Pensions

South Carolina Public Pension Idiocy Underscores Coming Retirement Apocalypse

|

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.

NEXT: Cellphone Video Shows Four Cops Beating Philly Motorist Charged with Aggravated Assault and Resisting Arrest

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Thank you, for finally getting to the nub of the pubsec pension fraud:

    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).

    Until these fake projections are stopped, the real shortfall is calculated, and plans to fully fund the pensions (hopefully, by cutting benefits/increasing worker contributions), we haven’t even begun to solve this problem.

    1. ^this^

      Out here in Realworldia, we pvt sector Evul Kochporashun types search for “root cause” of issues in production and the like. Why? To ensure we actually FIX WHAT’S CAUSING PROBLEMS, and not just “fixing” symptoms.

      The growing “attacks” on state unions, the union pushback on “ZOMG but it’s a contract!” are all symptoms of the fundamental, root cause – promising “guaranteed” levels of returns that cannot be “guaranteed” to occur, and, in fact, probably will NOT occur.

      “Stop making the impossible-to-keep promises” is step one – THEN fix the problems with the existing bad agreements.

      Fucking shit that sounds too good to be true – how does it work?

      Oh – it doesn’t. Surprise!

  2. The insanity will end only when all government employees are moved to 401k’s (403b’s) instead of defined benefit pensions.

  3. I’m shocked that a group of people who can’t follow a simple election statute also suck at investing other people’s money. I know the election thing is more recent but this is just another episode in the continuing embarrassment that is my home state.

  4. I figure I’ll just work from home for $6714 a month like Betty or Jeremy do, so I don’t really need a pension.

    Either that or I’ll just heavily invest in opera glasses and typewriter cleaning supplies.

    1. FUS…

  5. I’m guessing the NYT narrative is that allowing the pubsec pension fund to invest in the icky and unregulated private market was their downfall?

  6. A fashionable critique of 401(k)s by leftists is that workers can’t be asked to manage their retirement funds or to bear market risks — they’ll choose stupid investments, get snookered into paying outrageous fees, and will lose money. Well, this article shows that public pensions are no different. The “smart money” pension managers are equally foolish, buying tech stocks at the height of the bubble, paying performance fees to managers for phantom gains that disappeared with the housing bust, etc. So the only difference between a public pension and a 401(k) is that the former permits the employee to have his hand in the voters’ pockets.

    1. yeah, but “public” investments are better because, well, because they are. As with all other things public, this is about intentions – guaranteed rates of return, no risk, no losses, ponies and unicorns, unlike those suckers who keep track of 401k’s themselves and are not covered by the blanket of public protection.

  7. Before all you future pension actuaries and CFAs start opining on how shitty these things are, let me point out a key note from the NYT article:

    “In 2005, South Carolina paid $22 million in management fees. By last year, that figure had soared to $344 million”

    This means that SC has been paying hedge funds to do the work. If it had been done internally, it would’ve (obviously) cost $344 million less. Also, while 8% is awfully high, 7% is not out of this world for a pension fund run by professionals. But, if you’re saying you can hit 7%-8%, and your staff is full of dilettantes who do nothing besides hire hedge fund managers, then THAT is the problem, not the expected ROA.

    1. So, you’d need a gross return of 15 – 16% to pay your fees AND hit your targets? Every year?

      Three words: No. Fucking. Way.

  8. The Federal Reserve just needs a third mandate.Congress should pass a law requiring financial markets to produce an 8-20% return on pension funds.

Please to post comments

Comments are closed.