How bad is the public-pension situation in these United States? Bad enough that the New York Times illustrated a must-read story about South Carolina's experience with a completely stupid image riffing off the old book/movie Fast Times at Ridgemont High (because pensions are so like…coming of age teens in Southern California in the early 1980s?).
The Times story tells a tale that is appallingly familiar to readers of this site and Reason magazine. In the hunt for higher returns to pay off on inflated earnings estimates, South Carolina has shifted more of its public-employee pension funds into riskier and riskier investments. This can't end well, can it?
Not long ago, this fund was about as boring as it gets. Before 1999, it was largely invested in a mix of United States Treasuries and corporate bonds. The fund moved into equities just before the technology bubble burst in 2001. By 2005, some state leaders were pushing to give the fund more leeway, arguing that South Carolina's money should work harder. State laws were changed in early 2007 to let the fund put money in a broad mix of private investments….
Those investments carried an enormous price. In 2005, South Carolina paid $22 million in management fees. By last year, that figure had soared to $344 million, including performance fees….
After a burst of some good returns, pensioners were guaranteed returns of 8 percent on their payouts. The average actual return for public pension plans is somewhere around 4.5 percent. Don't bother doing the math. The result is pretty much the same everywhere: States are guaranteeing impossible rates of returns on defined-benefit pensions. Somewhere down the road, the $1 trillion to $3 trillion deficits between what funds owe and what they have is gonna come due. And then the question will be who gets the haircut: Pensioners (in the form of lower retirement payments) or taxpayers (in the form of higher taxes).
Due to rotten returns and ridiculous promises, California is facing a 304 percent increase in state contributions to pensions. That's a major reason that voters in the city's second and third-largest cities, San Diego and San Jose, just voted overwhelmingly to put new public-sector workers into defined-contribution plans. It makes budgeting easier and takes the state out of the investment game. It's a solution that needs to be adopted everywhere—and applied retroactively to the greatest degree possible through buyouts and the like of defined-benefit participants and about-to-retire folks.