Pensions: Underfunded, Underperforming and Unable to Pay
Pensions: Underfunded, Underperforming and Unable to Pay by Rory – The Daily Coin
As a lot of the long time readers of The Daily Coin are aware we have a close relationship with Fund Manager, long time Wall Street analyst and publisher of Investment Research Dynamics, Dave Kranzler. Over the past two years Dave has explained, on a number of occasions, the problems with pension funds throughout the U.S. This fact has been driven home during the past year as a couple of the larger pension funds, most notably one of the Teamsters funds, announced their funds were underwater and would be making very serious, very deep cuts in benefits to pensioners. Today, we learned the largest pension fund in the country is in very serious trouble and it appears the challenges they face may result in the same actions being taken as the Teamsters. I am not saying this is going to happen but the evidence, presented below, speaks for itself.
According to The New American:
…the country’s largest pension plan, the California Public Employees Retirement System (CalPERS), did the best he could with the bad news: “Positive performance in a year of turbulent financial markets is an accomplishment that we are proud of.” That “positive performance” was a measly 0.61-percent return from July 1, 2015 through June 30, 2016, on his $300 billion pension plan. That means that the fund is now about $100 billion short of meeting its future obligations.
But that $100 billion number greatly understates the real liability because it’s based on a pixie-dust assumption that the plan can earn an average of 7.5 percent each year on its invested assets. Unfortunately his plan’s returns haven’t met that target over the last three years, or the last five, 10, 15, or 20 years for that matter. [Emphasis added]
If you have assets in the CalPERS system, good luck. As we continually report our economy is nothing more than smoke and mirrors and the mirror is cracked. The Daily Coin has been one of very few news agencies to actually use the words recession and depression. Our economy has been in a recession for some time. The talking heads on mainstream media will not use this word until they are told. The Federal Reserve, working in concert with the Treasury Secretary, will make the announcement and the news will then filter throughout the various reporting agencies – with lots of spin attached for your entertainment pleasure.
What does this say about the smaller pension funds? We have two of the largest, including the largest, pension funds in the country reporting they are in serious trouble, they are underperforming and underfunded. Not sure about you but $100 BILLION underfunded sounds like a pretty dire scenario. Over promised, under-delivered results and guess who suffers. That’s right, we do. Now what?
The New American not only reviewed the short term performance but took into account some of the longer term projections as well. The past performance and future assumptions of these funds is stunning in their departure from reality. Any fund manager that has assumed, beginning in 2008, their pension fund would perform at the same rate of return as before 2008 is either a fool, a thief or a liar. In 2008 the words Quantitative Easing had been dreamt-up by the geniuses at the Federal Reserve, so how could anyone assume their account would perform the same as previous years?
Here’s The New American‘s assessment of the longer term picture:
The manager of CalSTRS, Christopher Allman, sang the same tune as Eliopoulos: “[Our investment strategy] is designed for the long haul and we look at performance in terms of decades, not years.” But like CapPERS, over the last 10 and 20 years CalSTRS has failed to meet its benchmarks, too.
And if those benchmarks were lowered to a more realistic level — say to the five or six percent range — his shortfall, just as with CalPERS, would be vastly larger.
Extended across the entire public-sector pension plans, the shortfall becomes breathtakingly (some say unnervingly) huge. According to The Economist magazine, the average American state or local government pension plan assumes that it will earn an average of 7.69 percent per year in the future. But in today’s world, those assumptions are increasingly being called into question. Most investment strategies put 60 percent of the plans’ assets into bonds, hoping to generate yield from bond interest payments, and perhaps some capital appreciation if interest rates continue to decline. But with 10-year Treasuries yielding barely 1.5 percent and 30-year bonds paying not much over two percent, asking those investments to approach anything like seven percent is like asking a long-jumper in the Olympics to reach 100 feet when the current world record is just under 30 feet. [Emphasis added]
Wildly exaggerated to put it mildly.
This is why, not as a financial advisor but as a concerned citizen explaining my own approach, the only logical conclusion that can be reached is to get out of the system. Why not remove those assets from the system and take charge of my own future? Am I going to lie to myself? Am I going to knowingly put myself in harms way? Am I not smart enough to read, use basic math skills and determine that even sitting on a pile of cash will serve me better than being in one of these underfunded, underperforming funds? With the real threat of losing a major portion of my wealth to mismanagement on the line it seemed like the right thing to do in 2009 when I pulled the plug on my 401k and converted it to tangible assets. Those tangible assets have not only recovered the taxes, penalties and fees, but they are now, safely, outside of the system.
When people sit idly by and do nothing about a given situation there could be insurmountable consequences to making that choice. Since when is a person that most of us know nothing about a better choice to handle our wealth than ourselves? Since when does it make sense to blindly place our entire life’s savings into an account, and rarely review it’s performance, and hope for the best? This, sadly, is how most of the funds within pension programs, 401k and IRA accounts are handled. It may be time for a change. If you don’t think so, please re-read how well the largest pension plan in the country is handling those funds and if the largest pension plan in the country is this far out of balance then how well do you think the managers of your account are performing?