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Public Pension Ponzi Schemes

Posted by Larry Doyle on April 6, 2010 10:50 AM |

Making promises that can’t be kept.

Garnering support via payback, if not kickbacks.

Effectively misrepresenting expected returns.

Am I talking about Bernie Madoff and every other con artist who has ever perpetrated a Ponzi scheme? No, although I could be. I am addressing the reality of the public pension system in our country. Those participating in public pensions can rail on me all they want. The simple fact is the power and leverage of the public unions combined with the willingness of public officials to sell their souls, while mortgaging our children’s futures, have created a massive gap in the funding of public pension liabilities in our nation today.

Call me heartless if you’d like. The truth may hurt, but unless we are willing to face it, our collective national future will be in serious jeopardy…hell, it already is.

I have highlighted this growing financial disaster previously, but I witness more evidence of it again today via a recently released report from Stanford University. The Wall Street Journal highlights this report in writing, Shortfall Awaits California’s Big Pension Funds:

A study released Monday by Stanford University estimates that California’s three largest state-operated, public-employee pension funds—the California Public Employees’ Retirement System, California State Teachers’ Retirement System and University of California Retirement System—currently face a total shortfall of more than $500 billion.

Nice round figure, huh? Look at that number relative to the estimate made less than two years ago:

The figure dwarfs the funds’ own combined shortfall estimate of $55 billion as of July 2008, according to the report, which doesn’t account for the more than $100 billion loss sustained by the funds during the recession. That adds a further wrinkle to California’s already precarious fiscal situation.

The study, prepared by Stanford graduate students for Gov. Arnold Schwarzenegger, used a more conservative formula to estimate the pension systems’ unfunded obligations, an approach advocated by a growing chorus of experts.

Like who? Well, start with Blackrock’s Larry Fink. (Refer back to my March 1st commentary, “Larry Fink Warns Calpers, Sense on Cents Warns America.”) The WSJ continues:

The report also recommended increasing contributions to the funds, investing in less risky assets and trimming pension benefits for future employees.

Gov. Schwarzenegger warned Monday that pension-fund shortfalls could lead California, which faces a $20 billion budget gap in the coming fiscal year, to divert more funds from other state programs to cover pension costs.

What do you think the chances are that Schwarzenegger, or any other politician, would compel those holding these pensions to take a haircut in terms of their payouts? Not likely. How then might these growing pension gaps be addressed? Look for the funds to disregard this report and actually increase the risk profile within their investment portfolios in an attempt to generate greater returns. Can you repeat after me? Private profit for those holding the pensions versus social loss for the taxpayers stuck with the bill.

The union beneficiaries of these pensions represent the base of support for the Democratic Party. I have no interest in politics in this commentary. I have every interest in exposing these Ponzi-type pensions and providing integrity in the process.

What might be the ultimate solution for these state pension funds and also the federal pensions, including Social Security?

Keep a close eye on your retirement accounts. Would the United States, especially under the Obama administration, effectively take control of our individual retirement accounts, use the current assets to fund these pension gaps and some of our federal deficit, and then issue government IOUs to us in return? Do not think it can’t or won’t happen. For more on this leg of the Ponzi scheme, I strongly recommend you read my commentary from February 19th, “Will Uncle Sam Takeover Your IRA?”


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