Problems with Pensions

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Excellent article concerning the problems with pensions, in the US and abroad.

http://pensionpulse.blogspot.com/2009/04/should-governments-stop-meddling-in.html



snip:

In my last post, I discussed how CalPERS is seeking to buy TARP holdings and Citigroup assets. I said that this carries enormous risks, especially if the recovery turns out to be very modest or even worse, it falters.

The U.S. government invited CalPERS and other large pension funds to take part in the new program to buy these assets from the banks with the help of hedge funds and private equity funds.

You might stop and ask why does any government get involved in the investment decisions of public pension funds? Consider the case of the National Railroad Retirement Investment Trust where stock losses may be a lesson:

A special pension fund for railroad workers that was given permission during the Bush administration to invest its assets in the stock market lost more than a third of its value during a recent 18-month period, a loss that could influence an ongoing debate about how to keep government-affiliated retirement programs solvent.

After the National Railroad Retirement Investment Trust initially made healthy gains by investing in the stock market, it was hailed by some lawmakers as a model for how to save Social Security - either by investing part of the Social Security trust fund in stocks or by creating private accounts and giving individuals a chance to do the same.

Senator Chuck Grassley of Iowa, at that time the Republican chairman of the Senate Finance Committee, was quoted in 2005 as saying that Congress should consider putting part of the Social Security trust fund into stocks "based upon the success of the railroad retirement fund." Many other members of Congress made similar comments, and then-President Bush launched an un successful campaign to give people the power to invest portions of their own Social Security funds in the stock market.

But since the end of 2007, the railroad fund's returns have crashed. The fund, which had previously been restricted by the government to investing in Treasury securities, put its assets into everything from foreign stocks to real estate to "opportunistic" investments. As a result of the losses, taxes may be raised on the railroad companies and their workers, as provided for in the law under which the trust was established.

"They just kept on investing more and more and more into the market," said Marvin Dickman, inspector general of the fund's parent agency, the federal Railroad Retirement Board. Dickman said in an interview he would like to know more about the investment strategy but has run into roadblocks because Congress classifies the board's trust fund as a separate, "nongovernmental" entity.

"There is a total lack of oversight," he said.

But the federal railroad board that oversees the program believes the strategy will pay off in the long run and it has no intention of halting the investments. Asked if he worried about the losses, Federal Railroad Board general counsel Steven A. Bartholow responded, "I would say that we don't have any overriding concern . . . you expect the market to go up and go down."

The railroad retirement program predates Social Security as a federally sanctioned retirement plan, having been created in 1934 - and becoming the model for the Social Security plan that President Franklin D. Roosevelt implemented a year later.

As a result, Congress created a special exception for railroad employees: They do not receive Social Security and pay no taxes for it. Instead, they pay taxes for a two-tier system that supplies benefits similar to Social Security, as well as a pension plan that is funded through the Railroad Retirement Investment Trust.

The government took pains to make sure the money wasn't lost on any risky investments, requiring that the assets be invested in conservative Treasury securities.

In 2001, however, the managers of the railroad fund pushed for permission to invest its assets more aggressively. At the time, proposals were being floated to allow the Social Security trust fund to be invested in the stock market. Former President Bill Clinton earlier had proposed putting a portion of the Social Security trust fund into the stock market, and an influential former Social Security commissioner, Robert M. Ball, had urged the measure as well, saying stocks would produce "a better return for the Social Security system" than bonds.

While Congress never approved putting Social Security funds into the market, it did make a bipartisan decision to allow the railroad retirement program's trust fund to be put into stocks and other investments - as long as the rail industry agreed to make up for any shortfall. The industry and its unions embraced the idea in the belief that it would enable them to have lower taxes but higher returns. If it worked for the railroad trust fund, backers reasoned, then it could be applied to other programs.

The fund says on its website that its target portfolio is to have 26 percent in US stocks, 22 percent in foreign stocks, 10 percent in private equity funds, 15 percent in real estate and commodities, and 27 percent in fixed-income - an investment strategy that some analysts consider too risky.

But the exact nature of the investments is difficult to determine. Congress gave the fund the authority to make its investments autonomously, exempting it from direct oversight by an inspector general. As a result, Dickman, the inspector general, last year took the unusual step of issuing a public "statement of concern," complaining that the program had "fewer safeguards than those established to protect the retirement investments of Federal and private sector workers."

The fund did well from 2002 to 2006. That prompted a number of politicians to say the idea should be tried elsewhere. In addition to Grassley's comment that the idea should be considered at the Social Security trust fund, Senator Ben Nelson, a Nebraska Democrat, said he "wondered why that suggestion hadn't been made by others" and was "anxious" for details, according to a 2005 article by Congressional Quarterly. Nelson said through a spokesman that he didn't follow up on the idea.

Grassley spokeswoman Jill Kozeny said the senator today would "approach that debate as he did in 2005, wanting to talk through every option in order to save the program."

While Congress never approved the proposal to invest Social Security trust funds in the market, the federal Pension Benefit Guaranty Corp., which insures private pension plans, pursued the idea vigorously for its trust fund. Officials from the pension agency met with the general counsel of the railroad trust fund to learn about the idea, and then approved a similar investment strategy, which is now being implemented.

But the railroad retirement fund has done poorly in recent months. While the fund won't release cumulative figures, its reports indicate the fund dropped in value by more than one-third, and perhaps as much as 40 percent, from September 2007 to February 2009, after taking benefit payments into account. In the last quarter of 2008, for example, the fund said its investment performance was down 17.15 percent.

Dickman said the railroad fund's decline should serve as a warning to officials at Pension Benefit Guaranty Corp. He said it is "ludicrous" for the pension agency to be "investing one dime into the stock market at any time."

The idea of investing part of the Social Security trust fund in the markets remains a possibility - but on a much smaller scale than adopted by the railroad fund and the pension agency.

James Roosevelt Jr., whose grandfather implemented Social Security and who advises the White House on the issue, said he might support a test that put 5 percent or more of the fund into the stock market as long as everyone agreed to one principle: "As ought to be true of every investor, don't invest more than you can afford to lose."

[JDPriestly]

1. Just got my copy of Mother Jones -- It's all about pensions.

Look for it. The articles I am talking about are not yet on the Mother Jones website as far as I can tell. Just watch for it at newstands, in your mail. Sooner or later the articles I am describing will be on the website I think. Be sure to see a copy.