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Tough Love for Public Pension Funds

public pension fundsThe immediate problem with public pension funds is that they are in danger of being run into the ground by short-sighted fund managers. Some believe the problem has progressed too far and there is no turning it around – that attempting a fix now is akin to closing the barn door after the horse has escaped. We’re pretty sure there are thousands of people who either are right now or eventually will be public pensioners who fervently hope we, as a society, don’t simply throw up our hands and mutter, “It was a bad idea anyway.”

Fixing broken public pension funds is going to be tough but here are some broad ideas to start with.

1. Actually Fund the Fund: Fund managers need to start actually depositing the actuarially required annual contributions. Believe it or not, this is a pretty big issue. As companies and governments juggle budget shortfalls, they often don’t worry about skipping a pension fund deposit or two. What’s the worst that could happen? They’ll double it up next year, right? 95% of today’s retirees medical plans are underfunded and too many employers have quit even trying to meet the contribution requirements. First order of business – fund the fund.

2. Curb Spiking: With many pension payouts based on a percentage of the final few years of salary, a forward thinking employee might decide to make sure he gets plenty of overtime, vacation pay, and other non-recurrent bonuses just prior to retirement, the better to pad the salary numbers used in calculating pension. This is an obvious example of gaming the system.

3. Raise Retirement Age: Want to create a full scale riot at the company? Walk into any break room around the country and declare that the retirement age has just been raised five years. The truth is that the average life expectancy for Americans has increased by that amount over the last 50 years. People are living longer but public pension funds have often reduced the retirement age, especially during the boom years of the 1980’s. This leaves more time after retirement to be drawing a pension from a fund that teeters on the verge of solvency. Bite the bullet and start increasing retirement ages back to an economically sustainable level.

A last bit of advice would be to get real about the rate of return expected by invested funds. Predicting a ludicrous profit from investments has the effect of suppressing contributions, which is what set this whole miserable ball of insolvency into motion.

The Heroic Investing Team

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