The problem with pensions

Posted on 2011-04-10 08:41

I was discussing the perceived "problem with pensions" the other day with someone at work and realized I had to do a little more research to understand the topic. I found this post by John Maudlin explains the situation pretty well. (see the "problem with pensions" paragraph which starts a bit down the page).

Basically, states haven't been funding the pensions enough over the years because they hired consultants who told them they should expect an 8% return rate on investments they make with that money when they're really only making 5% (or in the case of NYS teachers - 2.3%! which I read in another article). A NY Post article suggests most of the loss of return was due to a shift in asset allocation as the states tried to shift their investments chasing higher returns but ended up with investments which charge much higher fees. Since the NYS Constitution (Article V, section 7, 1938) states that benefits cannot be diminished, the difference will have to be made up by the tax payers - which means essentially that the NY taxpayer will be paying fund managers (Wall Street). So the real problem isn't that the pensions are so amazingly generous, its that the states haven't been putting in enough money to pay for them because they've been drinking the Koolaid regarding return on investment - just like the mortgage industry!