, many state and local policymakers will need to make painful cuts in financing for state universities, hospitals, local schools and municipalities. Increasingly, they will make controversial decisions to privatize roads, parking meters and other public services.
When a government allows its fiscal problems to become too great — as New York City’s did in the 1970s — it reaches a point where it can no longer borrow money. Municipal bondholders may comfort themselves that the federal government would never allow a state to default. But the federal government should not be expected to provide special aid to states that do not address structural budget deficits. New York’s crisis allowed it to conduct some unprecedented budget-cutting — but the price of austerity is greatest if you wait for crisis to strike.
Accounting is inevitably an artificial language that can distort some economic truths. But at the least, government accounting should aim for greater transparency and consistency, allowing outsiders to compare one jurisdiction against another. At the same time, the social contracts that exist today in many places among taxpayers, beneficiaries of public services and public employees need to be renegotiated before a crisis arrives.

They say cities and states will have to start selling assets like tollways and parking meters to balance their pension funds. Ha. We're really screwed. Better load up on your 457b and whatever else you got. You may not have much else at retirement time. What a mess!

1 comment:

  1. Off topic...

    If you don't want to answer a red light then take off the white shirt and get on the radio or answer some calls.

    Maybe the next time you get up and walk out when I turn my light on, I'll put it on a few more times.