Kiss Your Pension Checks Good-Bye

Las Vegas is Welcomed at the Door of Pension Fund Management.

“Make It All Back by Doubling Down.”

Right.

Make a photocopy of your next pension check.  Then frame it, put it in a safe place, and be ready to retrieve it and hang it on the wall as a memento of days gone by.

The lead story in The New York Times today (March 9, 2010) informs us that pension funds which are operated by certain States and companies have begun to move their investments out of domestic stocks and into riskier investments such as offshore stocks (presumably, some of those are stocks based in “emerging economies”), junk bonds, commodity futures, and securities which are backed by questionable mortgages.  However, it is inaccurate to label these devices as “investments.”  This process ought to be called by its correct name: “gambling.”  It is emblematic of the perennial search for “yield.”

There are least two reasons for the shift in attention: 1) pension funds were badly hurt by the falloff in the stock market from October 2007 to early March 2009; and have not fully recovered during the Great Rally of 2009; 2) the funds’ assumptions of the return which would flow from their portfolio is wildly optimistic in the real world, and has been so for decades.

Therein lies a Great Lie, and a Great Cover-Up.  Pension funds are desperate to avoid having to (or being forced to) lower their assumptions of portfolio return, for to do that would necessitate massive infusions of Cash into the funds’ trust accounts in order to bring their future payout obligations into line with reality – and many pension funds, especially those which are operated by the States, simply do not have the money, or any prospect of acquiring it.

States, in particular, are particularly adept at lying to their own people.

The recession is far from over.  We are staring into the face of a full-blown Depression, more severe than the Depression of the 1930’s.  This entire edifice of lies, deception, and desperate risk-taking will inevitably collapse when these so-called “investments” fall into the gutter, as they surely will.  We can look forward to short-changed pension checks, to be followed by civic unrest including strikes by present and future government retirees from the ranks of the teachers, police, firemen, other professionals, and office workers.  What had been thought to be unbreakable contracts as absolute guarantees of security will turn out to be fictions.

There is no easy way out.  There may not be any way out at all, easy or otherwise.  The money is not there, and will not be there, to make up the deficit in promised future obligations, even under present assumptions of portfolio return on investment; and the money is not there, and will not be there, to make up the shortfall which would result from bringing those assumptions into line with reality.

This is a ticking time bomb which can only result in disaster.  Frame a copy of your next pension check.  You will able to look upon it and say “Those were the days.”  If you’re not receiving a pension check as yet, plan ahead on the basis that you may never receive the first one.

William Kurtz

March 9, 2010

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