Since I started in financial journalism over 35 years ago as a reporter in a two-person bureau in Chicago with the trade magazine Pensions & Investments, the issue of underfunded corporate and municipal
pension funds is something we all learned on the first day of work.
Now, over 35 years later, thanks to political ignorance, inaction, outright stealing from pension funds, gross mismanagement, fees bordering on larcency , incompetence and total disregard for the average worker who naively trusted in the quality and concern of their municipal and corporate pension committee’s management, we now have the biggest underfunding of pension assets in world history. This gap is $1.3 trillion in the government sector alone.
This is accompanied by bad news from corporations. The private sector funding gap is estimated at $343 billion, according to a 2013 Towers Watson survey of 411 corporations selected from Fortune 1000 corporations. The study found hat by year-end 2014, the pension deficit for these firms hit $343 billion, an increase of $181 billion over 2013. This is more than twice the pension deficit at year-end 2013.
This is no small feat since it represents almost 50 years of gross mismanagement and arrogance from highly-paid financial industry and pension executives. Actuaries, pension fund consultants, trustees, compensation committees, elected officials, and union reps all paid a role in this disaster, and predictably, no one in the industry will step forward and take responsibility.
As a former employee of Frank Russell, who also covered Russell as a reporter, I often interviewed their very educated and intelligent fund consultants for decades. I saw they all prepared thorough and objective actuarially-based and investment return projections and to my knowledge, gave honest, sobering advice if the situation warranted. But their advice and warnings were probably ignored if they differed from corporate goals about how to deploy this huge pile of cash or make the contracted pension contributions that did not meet the new high standards of leveraged financial engineering.
I also got the feeling that consulting was just a job. Passion is never part of a consultant’s presentation. It is bad for the consulting business and if it backfires, it could jeopardize the consultant’s persona as being the smartest person in the room. Plus, all the consultants were always paid large salaries whether they were right or wrong, so their advice and salaries were always hedged. The only people who relay paid the ultimate price were the unsuspecting, and often unrepresented, pension beneficiaries.
The average state pension in the last fiscal year returned something south of 1%. You cannot fill that gap with a bulldozer, it’s impossible
Flashing forward to today, as this very sad story from MSN Money states, there is a $1.3 trillion underfunding gap in municipal pensions and it is only getting worse since elected state and federal officials are more concerned about who has access to America’s restrooms, Hillary Clinton’s e-mails, and denying global warming.
As the MSN Money article states: “The average state pension in the last fiscal year returned something south of 1%. You cannot fill that gap with a bulldozer, impossible,” DiMartino Booth said. “Anyone who knows their compounding tables knows you don’t make that up. You don’t get that back unless you get some miracle.” (Danielle DiMartino Booth is a former Federal Reserve advisor and President of Money Strong.)
As Booth states in this article, muni pension funds assumed that they would generate returns over 8% and those funds would compound at 3% for the last 50 years or so. The reality, Booth said is that “it will take nothing short of an economic miracle to recover. The average state pension in the last fiscal year returned something south of 1%. You cannot fill that gap with a bulldozer, <it’s> impossible.”
Sadly, Booth is one of many over the past decades who have warned of the impending muni and corporate pension fund shortfalls. But greedy corporate takeover artists and weak politicians both worked together to loot the pension assets of works in pension fuds. In most cases, these pension fund assets were to be segregated and dedicated for the exclusive benefits of the worker beneficiaries, but takeover greed in the Go-Go 1960s and after converted pension assets into cash for more conglomerate expansion.
At the municipal level, weak unions and sadly complicit weak union leadership let corrupt elected officials to avoid the worker pension obligations.
Now, we have the same thing emerging at the national level where Republicans want to privatize Social Security, Medicare, Medicaid and even the Veterans Administration health care system to private corporations. So, far only the lobbyists are driving this conversation and even the Trump supporters who have some fantasy about getting their old time-clock jobs back in a mechanized factory back at $30 an hour with full benefits are living the dream, and it is certainly only a dream. Those old jobs will never return in their former glory.
Worse, at the individual household level, there is also a huge savings shortfall for retirement. A 2015 EBRI study found that the Retirement Savings Shortfalls (RSS) for people approaching retirement (so-called Early Baby Boomers), have deficits that vary from $19,304 (per individual) for married households, increasing to $33,778 for single males and $62,734 for single females. The same study became more technical when it delivered even more bad news:
” This may appear to be relatively small considering they represent the sum of present values that may include decades of deficits, it is important to remember that less than half of the simulated lifepaths modeled are considered to be ‘at risk.’ Looking only at those situations where shortfalls are projected shows that the values for Early Boomers vary from $71,299 (per individual) for married households, increasing to $93,576 for single males and $104,821 for single females,” the same EBRI study said.
No Accountability from the Financial Industry
Of course, the underfunding crisis would never have gone unnoticed for decades if the financial services industry would have done its job. Since the main job of the financial industry is to sell, it’s a given that bad news hinders sales. As a result, low investment returns, inaccurate return assumptions, bad actuarial
models, lousy and expensive hedge fund investments, investment advice skewed by pressures from investment bankers, pressure to generate stock prices for the exclusive benefits of executives with stock options, and other financial engineering tricks, all made it easy to avoid the bad news of underfunding.
All this made it easy for many second homes, European vacations, alimonies, hot cars and Tiffany jewelry to be paid for from executives and sales people who consistently failed to admit these major corporate and pension fund investing mistakes.
But no one cared to tell the Emperor, so we now have the shortfalls for millions of unsuspecting mopes in all 50 states, who never knew what hit them. In short, just as the prevailing corporate moral code is to accept individual responsibility, no one at the investment corporations stood up and said anything. There are thousands of top financial execs in $2,500 Brioni and Hugo Boss suits who just looked the other way and then went to lunch. This happened thousands of times of over the past 30 years when bad news came across their desks.
It’s also part of the pattern that emerged from the 2007 mortgage and housing crisis. That was systemic top-down and bottom-up real estate and mortgage and derivatives fraud. But that alone was not enough. It was accompanied by the LIBOR and foreign exchange price fixing frauds, as well as a host of other culturally accepted fraudulent business practices that were normalized most recently by Wells Fargo, just to name one crooked institution, this chart shows. There will certainly be many more to come in the Trump era.
Big Bank Frauds, Big Costs
|Sums paid ($billions)
|Bank of America
Source: Keffe, Bruyette & Woods
Abe Lincoln was right: You can fool some of the people all the time, and all the people some of the time, and now it looks Like the Trump Administration wants to fool all the people all of the time via outrageous undeliverable, fantastical promises.
But as the municipal pension underfunding time bomb shows, you can fool unsuspecting, uninformed and naive people all the time.
And worse, those are the people who need their modest pensions the most. Once their Social Security and Medicare is privatized and they are subjected to excessive fees, revenue sharing and expenses, they will have even less in their bank accounts at month end. This will certainly make American Great Again for the investment industry, but not for the average investor.