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Taibbi on How Wall Street is Looting Public Pension Funds

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You must go, pronto, and read Matt Taibbi’s latest expose, on how hedge funds are plundering public pension funds, meaning pension funds managed on behalf of government employees like policemen, sanitation workers, and teachers. Taibbi describes how a concerted PR campaign has made workers the scapegoats for large pension shortfalls when in fact public officials and unscrupulous financiers (both through their machinations with these funds and via damage done by the global financial crisis) are the real perps.

Taibbi describes how the fact that they are exempted from ERISA meant their overseers, state and local politicians, could play fast and loose. As he explains:

Politicians quickly learned to take liberties. One common tactic involved illegally borrowing cash from public retirement funds to finance other budget needs. For many state pension funds, a significant percentage of the kitty is built up by the workers themselves, who pitch in as little as one and as much as 10 percent of their income every year. The rest of the fund is made up by contributions from the taxpayer. In many states, the amount that the state has to kick in every year, the Annual Required Contribution (ARC), is mandated by state law.

Chris Tobe, a former trustee of the Kentucky Retirement Systems who blew the whistle to the SEC on public-fund improprieties in his state and wrote a book called Kentucky Fried Pensions, did a careful study of states and their ARCs. While some states pay 100 percent (or even more) of their required bills, Tobe concluded that in just the past decade, at least 14 states have regularly failed to make their Annual Required Contributions. In 2011, an industry website called 24/7 Wall St. compiled a list of the 10 brokest, most busted public pensions in America. “Eight of those 10 were on my list,” says Tobe.

Among the worst of these offenders are Massachusetts (made just 27 percent of its payments), New Jersey (33 percent, with the teachers’ pension getting just 10 percent of required payments) and Illinois (68 percent). In Kentucky, the state pension fund, the Kentucky Employee Retirement System (KERS), has paid less than 50 percent of its ARCs over the past 10 years, and is now basically butt-broke – the fund is 27 percent funded, which makes bankrupt Detroit, whose city pension is 77 percent full, look like the sultanate of Brunei by comparison.

Here’s how it played out in New Jersey, as we wrote in 2011:

And how exactly did the crisis “reveal” that some pension funds were close seriously under water? A more accurate rendition would be that, at least in New Jersey, the state has been raiding the pension kitty for over 15 years. This is not news to anyone who has been paying attention, any more than underfunding of corporate pensions. In the Garden State’s case, Governor Chris Christie skipped the required $3.1 billion pension fund contribution last year. He claimed this move was to force reform, but what impact does another $3.1 billion failure to pay have on an unfunded liability that was already over $50 billion?

The shell game started in 1995 with Christine Todd Whitman. As Bob Herbert reported:

Now many of the gains made over a quarter of a century are in danger of slipping away because the current Governor, Christine Todd Whitman, has chosen to finance her political ambitions with a popular buy-now, pay-later economic policy that will place a financial stranglehold on future generations of New Jerseyans….

This is best illustrated by Mrs. Whitman’s decision to withhold billions of dollars that should be going into the public employee pension funds over the next few years, and using the bulk of that money to balance the state budget. Then, with an audacity that dazzles her supporters and even draws grudging admiration from opponents, Mrs. Whitman smiles and characterizes the withheld funds as savings.

Of course, they are not “savings” — not in any sense of the word. The pension obligations at some point will come due and future generations will have to meet them.

Not only will the money have to be made up, but future taxpayers will be deprived of the income that the money — if properly invested now — would be expected to generate…The changes that she has made have been drastic. According to the New Jersey Education Association, which has filed suit against the state, the employer contributions to the pension system this year will be as much as 96 percent below the amounts contributed in the early 1990′s.

The state also did a swell job of investing the money it did have. Per a 2009 FireDogLake article:

Orin Kramer is also Chairman of the New Jersey State Investment Council, which is tasked with oversight of the state’s public pension system. In 2006 he successfully pushed to shift a huge chunk of the state’s $72 billion pension fund to private money managers rather than state employees. Kramer was the “prime architect of the diversification strategy” that saw union retirees pick up the tab for $115 million in Lehman Brothers losses on money invested shortly before the firm’s collapse

And the Lehman losses were not a one-off; New Jersey has the dubious distinction of being the only state ever reprimanded by the SEC for pension mismanagement, including phony accounting

Oh, and who is Orin Kramer? He’s the epitome of the problem Taibbi focuses on in his piece, the politically connected hedgie. His firm, Boston Provident, manages hedge funds. He was under consideration to be the #2 at Treasury under Jack Lew. Here’s what we wrote when his name was mooted:

And as for the real reason for Kramer being on the short list, it’s undoubtedly due to his being a monster bundler for Obama. I’m clearly behind the times; I thought fundraising payoffs were limited to ambassadorships and heading organizations like the Export-Import Bank. Now I infer you can buy yourself a seat at the table. In 2008, the New York Observer called him “King of the New York Obamasaurs“. In 2012, WNYC listed Kramer as one of only two New York bundlers who had raised more than $500,000 for Obama for 2008 and 2012. And this was as of February 2012!

Back to Taibbi’s piece. He does the important service of discussion how the Pew Charitable Trust is not the benign, independent foundation that most people believe it to be. Pew was set up to oppose New Deal and other “socialist” reforms. Even now, among pollsters, it’s recognized for having a right-wing slant on economic matters (poll results can be skewed significantly by adept statement and ordering of questions). I was tempted to write about how its questions on its polls about Snowden were skewed, but never got around to it.

Pew has been pushing the “public pensions are broke” meme and shifting blame to employees:

In 2007, Pew began publishing an annual study called “The Widening Gap,” which aimed to use states’ own data to show the “gap” between present pension-fund levels and future obligations. The study quickly became a leading analysis of the “unfunded liability” question…

In 2011, Pew began to align itself with a figure who was decidedly neither centrist nor nonpartisan: 39-year-old [former Enron energy trader and later hedge fund manager/billionaire] John Arnold….

In 2011, Arnold and Pew found each other. As detailed in a new study by progressive think tank Institute for America’s Future, Arnold and Pew struck up a relationship – and both have since been proselytizing pension reform all over America, including California, Florida, Kansas, Arizona, Kentucky and Montana. Few knew that Pew had a relationship with a right-wing, anti-pension zealot like Arnold. “The centrist reputation of Pew was a key in selling a lot of these ideas,” says Jordan Marks of the National Public Pension Coalition. Later, a Pew report claimed that the national “gap” between pension assets and future liabilities added up to some $757 billion and dryly insisted the shortfall was unbridgeable, minus some combination of “higher contributions from taxpayers and employees, deep benefit cuts and, in some cases, changes in how retirement plans are structured and benefits are distributed.”….

[E]ven if Pew’s numbers were right, the “unfunded liability” crisis had nothing to do with the systemic unsustainability of public pensions. Thanks to a deadly combination of unscrupulous states illegally borrowing from their pensioners, and unscrupulous banks whose mass sales of fraudulent toxic subprime products crashed the market, these funds were out some $930 billion. Yet the public was being told that the problem was state workers’ benefits were simply too expensive

So what’s the solution? Even more reaching for return, as in putting pension funds in high-risk, high fee alternative investments. As we’ve discussed in our private equity series, public pension funds have long been deeply in bed with private equity funds precisely because they want those supposed returns really really badly and have been willing to accept all sorts of conditions that no prudent investor should tolerate, like insane secrecy requirements, glaring conflicts of interests, and going to great lengths to help funds evade taxes (more on that soon). The hedgies are latecomers to recognizing that public pension funds are great kitties to be plundered. And we see the hedgies copying the PE playbook we’ve described. For instance:

In fact, in recent years more than a dozen states have carved out exemptions for hedge funds to traditional Freedom of Information Act requests, making it impossible in some cases, if not illegal, for workers to find out where their own money has been invested.

The way this works, typically, is simple: A hedge fund will refuse to take a state’s business unless it first provides legal guarantees that information about its investments won’t be disclosed to the public. The ostensible justifications for these outrageous laws are usually that disclosing commercial information about hedge funds would place them at a “competitive disadvantage.”…

Hedge funds have good reason to want to keep their fees hidden: They’re insanely expensive. The typical fee structure for private hedge-fund management is a formula called “two and twenty,” meaning the hedge fund collects a two percent fee just for showing up, then gets 20 percent of any profits it earns with your money. Some hedge funds also charge a mysterious third fee, called “fund expenses,” that can run as high as half a percent – Loeb’s Third Point, for instance, charged Rhode Island just more than half a percent for “fund expenses” last year, or about $350,000. Hedge funds will also pass on their trading costs to their clients, a huge additional line item that can come to an extra percent or more and is seldom disclosed. There are even fees states pay for withdrawing from certain hedge funds…

On Wall Street, people are beginning to clue in to the fact – spikes notwithstanding – that over time, hedge funds basically suck. In 2008, Warren Buffett famously placed a million-dollar bet with the heads of a New York hedge fund called Protégé Partners that the S&P 500 index fund – a neutral bet on the entire stock market, in other words – would outperform a portfolio of five hedge funds hand-picked by the geniuses at Protégé.

Five years later, Buffett’s zero-effort, pin-the-tail-on-the-stock-market portfolio is up 8.69 percent total. Protégé’s numbers are comical in comparison; all those superminds came up with a 0.13 percent increase over five long years, meaning Buffett is beating the hedgies by nearly nine points without lifting a finger.

Hedge funds on the whole have done not at all well in the wake of the crisis. Even before the bust, returns were less than impressive simply because too many people were becoming hedgies, and to get the blessing of the institutional gatekeeper, you have to follow a particular strategy, such as global macro, distressed investing, “event driven” (special situations and merger arbitrage), market neutral, etc. You need to stay within your style or you get accused of style drift. With hedgies being tracked into particular flavors of investing, you began to see alpha (manager outperformance) diluted by the amount of competition. Hedge funds were admitting even before the crisis that what they were really selling was “synthetic beta” which is fancy speak for a return pattern that id different from that of other asset classes and therefore is a useful addition to a portfolio. That’s all well and good, but those big fees are supposed to be for alpha. You can create all sorts of synthetic beta much cheaper than that. But too many people benefit from the scam to encourage investors to do that:

Many states have engaged middlemen called “placement agents” to hire hedge funds, and those placement agents – typically people with ties to state investment boards – are themselves paid enormous sums, often in the millions, just to “introduce” hedge funds to politicians holding the checkbook.

But the PE funds, who’ve been at this game longer, are even bigger pigs more practiced:

In California, the Apollo private-equity firm paid a former CalPERS board member named Alfred Villalobos a staggering $48 million for help in securing investments from state pensions, and Villalobos delivered, helping Apollo receive $3 billion of CalPERS money. Villalobos got indicted in that affair, but only because he’d lied to Apollo about disclosing his fees to CalPERS. Otherwise, despite the fact that this is in every way basically a crude kickback scheme, there’s no law at all against a placement agent taking money from a finance firm.

So please read and circulate this piece. It’s an important corrective to the many-faceted “blame the little guy for the failings and corruption of our elites” narrative. And only via relentless re-education do ordinary citizens have a chance of defining problems properly, which is a necessary condition for coming up with effective remedies.

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64 comments

  1. Conscience of a Conservative

    Ultimately responsibility rests on those charged with managing the pension funds, which means the public officials entrusted with the responsibility. The individuals allocating pension monies to vehicles with high fees and low returns are at fault first and foremost.

    1. from Mexico

      So let me get this straight. A public official accepts a bribe (“campaign contribution” in today’s parlance) to betray the public trust. And the person who bribed the public offical is innocent?

    2. Thorstein

      …and there was no fraud in how MBS and other financial instruments were constructed and sold to local and state governments?

      1. LucyLulu

        “…and there was no fraud in how MBS and other financial instruments were constructed and sold to local and state governments?”

        The two aren’t mutually exclusive.

    3. Bruno Marr

      CoC:

      You just don’t “get it”, do you?. While “public officials” may “decide” to place pension funds with “hedgies”. The pension funds come from employees. Hence, why is the media blaming the employee for the fate of pension funds and not these “public officials”?

      The bigger point is that the employer-funded portion of the employment/pension contract is being subverted; thus shortchanging the pensioners. (Time, and compounding interest, is of the essence.)

      1. JTFaraday

        “why is the media blaming the employee for the fate of pension funds”

        Because in the eyes of corporate shareholders and The Taxpayer, as well as the executive class, and even middle management here and there, employees are the new welfare queens.

        I’ve been saying just that for, let’s see, about… seven years now.

  2. Skeptic

    Cheers for Taibbi, a guy who sees behind the curtain! A rare talent.

    “…the Pew Charitable Trust is not the benign, independent foundation that most people believe it to be. ”

    True of many Trusts, Foundations, Non-Profits, and so-called Non Government Organizations. Folks get touchy-feely when they hear about such organizations. Say “charity” and folks get warm all over.

    I was involved a number of years ago with a non-profit run by a married couple, one whose Daddy was a VP in a well known cereal corporation which pushes junk cereal for children. THey and their child ate organic, of course! I did some research which included examining a tome at the library listing national foundations and their finances. What a rat’s nest that was.

    This person’s Daddy through one of his company’s foundations, they had three, was the main contributor to his daughter’s non-profit. I took a look also at the registration papers for the non-profit and it had lots of language preventing any “takeover” contrary to the interests of her and her husband. So, many of these entities are ways to funnel profit out of corporations and, at the same time, corrupt and manage the social agenda while receiving generous tax relief.

    Many of these Foundations and Trusts are dumping grounds for the ne’erdowells of the Elite or their spouses and relatives. In the case I saw, Daddy had created jobs for wife and husband.

    1. s spade

      Foundation= one part tax evasion; one part public relations; one part sinecure for witless relatives. They are a gold mine for lawyers, since evading the spirit of the pathetic regulations and complying with the paper requirements takes considerable ingenuity and endless time.

    2. Mcmike

      Indeed, especially private family foundations, set up to pay high salaries to the idiot grandson, hold tax deudctible black tie galas, and donate a little money to the alma mater to fund skyboxes in the football stadium.

      But don’t throw the baby out with the bathwater, many foundations do not fit this description.

  3. s spade

    When I couldn’t interest Warren Buffet in managing my pathetic portfolio, I opted for a dart throwing monkey. He gets 2 and twenty (2 bananas and 20 nuts), payable daily.

    Over fifteen years the monkey has beaten the S&P in twelve years, by more than 10%. He was down very slightly in the other three. I had to pay him anyway.

    1. rich

      Albert Edwards accuses Fed of inequality cover up

      The U.S. Federal Reserve has engineered a housing bubble to divert attention away from growing inequality in the country, according to controversial Societe General strategist Albert Edwards.

      Edwards, who is known for his bearish views, argued that the Fed’s surprise decision last week to keep its stimulus program intact would continue to inflate house prices in the U.S.. The idea behind the Fed’s bond-buying program is to free up more funds so that banks have more money to lend to home-buyers. With more buyers on the market, and interest rates near record lows, house prices should increase.

      Edwards referred to recent comments by Marc Faber, publisher of the Gloom, Boom & Doom Report, who said the Fed’s decision to maintain its $85-billion-per-month quantitative easing program meant it was “climbing to a higher diving board.”

      But Edwards added: “I go further. I see growing inequality draining the swimming pool dry. The crunch, when it comes, will be ugly.”

      Edwards ended his research note with a stark warning for investors.

      “Investors should make no mistake,” he said. “The anger of the 99 percent will ultimately not be bought off by yet another central bank inspired housing bubble, engineered to pacify them and divert their attention as their real incomes fall and inequality continues to grow.”

      http://www.cnbc.com/id/101068112

  4. Mcmike

    My radar has been going off the last couple years of a right wing takeover of foundations.

    Foundations and charities routinely stack their boards with corporate types; putting in an inherent corporate/establishment bias. But they were historically at least socially-liberal and economically moderate-ish.

    However, at least locally, I see a creeping increase in hard right wingers and questionable board appointments. I have not studied it, but I am fairly confident a dedicated analysis would reveal a methodical invasion-of-the-body-snatcher type takeover.

    That would be completely consistent with the right wing script, and not unlike what was done with local school boards and university boards in the 1980′s/1990′s.

    Not to mention the corporation for public broadcasting which clearly got “couped”, and if I recall even a breast cancer foundation recently ended up with a right winger at the helm trying to deconstruct by precipitating self-destruction from the inside.

    And then there’s the massive Bill Gates style philanthropy, which uses its heft to push pharmaceutical products (vaccines: i.e. pound of cure versus ounce of prevention) and privatizing education. In fact, many foundations have picked up the charter school meme, we can assume they did not all wake up and decide to do that without some help.

    The recent Koch takeover of Cato was the big tip-off. Which was a rather blatant textbook hostile takeover.

    In the meantime, it would be completely consistent to find a methodical campaign by the right to co-opt, hijack, disassemble, and destroy what they view as liberal foundations.

  5. Peripheral Visionary

    Taibbi is correct on a number of points, but he still does not see the whole picture.

    He is absolutely correct that states have been underfunding pensions for decades (although somewhat absurdly he tries to backpedal on the significance of that halfway through the piece). He is also correct that pensions would be better off investing in index funds rather than chasing yield in alternative investments, that they are being ill-advised by overpaid consultants, and that supposedly independent sources of information are often fronts for the financial industry that are deeply conflicted.

    What he misses, however, is the entire reason why pensions are desperate for yield: high fixed return targets in a low interest rate environment. A full five pages of discussion on the plight of pension plans, and not a single mention of the role the Federal Reserve and its zero-interest-rate policy has played – that seems odd to me, and represents a critical omission.

    The whole reason pension plans have been desperate for yield is because they can’t get the returns they need through the low risk investments they held prior to the housing bubble and the economic crisis. In the halcyon days when pension plans were equated with very safe and very boring investing, they held highly rated fixed income securities and some broad market equities, and that was enough to hit their return targets. But when interest rates went to zero and fixed income yields followed, pension plans were forced to the far end of the risk curve to hit their targets.

    The Federal Reserve wasn’t born yesterday, and surely knew what it was doing went it dropped rates to the level it did. With a huge number of institutional investors that have to hit high fixed return targets (7%, 8%, in some cases even higher), they would have known perfectly well that they would be pushing pension plans deep into risky territory. It’s one thing for a college endowment to make the plunge into speculative equities, forex, commodities, and other alternatives – it’s another thing entirely for a fund that holds the retirement money for police officers and firefighters to be forced to do the same.

    But the Fed had a playbook developed in the sanitary academic environment and couldn’t be bothered with real world complications, and proceeded to put the pension plans into an impossible position, that will surely result in more losses to pensioneers when the latest of the serial bubbles collapses.

    1. financial matters

      The Fed’s action relative to pension funds seems more complex. They are also propping up MBS and equities which make up a substantial amount of these funds. The problem is that we don’t have solid believable markets in stocks or bonds at the moment. The effects of QE, poor corporate governance and fantasy accounting. It seems that pension funds are paring back their expectations from 8% to 6 or 7% when they should be using 1 or 2%. Also considering MF Global and Cyprus no investment should be considered off limits for the quest for bank recapitalization.

      We need much better and more innovative thinking. See Dan Kervick below.

      1. LucyLulu

        With the retirement of baby boomers, the landscape of pension investment has changed, or should have. It’s very different to invest in risky assets 20 years prior to retirement versus immediately prior or during retirement. Public pension funds are now seeing their funds being drawn down by payment of benefits. During this latter period, low risk vehicles should should be heavily weighted, as losses can’t be easily replaced. In addition, ‘pension funds’ more broadly include the savings of retirees that are privately held. Traditionally, this is when retirees would have their assets held in T-bills, CD’s, highly rated corporate bonds.

        In this context, ZIRP has been devastating. With savings of $1 million, not including residence, in the past considered a very comfortable nest egg, and far more than the savings of the vast majority of Americans, at most an income of $40,000 could be safely earned w/principal drawdown over 30 years (rough estimate). Add $25,000 social security for a total of $65,000 pre-tax income (with SS taxable). Pension benefits are becoming increasingly rare outside the public sector, and as this article points out, those are at risk. That ‘millionaire’ won’t have to eat catfood but hardly the lavish lifestyle that not long ago was associated with the term, and most likely a significant reduction in standard of living.

        I saw a documentary on the bankruptcy of Stockton, CA. Their public pensions are at risk, at least were at time of filming. The public workers had been extensively demonized for exaggerated outrageous salaries and benefits. In the run-up to the crisis, the pension funds were used by the city to “revitalize” the downtown and lakefront area, including building several high-rise office buildings. The buildings now sit empty, and the pension fund is stuffed with IOU’s from the city. City staffing was stressed not only by budget constraints, but also by the crime and other problems associated with the high vacancy rates left by massive foreclosures and walk-aways. On the day of filming police dispatch, there were 39 calls on the queue awaiting the next available officer to respond, which was fairly typical. I don’t recall if they had already held a fire sale.

        We know that corporate management raided pensions so it shouldn’t be surprising that the same happened in the public sector. I haven’t seen any reports of problems with federal pensions, which have the advantage of “full faith and credit of the US government” (and that Congress gets them and the protection that implies), but does anybody know if there are any?

        1. Dr. Noschidt

          My apologies: It’s JOSEPH P. Farrell: “BABYLON’S BANKSTERS: The Alchemy of Deep Physics, High Finance and Ancient Religion” (2010), well worth your time.

  6. tyaresun

    And they hire one of the proles close to retirement to go and betray the rest of them. I have met a couple of them. They are so proud that they are finally moving into a “big” position and fall for all the flattery of the wall street types, never realizing what the wall street types are thinking of them.

  7. Jim Haygood

    ‘This landmark worker-protection law [ERISA] left open a major loophole: It didn’t cover public pensions. Some states were balking at federal oversight, and lawmakers, naively perhaps, simply never contemplated the possibility of local governments robbing their own workers.’ — Matt Taibbi

    A point I’ve been hammering on for years — if transparency and fiduciary accountability are good for private sector pension beneficiaries, why shouldn’t public sector beneficiaries be entitled to the same transparency?

    The most probable reason is that making ERISA universal (which certainly should be done) would expose Congress’s epic embezzlement of Social Security, whose negative net worth now stands at $11.278 trillion (table 2, page 178 in the Financial Report of the United States):

    http://www.fms.treas.gov/fr/12frusg/12rsi.pdf

    This shortfall is more than four times Usgov’s annual revenues and won’t be easily made up — not when Medicare is another $27 trillion in the hole.

    1. LifelongLib

      Unlike state and local governments, the federal government is monetarily sovereign and could fund any amount of SS, Medicare, pensions, etc. without taxing, borrowing, or investing. It chooses not to do these things because of political constraints, not economic ones.

      1. Don Levit

        Even if we assume that the U.S. can fund any debt it has, is still no reason for the Social Security trust fund to be used for governmental expenses, just as it is wrong to use the state pension plans to fund their current expenses.
        If what you assert is true, then it seems to me the U.S. has very little to lose by raiding the SS trust fund and 28 other trust funds.
        Heck, thry can always pay back the debt, even debts which were illegally created.
        If you are wrong, though, and this hubris of an infinite money supply is not correct, the economic futures of generations to come will pay for our sins.
        Don Levit

        1. William

          Don, why assume this guy knows what he’s talking about? Read what he’s referencing. Clearly he is either ignorant or purposely trying to mislead.

          1. financial matters

            The economic constraints are inflation and currency exchange rather than a ‘debt ceiling’.

            The political constraints are a Congress, Administration and Judicial System that favor corporations over their constituents. The number of foreclosed empty homes and the increased income equality are national disgraces.

            http://neweconomicperspectives.org/2013/09/stephanie-kelton-interviews-l-randall-wray-monetary-policy-economics-retirement-security.html

    2. William

      Wow man, you need to learn how to read and interpret technical information. You can start by understanding the title of chart you refer to: “Present Values of Estimated OASDI Expenditures in Excess of Income Under Various Assumptions, 2012-2086″

      What that means is that your $11 trillion is a cumulative total up to 2086–of the difference between payroll contributions and non-payroll contributions.

      At the bottom of page 174 it states that the Social Security Trust Fund “is projected to begin drawing down trust fund balances starting in 2021 and to exhaust those
      balances in 2033. After trust fund exhaustion, noninterest income will continue to flow into the fund and will be
      sufficient to finance 75 percent of scheduled benefits in 2033 and 73 percent of scheduled benefits in 2086.”

      What this seems to be saying is that, starting in 2033 thru 2086, Social Security will require 25% of its funding to come from other-than-payroll sources. The 11 trillion you refer to is the accumulated total of that 25% over 50+ years. A modest reduction in defense spending could easily make up that needed 25% with no increases in taxes.

      Pretty simple stuff, yet you somehow you come away with the idea this represents “Congressional embezzlement.”

      So please stop spewing lies and wise up to what you are reading.

      1. William

        $11.3 trillion divided by 53 years = $213 billion a year. What’s that, about 25% of the defense budget? How about taking a little from the “Homeland Security” , NSA, etc. budgets? Problem solved. Pretty simple really.

    3. David

      Read the fine print: REQUIRED SUPPLEMENTARY IN
      FORMATION (UNAUDITED)
      178
      Table 2
      Present Values of Estimated OASDI Ex
      penditures in Excess of Income
      Under Various Assumptions, 2012-2086

      Key point: 2012-2086

  8. TC

    These public pension shortfalls seem nothing a 1% Wall Street Sales Tax would not substantially alleviate. This is to say it’s one thing to righteously cite troubles we face, and quite another seizing power to fix them.

    Speaking of “pew” … the stink of anti-socials who lash out against any political force dedicated to the general Welfare just got a little less overpowering with this week’s developments in Greece, whereby an evidently anti-fascist Special Forces Reservists group is threatening a coup against the sold out looters of the Greek state.

    The “blame the little guy” trick on both sides of the Atlantic is starting to hit the brick wall…

  9. Jim Haygood

    ‘In fact, Dean Baker said, had public funds during the crash years simply earned modest returns equal to 30-year Treasury bonds, then public-pension assets would be $850 billion richer than they were two years after the crash.’ — Matt Taibbi

    As has been understood since the landmark Fisher-Lorie paper in 1964, over long periods equities outperform bonds, to the tune of several percentage points annually. The ‘equity premium’ is the foundation of modern finance.

    Following Dean Baker’s uninformed, Luddite advice would have sidestepped the crash of 2008. But Social Security, one of the few pension funds on the planet still holding a 1935-era, pre-CAPM, all-bonds portfolio, has dug itself into an $11.3 trillion hole using exactly this low-return, whip-me-with-inflation, hair-shirt approach to investing.

    Moreover, returns on Treasuries of 5 years and higher maturity have been nearly identical since 1926 (5.4% for 5-year T-notes; 5.7% for 20-year T-bonds). But the long-term bonds are far more volatile, adding risk that is not justified by the fractional increment of extra return:

    http://www2.troweprice.com/rms/rps/Marketing/Articles/Assetclassreturns_13-FINAL.pdf

    Lesson: take financial advice from the charlatan likes of Dean Baker, and you’ll soon be as broke as Social Security.

    1. Mcmike

      Social Security’s modest decades-down-the-road fake “crisis” can be fixed with very modest tweaks in withholding and benefits.

      Surely you know this.

      1. Jim Haygood

        All I know is what the U.S. Treasury tells me:

        The open-group infinite horizon net obligation is the present value of all expected future program outlays less the present value of all expected future program tax and premium revenues. Such a measure is provided in Table 6 [page 189] for the three trust funds [two for Medicare and one for SocSec] represented in Table 5.

        The total resources needed for all the programs sums to $66.3 trillion in present value terms. This need can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination.

        http://www.fms.treas.gov/fr/12frusg/12rsi.pdf

        Maybe $66 trillion is small money to you. To me, four years worth of GDP gone missing sounds pretty ominous.

        Don’t they call it Stockholm syndrome, when one comes to sympathize and apologize for one’s own victimizers?

    2. YankeeFrank

      Oh no you didn’t just blame the lack of funds in the Social Security “trust fund” on poor investing. Wow. So you mean it has nothing to do with all the looting the government’s been doing? Who knew? You sir are a fascinating person of deep insight.. a truly brave teller of truth to power.

      1. Mcmike

        YF: Please be careful not to adopt the anti-SS talking points, even subconsciously.

        The SS does not “lack funds.” It currently sits on almost $3 trillion dollars in funds.

        Nor is it “bankrupt”, or “going bankrupt.”

        What it has, is a transition to a shortfall gap between inflows and outflows. Two lines crossing in the night.

        But it still has, remember, almost $3 trillion dollars.

        This shortfall, the gap between inflows and outflows, is PROJECTED to lead to an inability for SS to pay its full benefits at some point in a couple decades from now.

        Note: it is not expected to lead to bankrupcty. It is not excpected to lead to being broke.

        Even in a few decades, it is still expected to have lots of money, just not enough to pay 100% of the expected benefits.

        Which is why a modest tweak now can wipe the “crisis” right off the books.

        Further, the “IOU’s” held by the trust are US government debt, the same thing as the TBills owned by China, by rich old money easterners, and by your pension fund and money market accounts.

        The crisis is a manufactured lie, cooked up by ideologues and thieves, and you should pour derision on anyone gullible or crooked enough to claim otherwise.

          1. curlydan

            “In a letter to the Social Security trustees in December 2003, the American Academy of Actuaries, the leading professional organization of actuaries, warned that infinite-horizon projections ‘provide little if any useful information about the program’s long-term finances and indeed are likely to mislead anyone lacking technical expertise in the demographic, economic, and actuarial aspects of the program’s finances into believing that the program is in far worse financial shape than is actually indicated’.”

            http://journals.democraticunderground.com/suffragette/72

            Apparently, Mission Accomplished.

        1. craazyboy

          If you assume the human race ends at the same time as when the SS Trust fund runs out, about 2033, then all this talk about 75 year projections seems pretty silly, doncha think?

          Then the only problem left is government pension funds, which don’t make it that far with their diversified portfolios. (‘course they do have the problem of having to pay out 60%-80% of peak pay. Much higher bar than SS.)

        2. Don Levit

          Redeemimng the $3 trillion will also increase the deficits and the debt held by the public for every dollar redeemed.
          And, you call that a surplus?
          I call a surplus the excess FICA and SECA taxes remaining in the trust fund, solely fof SS beneficiaries, instead of being used to pay for current government expenses over many years.
          I do not call a surplus in which collateral is issued for the privilege of raiding SS beneficiaries benefits, which is a crime, for the excess taxes were supposed to buy Treasuries as an investment, not as collateral for loans to pay for other expenses.
          This is why the $3 trillion is correctly called intragovernmental debt, not intragovernmental equity, which suggests there would have been surplus available.
          Don Levit

          1. Mcmike

            Its money the general government owes social security. Period.

            Exactly like the money general government owes every other holder of treasury debt. No more no less.

            It has no less worthy a claim as does my money market account. And is right there in line to get paid with everyone else.

            What the pirates are trying to do is change that. And SS haters are helping them.

      2. Jim Haygood

        ‘So you mean it has nothing to do with all the looting the government’s been doing?’

        You talkin’ to me? Quoting my post at 10:41 am:

        ‘… expose Congress’s epic embezzlement of Social Security …’

        Hello, Frank …

    3. Dan Kervick

      There is no reason to fund retirement with either government bonds or equities. That’s all smoke and mirrors anyway to cover up an exploitation racket. Convert Social Security to a straightforward general fund obligation, and double it is size. Get rid of the payroll tax. Then get rid of the whole universe of 401K’s, pensions and other crap. Seize their assets for the government and pay off the intermediaries with a one-time Sayonara service fee.

      No matter what sort of financial intermediaries and layers of public and private sector financial promises and funds are used, in the end the lives of retirees in any given year are supported by the work and output of working people alive in that year. The most rational and efficient way to handle this is to make it as logistically simple as possible and organize the system as a direct transfer of resources from workers to retirees.

      And yet we have an absurd system based on packing the path between that output-generating worker and the retirees he is supporting with an army of financial intermediaries taking totally unnecessary cuts. If you want to put a stake through the heart of Wall Street, kill the privatized and semi-privatized retirement system. Kill it dead.

      And get rid of the damn payroll tax. It’s a regressive tax designed to confine the funding of the retirements of the lower economic orders in our society to the other members of that same order. Junk it.

      1. Dr. Noschidt

        “and pay off the intermediaries with a one-time Sayonara service fee”

        Always gotta plump for Big Daddy, huh Professor Kervick? Wouldn’t want to make the Boss cross.

        How about paying off the intermediaries with an IMFCIA kissoff, their duty done?

  10. Jess

    Taibbi is right on all counts. However, in some states like CA, the unions are a crucial component of the fraud and deserve their portion of the blame. Calpers is governed by a 13 memeber board, of which nine members are the heads of major union bargaining groups that pay into CalPers. The other four are ex-officio members who are there by virtue of holding state office. (IOW, officer holders who, in large part, owe their election to support from the public employee unions). There is nobody on this board who has a vested interest in rocking the boat, blowing the whistle, or representing the taxpayers.

    Unions have also helped foment the current climate of hostility to public employees by allowing top-end earners to walk off with exorbitant pensions. The average retiree gets something like $30K, but all the public hears about is the $150-$350K pensions like the ones two of our former local fire chiefs enjoy. ($165K for one, $220K for the other.)

  11. Eric377

    The first question of whether or not pensions funds are broke is independent of why they might have arrived at that state. The only legitimate function of pension funds is to manage the funding requirements to meet the obligation to the pensioners. Pensions levels should not be viewed in some kind of absolute continuum, but relative to the funds available. If a fund is flat broke, then $1/month is too high. The claim is made that funds are out $930B. It is a horribly hard message, but barring some committment from somewhere to find and apply $930B to cure such funds, the pensionsers are going to take a hit. This article can be corrective to the notion that the problem is the little guy, but the cures available are quite limited….’you little guys were not the problem, but you are a big part of the solution, sadly for you’.

  12. steelhead23

    Umm, I gotta guess that somewhere on Wall St. there is a dart board with Matt’s broad face taped to it with a fat cat behind the rosewood credenza chucking darts at lightning speed. The enemy of our enemies is our friend. God bless Matt Tiabbi.

  13. Funonymous

    Funny how ‘pension reform’ never means ‘The states paying their decades of missed pension contributions’. All a part of the playbook we see everyday; defund the giant pools of capital that benefit the rank and file to the point that they need ‘reform’ which always means handing the rest of the remaining capital over to the vultures to manage.
    Also, Dear America, if a coordinated PR machine attempts to convince you that any NJ politicians deserve national seats because of things like ‘saving puppies’ or ‘being a guy’s guy that can make the tough decisions’, and you don’t laugh them out of the room, it is time to stop drinking lead paint.

    1. Mcmike

      What the pensions need to do is make a really bad bet with AIG. Then the government would gladly bail them out dollar-for-dollar.

  14. Paul Tioxon

    http://littlesis.org/org/51262/Peterson-Pew_Commission_on_Budget_Reform/interlocks

    http://budgetreform.org

    The above links will demonstrate the interlocking austerity proponents from Pete Peterson entities and Pew Trusts. While Pew Trusts has billions in a public foundation, in order to have a wider ranging set of interests and money to give to that wider ranging set of interests, it no longer derives its money from the old Sun Oil Co. aka, Sunoco, becasue Sunoco is no more. The last of its assets were divided up in a sale with some natural gas pipelines going to the gas industry and the crude oil refineries sold off to the Carlyle Group. Train loads of Bakken and Canadian Tar Sludge are processing that cheaper crude as fast as the trains can bring them in. Pew has managed to make itself the foe of environmental polluters, funding awareness of climate change and global warming since the 1990′s. However, that doesn’t mean that all of its money has been placed in the service of liberal do-gooders.

    http://www.reuters.com/article/2012/07/02/us-sunoco-carlyle-philadelphia-idUSBRE8610JF20120702

  15. Dr. Noschidt

    “Many states have engaged middlemen called “placement agents” to hire hedge funds, and those placement agents – typically people with ties to state investment boards – are themselves paid enormous sums, often in the millions, just to “introduce” hedge funds to politicians holding the checkbook.”

    So “placement agents” are “pimps” in the vernacular?

  16. danny

    It doesn’t get mentioned here, but the Northern Mariana Islands (US territory) is a good study at what happens when a government decides not to fund its pensions. The NMI pension fund its nearly gone. It will be fully depleted by the middle of next year without the territorial government kicking in more money. The CNMI government recently signed a settlement in federal district court to ensure at least 75 of pension payments for retirees, but there’s some question about whether that’s sufficient, our whether the government will continue to pay.
    Drama on the high seas.
    http://www.mvariety.com/cnmi/cnmi-news/local/59430-senator-reyes-larry-cabrera-urge-retirees-to-sign-petition

  17. danny

    Then again, the CNMI pension fund fiasco is a case study in all of the corruption, private money managers, and bad/missing oversight highlighted above – amplified to the nth degree.

  18. JaaaaayCeeeee

    Thanks for making Matt Taibbi’s article even more useful and understandable, Yves and commentators.

  19. Washunate

    Buy now, pay later.

    The motto of our system for the past couple decades. It’s the only way to pay for all the tax cuts and prisons and police and cameras and administrators and all the rest.

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