Public Promises and Pensions

What’s wrong our public pensions?

On the face of it, the promises are too big and the funds are too small. We’ve underfunded our pensions because contributing a dollar today requires taxes today, taxes that have to be approved by politicians who can be punished at the ballot box. At the same time, pension benefits promise a dollar tomorrow, dollars that earn worker loyalty and union support today. A tax today is penalized; a future payment is rewarded.

But it goes deeper. There’s a deeply corrupt public pension culture in which audits are scarce, board members owe seats to politicians—politicians who receive political contributions from those who directly benefit from the system—retirees, unions, consultants, and investment managers. Those board members are rarely investment or actuarial experts themselves; instead they rely consultants who charge fat fees to give plain-vanilla advice that comports with the wishes of the most powerful pols.

In order to supplement the budget, public pensions act as a private piggy-bank for stealth borrowing. And multi-billion dollar pension funds are awfully tempting targets. Underfunding thrives in a place that tolerates corruption. The solution is a culture of accountability and transparency that punishes covering up. Sunlight is the best disinfectant.

Douglas R. Tengdin, CFA

Chief Investment Officer

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