A network of financial advisers capable of responding to growing concerns of workers participating in our nation’s largely underfunded public pensions is needed—immediately.
With nearly 80 million Baby Boomers retired, or on the verge of retiring, news that the overwhelming majority of this population is unprepared financially for retirement is finally getting the attention it has long deserved.
Ten Years ago I wrote in Forbes,
“We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, the Baby Boomers and others, slipping into poverty. Too frail to work, too poor to retire will become the “new normal” for many elderly Americans.
That dire prediction is already coming true. Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is inevitable. With the average 401(k) balance for 65 year olds estimated at $25,000 by independent experts – $100,000 if you believe the retirement planning industry – the decades many elders will spend in forced or elected “retirement” will be grim.”
It is well known that the percentage of full-time private sector workers who have a pension has declined dramatically in recent decades. In the public sector, pensions are still the norm, so most state and local government employees have been promised a stated amount of retirement income for life.
Note I said, “promised.”
Whether state and local workers will ever get the full retirement benefits they have been promised is, with each passing year, becoming more and more uncertain. A great many of the states and local pensions are massively underfunded.
States with the biggest pension crisis include Connecticut, Arkansas, Mississippi, Kentucky, Hawaii, Alaska, Oregon, Illinois, California and Colorado.
On April 12th I was invited by PeakProsperity to do an hour-long podcast focused upon the subject of underfunded public pensions.
Tens of thousands listened to the podcast, making it clearer than ever to me that people are starving for experts to explain in plain language how pensions work, or don’t work—fail.
On May 20th, I will be participating in another lengthy interview on Oregon NPR focusing on that state’s pension. The folks at PeakProsperity and I are planning additional podcasts focusing on the worst funded states.
In addition to seeking clear explanations about how these pensions work and what taxpayers and participants should expect in the event of a bankruptcy, people keep asking me what they can do.
My message is clear: you are not helpless. There are steps you can and should take today.
Very simply, there are three main contributors to any pension’s health. First, how much money goes into the pot (contributions); second, how the money in the pot is managed over workers’ lifetimes, say, 30 years (investments) and third, how much flows out of the pot (benefits). If any of these three elements is out-of-whack, trouble ensues.
The issue of contributions to government pensions by taxpayers typically is hotly debated because taxpayers are already stressed about their own woefully inadequate retirement savings. Equally, taxpayers often cite too-rich state worker retirement benefits as a concern. These taxpayer responses have been attributed to so-called private sector “pension envy.”
Mismanagement of pension investments is the one key element to pension health that no one talks about—ever. However, in my decades of experience forensically investigating public pensions, I have repeatedly discovered that the greatest cause of pension underfunding is mismanagement of investments—not contributions or benefits.
Most investigations I have undertaken have concluded that if the pension had been properly managed, most or all of the underfunding would have never happened.
Part of the reason investments at even the largest public pensions, such as CalPERS, are such a mess is that the boards of these funds lack even basic knowledge of investing pension assets. Public pension boards consist of laymen—school teachers, cops, firefighters, and sanitation workers. Generally, in my experience, it is foolhardy for workers to put their trust in these boards. Even if they wanted to do the right thing– which (for political and other reasons) they often don’t– they wouldn’t know how to.
Likewise, most participants in public pensions lack the financial expertise required to divine whether the investment program securing their retirements makes sense.
Now for the good news.
Virtually all public pensions today have websites that disclose the key information regarding the investments, as is generally required under state Freedom of Information Acts. All pension stakeholders should visit these websites and learn as much from them as you can.
In addition, there are tens of thousands of financial advisers nationally who could assist state and local workers evaluate the strengths and weaknesses of public pension investment programs. (Obviously, some advisers are more skilled than others.) My advice to every financial adviser is to spend some time studying your state and local pension’s website and comment about your findings. It’s a great way of responding to the needs of potential clients who are government workers and your efforts will help address a growing national concern.
I encourage all financial advisers and public pension stakeholders to work with me to create a national network to scrutinize and improve public pension investing before it’s too late.