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Take the (Pension) Money and Run

We’ve heard from such credible sources as the Government Accountability Office, a Federal Reserve Bank, and now the Harvard Kennedy School Mossavar-Rahmani Center for Business Government (that’s a mouthful) has joined in to say its piece about the danger facing public employee pension plans. As quoted by the website StateBudgetSolutions.org, a recent Harvard study opines: “Across the United States, state and local government-sponsored pension plans are in trouble. They are dangerously underfunded to the extent that their assets are unable to meet future liabilities without either outsize investment returns or huge cash infusions.”

That’s pretty blunt language and with good reason. An amazing run of incredible investment returns is not likely to happen, and huge cash infusions are almost laughable. Let’s look at the first option: return on investment. The Harvard study confirmed what many of us who have been watching the situation already know. Pension managers at the state and local level are already desperate, which leads to increasing their investment risks, a sad ploy destined to lead to bigger losses the next time around. That leaves cash infusions.

Cash? From where? Taxpayers are at the end of their rope and covered workers are realizing the true extent of the unfunded pension issue. Public retirement systems that seemed exceptionally solid two decades ago have now been shuffled to the back of a long line of people and programs holding their hands out, ranging from bondholders to Medicaid payments. Add it all up and there’s about $18 trillion coming due.

The bottom line is that it’s time for public workers to take a serious look at getting out while the getting is, if not good, at least better than it’s ever likely to be again – and they’re clinging to life support as it is.

There’s one slim hope, that these governments can institute major reform and work themselves out of the hole. Unfortunately, historical evidence is scant that politicians and bureaucrats will be able to summon the intestinal fortitude to institute that kind of large scale change. Before you know it, public pensions may be a thing of the past.

The Heroic Investing Team

 

 

 

 

 

Flickr / Mr. Thomas

 

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