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The Public Union Pension Bucket is Full of Holes and Leaking Badly

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27 comments on The Public Union Pension Bucket is Full of Holes and Leaking Badly

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Despite enormous gains in the stock market over the past decade, Public Union Pension Managers are Running Out of Retirement Money.

The graying of the American worker is a math problem for Farouki Majeed. It is his job to invest his way out.

Mr. Majeed is the investment chief for an $18 billion Ohio school pension that provides retirement benefits to more than 80,000 retired librarians, bus drivers, cafeteria workers and other former employees. The problem is that this fund pays out more in pension checks every year than its current workers and employers contribute. That gap helps explain why it is billions short of what it needs to cover its future retirement promises.

“The bucket is leaking,” he said.

The solution for Mr. Majeed—as well as other pension managers across the country—is to take on more investment risk. His fund and many other retirement systems are loading up on illiquid assets such as private equity, private loans to companies and real estate.

So-called “alternative” investments now comprise 24% of public pension fund portfolios, according to the most recent data from the Boston College Center for Retirement Research. That is up from 8% in 2001. During that time, the amount invested in more traditional stocks and bonds dropped to 71% from 89%. At Mr. Majeed’s fund, alternatives were 32% of his portfolio at the end of July, compared with 13% in fiscal 2001.

Understanding the Pension Crisis

Thanks to the Fed, 10-year bonds yield 1.5%. Pension plan assumptions are 6.5% or so. 

The stock market has easily outperformed 6.5% annually, but when plans are underfunded and more money goes in in retirement income than goes in due to demographics, there are still shortfalls.

Demographics, Birth Rate, and the Covid Baby Bust 

The fact is Demographics, Birth Rate, and the Covid Baby Bust are Quite Deflationary

Deflationary and Inflationary Impacts

  1. Inflationary: Shortage of workers increases wage pressures
  2. Deflationary: Fewer workers support an increasing number of retirees
  3. Deflationary: Older workers need more assistance, buy fewer things, travel less.
  4. Deflationary: More government debt and deficits. Government spending has a negative impact on real GDP.

The net impact is rather deflationary, not inflationary.

Add to the above the potential implosion of pension plans due to excess risk taking. 

I expect a 50% decline or more in the stock market at some point. But it will not take that to cause massive convulsions. 

A flat market or even 2% gains on average for 10 years would make many pension plans insolvent.

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Mike Shedlock

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27 Comments
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Tony Bennett
Tony Bennett
4 years ago
“Huge gains are not enough to support pension withdrawals.”
…
A key question is how much of withdrawal lump sum vs monthly stipend.  I can imagine quite a few pensioners thinking pension might go bust at some  point and better to take $$s upfront … exacerbating the problem.
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Casual_Observer2020
Casual_Observer2020
4 years ago
The market the Fed is propping up is keeping a real pension crisis from happening now. The bond market bailouts  flooded money into the stock market and caused this wealth effect which is why you are seeing some older people choose retirement now. The Fed’s actions have been a defacto bailout of retirements, pensions, stocks and bonds. 
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Casual_Observer2020
“The market the Fed is propping up is keeping a real pension crisis from happening now.”
…
Yes.  But per their own data (2019 latest) only 40% of people in bottom 50% of income have any sort of retirement plan … vs 80%+ for those in top 50%.  So, propping up the stock market has allowed inflation to flourish … hurting those in bottom 50% much greater.
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Casual_Observer2020
Casual_Observer2020
4 years ago
Reply to  Tony Bennett
Agree. It is the law of unintended consequences. 
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Casual_Observer2020
Casual_Observer2020
4 years ago
Reply to  Tony Bennett
By the way, if the Fed cannot solve these problems without negatively impacting 50% of the population or more, there is a good chance the United States falls into the hands of autocrat in 2024 who govern more like Putin. I fully expect a full civil war by election day 2024. 
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Casual_Observer2020
Casual_Observer2020
4 years ago
The Fed will be forced to bailout many of these pensions by monetizing more debt ( they’ve already started down this path). The same thing happen in Japan. The accounting system is a joke because someone’s asset is someone else’s liability but it’s all monetized by the Fed. There is no limit to their balance sheet because it’s just entries on a computer that uses digital money created out of electrons. 
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blacklisted
blacklisted
4 years ago
There are plans in the current Bill to force companies of more than 5 employees to start a retirement fund, which requires 5-10% contributions. At retirement you are only promised an annuity payment. The proceeds will be going to save pensions.  They plan to also go after 401K’s and fold them in with pensions.  CALPERS is one of the drivers, as we know they are in bad shape, especially when they were forced to invest in green funds.
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Eddie_T
Eddie_T
4 years ago
On the other hand, maybe Texas is going to have a public pension shortfall. They’re betting on bitcoin now.
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PreCambrian
PreCambrian
4 years ago
Public employee pensions made sense when government employees got paid less than the private sector employees. The pension was compensation for being paid less. However now public employees get paid more than the typical equivalent private sector employees even without pensions and when pensions are considered the difference is tremendous. The answer is to change all new public employees to social security and change the existing employees and retirees to a payout scheme similar to social security, with a three bend point benefit curve. The curve should be based upon a conservative 100% funding amount. Right now social security pays 90% of the first $1024 of lifetime average earnings, 32% of the amount above $1,024 and less than $6,172, and 15% of the amount above $6,172. I would probably raise the first bend point and lower the second bend point but there is no reason to pay public pensions of 100% of final salary for those that make hundreds of thousands per year. There are many cases where those final salaries (especially for high salaried supervisory workers) were manipulated to be higher in the final five years so that the pensions would be higher. The current system isn’t sustainable and the sooner it is handled the more equitable the distribution of the contributed amounts will be.
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Captain Ahab
Captain Ahab
4 years ago
Reply to  PreCambrian
Al true, but with a few caveats.
1. Government employees were NOT given a choice of how to fund their retirement.
2. Today’s pension problems are the result of governments not paying paying in their share when times were good, thereby reducing capital.
3. The low yields (thanks to the Fed) on the pension plans’ portfolios in recent years, is directly related to the increased the value of other retirement plans, such as 401Ks etc.
So to be fair,  combine all retirement plans, pensions, 401ks etc, into one big fund and pay out accordingly. Seriously, though, the demise of pension plans was easy to predict. Similarly, those 401Ks will be devastated with any market drop.  Stacking gold is the only  solution at this point.
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PreCambrian
PreCambrian
4 years ago
Reply to  Captain Ahab
1) Almost no one but the self-employed is given a choice on how to fund their retirement. I didn’t have a choice for social security. 
2) Yes governments didn’t increase their contributions when expected yields went down. However either did most employee contributions. For those governments which cut their contributions as a percentage of payroll then I would have them increase their contributions to make up for it in the new system. Obviously a new pension plan can’t be described in a few sentences but cutbacks need to be made and they need to be fair.
3) Pension plans had the same opportunity to invest in stocks as everyone else.
In California I think that CalPERS is about 70% funded. A 30% decrease in payout would easily be manageable by a bend point type payout system like I described with perhaps 5% cuts for low to middle salaried employees, a 20% cut for mid to high salaried employees, and a cap on the maximum pension (or salary from which the pension is derived) similar to how social security works. There will be a lot of lawsuits.
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KidHorn
KidHorn
4 years ago
The ones with a lot of democratic voters will get bailed out. Teachers pensions will be fine. Oil workers, probably in trouble.
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TexasTim65
TexasTim65
4 years ago
Reply to  KidHorn
There are virtually no private pension plans anymore. There are a few that are winding down but most private companies no longer allow any new employees to get into existing plans. It’s all 401Ks now.
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StukiMoi
StukiMoi
4 years ago
Anyone who wakes up in the morning, looks in the mirror and sees someone dumb and naive enough to believe that; “saving” and “handing money to conmen in exchange for pie-in-the-sky promises of getting the Brooklyn Bridge (or anything else)” have anything in common whatsoever; truly is stupid and naive beyond any and all possible redemption. 
Which is fine as it goes, I suppose. But what is then even more hopeless, is when the dunce then doubles down on dumb, by believing wealth spent on hookers and blow and bomb craters and grandiose self promotion by those conmen; can magically be made to reappear again. Just because another conman goes on TeeVee and says so…..
It’s unbelievable, how flat out retarded a century plus of publicly funded indoctrination into naive pliancy, have managed to render once presumably literate Americans. Truly unbelievable.
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Captain Ahab
Captain Ahab
4 years ago
Reply to  StukiMoi
The fact is, most people do not have the skills to wisely invest their money. Every investment, even with due diligence, is about future expectations based on current information, and the ability to obtain that information and evaluate it intelligently requires not only investment acumen, but the time to do it.  And even then, the  Fed and a profligate government can screw it up with massive wealth transfers!
However, it was no different 100 years ago. People were no smarter. The Roaring 20s provided the foundation for the 30s’ Depression.
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StukiMoi
StukiMoi
4 years ago
Reply to  Captain Ahab
“The fact is, most people do not have the skills to wisely invest their money”
The Fact really is, noone has any more “skills” at it than anyone else. Those few who may, get prosecuted for insider trading. The childish racket currently branded “Investing,” meaning buying things one has no asymmetric information about, serves no other purpose than acting as a foil to fool the dumb and naive into believing that those who The Fed and Government is handing riches to by robbing everyone else, have somehow “done” something which justifies it. They haven’t. It’s pure, officially sanctioned, crass theft. And nothing but.
A drug addicted, blind hobo; who can’t speak a word of English; and Warren Buffet have exactly the same expected return when tasked with picking what to “invest” $X in.  And furthermore, they have exactly the same expected return; whether they are tasked with making as much money as possible with their picks, or losing as much as possible. (As long as they are constrained to pick among “investment” products. Even someone as hopeless as Buffet, is likely to do better than some guy choosing to invest in $X worth of bullets in the head….)
Retired Union guys aren’t pensionless because they invested “wrong.” Noone invests “wrong.” Just as noone invests “right.” Instead, retired Union guys are pensionless because they didn’t invest at all. They just handed money to some hack in New York, so said hack could pay himself handsomely and burn the money. That’s it. Nothing more to it than that. Union guys worked, conman spent.
Consumption has outstripped production in America since before Vietnam. There has been no net savings/investment for the duration of the Baby Boomers’ and later generations working lives. Nothing has been put aside. Hence nothing is available to draw on.
Running around like some halfwitted CNBC moron, creates zero value. It builds nothing. It facilitates building nothing. Etc., etc. Yet, the apes doing so, are the ones which financialization have enabled to spend the most. Meaning, since they have created nor built nothing of value themselves, all they have spent, have been stolen from others. From “workers” dumb enough to fall for the con. Who hence have no savings left. As well as from precious capital owners, such that America now has about as much productive capital left as it did in 1950 or thereabouts. And it’s rapidly declining; one printed, hence stolen, trillion at a time.
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Christoball
Christoball
4 years ago
I always wonder what percentage of stock purchases are made by public pension funds?
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PreCambrian
PreCambrian
4 years ago
Reply to  Christoball
Pension funds are actually net sellers of equities. The only net buyers of equities over the past decade is corporations in stock buybacks. https://i2.wp.com/heisenbergreport.com/wp-content/uploads/2020/06/Bye-Bye-Corporate-Bid.png?ssl=1
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Christoball
Christoball
4 years ago
Reply to  PreCambrian
That is a great chart. It was not what I thought it would be. Except for reduced corporate buy backs from previous years; it is so interesting that households and foreign investors are buying while everyone else is selling.
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TexasTim65
TexasTim65
4 years ago
Once the first couple of them collapse the rest will in short order. Partly because the stock market will take a hit that will ruin other pension funds but also because if the inevitable bail out is seen a something ‘decent’ all the rest will line up hat in hand for the same treatment.
Not sure it will even take till 2030 for that to happen. I’d guess by 2025 or so. The cited example of 18 billion for 80K retirees works out to only 225K a person. If the average pension is 30K a year, that’s only 8 years worth to drain it entirely (assuming no inflows and market gains). There will be inflows of course but it also won’t hit zero before the alarm bell is really ringing.
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Irondoor
Irondoor
4 years ago
According to so-called “gurus”, there is no alternative to a 50% stock market crash “in the future”. It is guaranteed to happen. Problem is, these Guru people have an alternative: Gold! Check it out. How much Gold do you hold ? Is it enough? After all, it has performed so poorly compared to stocks, you should have been loading the boat in Gold. But you didn’t, did you? So, what are you going to do? Like most people, you don’t know. I’m not saying a 50% stock market downturn isn’t in our future. We’ve had two of them in the past 20 years. The question is, what are you going to do? Buy bonds, maybe? If the crash is caused by a dramatic increase in interest rates, do you know what happens to the market value of bonds? One thing is for certain, Gold isn’t going to save you. 
In other words, we are screwed no matter what happens. The only alternative is higher taxes.
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TexasTim65
TexasTim65
4 years ago
Reply to  Irondoor
It won’t be higher taxes, that’s a non-starter politically for either party. It will be massive printing and inflation. If you inflate at 10% a year and claim the official rate is 3-4% you reduce your problem by 6-7% a year (doesn’t sound like much but in 11 years you’ve halved your problem). So you pay off the retirees as per requirements but they can only buy 1/3 or less of what they expected to get.
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Christoball
Christoball
4 years ago
Reply to  TexasTim65
I agree, that could be a likely scenario. Inflate the economy and make exorbitant pensions relatively modest
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RonJ
RonJ
4 years ago
Klaus Schwab says to imagine it is 2030, we own nothing, and are happy. Union pension buckets should not be a problem. 
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Eddie_T
Eddie_T
4 years ago
Nothing new…..the snowball is just getting bigger and rolling faster downhill. Some public union employees have made out like bandits for years…..soon the rest will get completely screwed, or the rest of us will have to pay for more bailouts.
Not an issue in Texas. Glad I don’t live in IL or PA.
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ed_retired_actuary
ed_retired_actuary
4 years ago
Public pension plan sponsors do not want to face the likelihood that a 6.5% to 7% assumed long term return to a diversified portfolio is very optimistic starting from recent low interest rates, extreme US stock valuations and slow future economic growth.  There is very little basis to estimate future returns to private equity, hedge funds and other alternatives, so the plans take a leap of faith that these will outperform Beta equivalent public indices by at least several % annually.  They do not want to consider the the massive inflow of funds into these alternatives could have bid up their prices to effectively arbitrage away most or all of the opportunity that they are chasing.
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Irondoor
Irondoor
4 years ago
Reply to  ed_retired_actuary
They have no choice. Any reduction in long term return assumptions means an increase in taxes. No can do.
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