Pensions, Another Ticking Time Bomb

12 10 2009

bomb

David Cho, Washington Post

Monday, October 12, 2009

The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money, or both.Within 15 years, public systems on average will have less than half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that level within a decade.

After losing about $1 trillion in the markets, state and local governments are facing a devil’s choice: Either slash retirement benefits or pursue high-return investments that come with high risk.

The urgent need for outsize returns by these vast public pension funds, which must hit high investment targets year after year to keep pace with rising retirement costs, is fueling a renewed appetite for risk on Wall Street.

Before the crisis, many public pension funds had experimented with risky trading techniques or committed more of their money to hedge funds and other nontraditional firms, which in turn invested some of it in complex mortgage securities. When these melted down, pension funds got burned.

Now, facing an even bigger funding gap, some systems are investing in the same securities, betting that a rebound in their value will generate huge returns.

“The amount that needs to be made up is enormous,” said Peter Austin, executive director of BNY Mellon Pension Services. “Frankly, they are forced to continue their allocation in these high-return asset classes because that’s their only hope.”

Some pension experts say the funding gap has become so great that no investment strategy can close it and that taxpayers will have to cover the massive bill.

The problem isn’t limited to public pension funds; many corporate pension funds have lost so much ground that they are also pursuing riskier investments. And they, too, could end up a taxpayer burden if they cannot meet their obligations and are taken over by the federal Pension Benefit Guarantee Corp.

Public systems still have enough to meet their obligations. If governments take no action, retirees could keep drawing full benefits in the near term even under the most pessimistic projections.

But already, some funds are seeking to trim benefits to conserve money. Some governments have also proposed increasing the amount of public money paid each year into the funds. In practice, however, some political leaders have begun doing the opposite – cutting annual contributions to pension funds – as a way of balancing state and local budgets buffeted in the recession by falling tax revenue and rising costs.

For these reasons, billionaire investor Warren Buffett has called these pensions ticking “time bombs.” The financial crisis, experts say, shortened the fuse.

~Submitted by Eowyn

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One response

12 10 2009
Dave

Don’t worry, the dims have private pension/retire plans squarely in their cross hairs. There is just too much money sitting there for them to ignore.

One day, following a midnight vote, Americans will be logging on to their retirement accounts, only to see the letters IOU, signed by Uncle Sam.

It happened in Argentina recently. Don’t think it won’t happen here once the dims get desperate enough.

-Dave

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