Public Pension Funds Are Adding Risk to Raise Returns

[groovedaddy]

States and companies have started investing very differently when it comes to the billions of dollars they are safeguarding for workers’ retirement. Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds.

But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.

“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. “Double up to catch up.”

Though they generally say that their strategies are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously shunned hedge funds are trying them now.

http://www.nytimes.com/2010/03/09/business/09pension.html?th&emc=th

[jody]

1. Why shouldn't Public Pension Funds gamble, aren't most of them protected by laws that obligate

taxpayers to keep paying pensions even if the fund is bankrupt? :mad:

[ParkieDem]

2. That's right.

And that's a big chunk of the problem, and why everyone should be afraid here.

The most tried and true investment adage is that, in the long run, investors are rewarded for taking risks. There is no such think as a high-return investment that is risk-free. If someone promises you that, they're pushing a scam on you.

For a variety of reasons -- increased life expectancy, lack of fiscal discipline, inflated assumptions about future returns, and irresponsible promises to public employees -- many public pension funds are becoming very strained. If there is a public pension deficit, the only way to make it up is to (1) try to increase investment returns, or (2) raise taxes. To raise investment returns, these funds have to raise their risk profile. Of course, if those risks don't pay off, then taxes will have to be raised even more.

Now, I don't generally have a problem with tax increases, but many people do, and will resist them. In this hypothetical, taxes may in fact be raised, but probably not enough to cover the shortfall. Thus, state services/budgets will have to be cut to cover the rest. The bottom line is this: if state and local taxpayers have to endure more taxes to cover public pension deficits, they will be ultimately paying more taxes for fewer services. This is a recipe for disaster, and could result in major government backlash. Take, for example, a steelworker whose company raided his pension fund. He's stuck with little retirement, and has to keep working until he's 70 or 75. All of a sudden, his taxes go up to cover a shortfall in a public pension, which allows its workers to retire at age 55. No matter how strong his belief in unions and the protection they provide, do you think he'll be happy paying these taxes so a 55 year-old government worker can retire?

States and local governments really need to start looking at their pension obligations so they can honor their contractual obligations and ensure that government workers are provided the pensions that they earned.

[lonestarnot]

5. I don't have a choice. Mandated contributions, no opt out!

Fighting like hell to stop that soon.

[raccoon]

3. So the taxpayers just bailed out the banks...now public pensions might

need a bailout too, in the not too distant future.

People, what's wrong with this picture? Everybody (meaning banks, public pensions,etc.)
can't be bailed out.

Looks like a train wreck coming down the tracks.

[girl gone mad]

4. It won't end well.

Many taxpayers have no hope of ever retiring, let alone getting a pension. Pensions are unheard of for most of the under 40 set. Asking them to bear the burden of failed pension system risks a lot of political fallout. The managers should take that under consideration.

[dixiegrrrrl]

6. Actually, the FDIC wants the pension funds to bail out the banks.

FDIC going broke buying all that toxic debt, so they floated the idea of YOUR pension "investing" in ...
the toxic debt.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x76641