Taibbi - Swing and a huge miss - public pensions

[LegendKiller]

Does the union decide where the money is parked or did the state/municipal gov?

That will make a difference. If the gov. did not "borrow" or knowingly underfund the plan. The members should take the hit if they were in control. If the state was in control. The taxpayer/voter is on the hook.


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It doesn't matter who was in control, the amounts were over-promised.

It doesn't matter who was in charge of the money, the results are the same. Most pensions use the long-term return for stocks from the last X years and say that the portfolio will grow at about the same rate. However, it doesn't take into account dips, downturns, or the simple fact that you have an asset-liability mismatch. You are guaranteeing an 8% return yet you cannot guaranty an equity return. If you want to guaranty something you buy a bond and even then you still have to determine potential losses.

If you don't change how much money goes in and you are capped at how much your return is then you will end up with an under-funding no matter what. It doesn't matter who manages it.

As far as private equity being better or worse, on average PE/HFs don't beat the benchmarks or the industry average, it's a simple bell curve. People like Ray Dallio or Warren Buffet are enigmas, just the skinny part of the distribution. Most cluster on in the center and once you eliminate fees, are probably no better than buying a bond or equity index.

They want to repeat Harvard's success. How do you do that? You spend money on management. You can't entice these guys with crappy pensions or guaranteed employment, they need money, the same money they'd make managing money elsewhere.

Thus, you pay up hoping to increase your return.

However, the most simple answer is to either force the pensioners to contribute more or to take less. But we can't do that...

 

[LegendKiller]

This is why the 401K was such a good idea and I am glad I have one. The worker is ultimately responsible for where the money in placed. They can do nothing and get the default placement or they can move it into index funds, bond funds, whatever. With a pension, the pension adminstrators/politicians have all the say. They can invest in hotels, real estate or hedge funds or accordig to the article into "coins and "other collectibles" – including Beanie Babies."


Taibbi's article isn't completely off. The hedge funds make big promises on what they can deliver, but then charge large fees and barely if at all beat the stock market. They often invest in very risky assets that don't always pay off. They do share some of the blame. As Taibbi put it, the "supposedly massive gap could all be chalked up to the financial crisis, which, of course, had been caused almost entirely by the greed and wide-scale fraud of the financial-services industry – particularly with regard to state pension funds."


Taibbi places blame on others besides wall street. "Politicians quickly learned to take liberties. One common tactic involved illegally borrowing cash from public retirement funds to finance other budget needs. .... Politicians run for office, promising to deliver law and order, safe and clean streets, and good schools. Then they get elected, and instead of paying for the cops, garbagemen, teachers and firefighters they only just 10 minutes ago promised voters, they intercept taxpayer money allocated for those workers and blow it on other stuff. It's the governmental equivalent of stealing from your kids' college fund to buy lap dances."


But blame needs to be shared further. Even though pensioners have gotten the worst of this and done very little to cause it, they still must share in a small part of the blame for believing such large promises from politicians.

You are missing the point.

This is simple compounded returns, as I explained in my 2-day return calculation.

In order to deliver what you promised you need a 100% daily compounded return. However, no matter what you try you can only obtain 20%. There are only 2 ways to affect your result if your return is capped, contribute more or take less. That's it. There is nothing more to it.

Let's say a hedge fund manager does do better, let's say they hit a 60% return, 3x better than the stock market, for 2 years, you are STILL only at $256, or $144 below, or underfunded by 36%. That is the absolute best you can hope to do.

Read up on the average rate of return required for pension funds. You'll find the number ridiculously high. It assumes that the GDP growth for this country will be exactly what it was for the last 50 years or something stupid like that.

Think about it, you are promising somebody that you will repeat the entire growth structure of the post-WW2 US for the next 40 years so they can retire with enough money to last another 15 years.


Just step back and think about that. Then you'll realize how fucked this whole situation is and why blaming Wall Street makes absolutely no sense.