William R. Lerach, a class-action lawyer and securities expert, has prepared this presentation that outlines the roots of the current retirement crisis and offers suggestions for reform. Lerach traces how deregulation and Wall Street's capture of the political and regulatory processes in Washington became key reasons why retirement plans for millions of people have lost value and in many cases are becoming an albatross around the necks of corporations and state and local governments.
Green Aesthetic Ripped Paper Thesis Defense Presentation_20240311_111012_0000...
America's Broken Retirement Plans and Pension Systems
2. 2008-2009 saw a major financial crisis. In the worst stock market crash in 70
years, investors lost $10 trillion.
While this collapse was the worst within memory, it was actually the third major
wealth destruction event in the last 20 years.
1
3. First we had the S&L blowup of the mid-1980s, which involved the collapse of
over 3,000 S&Ls. This scandal exposed major financial and accounting frauds.
It cost U.S. taxpayers $150 billion. Investors in the publicly-owned S&Ls lost
trillions.
2
4. Just a few years later we had the 2000-2001 dot.com/telecommunications melt-
downs.
Hundreds of Internet companies vaporized. Telecommunications saw scores of
failures – epitomized by WorldCom and Enron. Again, financial fraud was
rampant. Betrayed investors lost $8 trillion in this collapse.
3
7. Most recently, our major financial institutions were rocked by scandal. Bear
Stearns and Lehman Brothers failed. AIG and Citi might as well have. As the
smoke of this fraud cleared, the taxpayers coughed up “upteen” trillions to bail
out Wall Street. Investors lost $10 trillion in the worst crash since 1929.
These three massive wealth destruction events were the result of the teardown
of the regulatory framework that had been erected over the prior 75 years to
control our financial markets and protect investors and consumers from the
inevitable abuses that flow from unregulated free market capitalism.
6
8. Let’s take a brief look at history –
Free market capitalism exploded after the Civil War – in an environment of no
regulation.
As Wall Street emerged:
• Public corporations arose.
• Modern financial/securities markets developed.
• Robber barons and stock manipulators came forth.
• Oil/steel/sugar and other trusts were put together by Wall Street.
With no regulation, abuses abounded. Child labor. Unsafe food.
Monopolization. Price-fixing. Financial markets were corrupt. Stock
manipulation was widespread. Economic excess reigned. People were
victimized by corporate power.
7
10. As Americans became disgusted by these abuses, regulations were slowly
imposed – For example:
• The antitrust laws criminalized price-fixing and monopolization – and
empowered victims to sue.
• Child Labor and Pure Food and Drug laws were passed.
But the Wall Street banks and the financial markets remained unregulated.
9
11. • A stock market explosion in the late 1920s reflected a national mania with
Wall Street and the stock market. Fueled by huge leverage - 10% margin
requirements – stock investing became widespread.
• But then came the 1929 Crash – ending the hopes and dreams of an
American generation.
• A horrible collapse – NYSE lost almost 90% of value. A majority of new
stocks and funds sold to investors between 1920-1929 became worthless.
• As market collapsed and J.D. Rockefeller said– “My sons and I have been
buying sound common stocks” – Will Rogers quipped, “Of course they are,
they’re the only ones with any money left.”
• Groucho Marx said – “I lost $250,000 – I would have lost more, but that’s all
the money I had.”
10
16. As the 1932 Presidential election approached, the Pecora Hearings exposed:
• Stock manipulation/pools, self-dealing and fraud by Wall Street banks, giving
birth to the term “banksters.”
• Massive short-swing “insider” trading by corporate insiders.
• Secret payments to analysts/reporters for promotion of stocks.
• Massive falsification of corporate financial statements and a lack of
independence of accountants.
• The overlap of commercial/investment banking – selling securities of
corporate customers of investment bank side to the public in commercial
depository bank lobbies.
The final humiliation came when Richard Whitney, acting president of NYSE
was exposed – he had embezzled millions from NYSE fund to protect widows/
children of deceased members. He went off to Sing Sing.
15
18. America’s economic collapse led to massive unemployment and a social crisis.
It also resulted in huge public outcry for scalps. FDR – “a traitor to his class” –
went after Wall Street --“the malefactors of great wealth.”
17
20. A political revolution swept FDR into office. By 1932-1933 wall Street faced
ruin. Most Americans would have flushed the bankers and corporate capitalists
down the toilet. But instead of wiping out Wall Street – or nationalizing the
banks and corrupt accounting firms – the newly empowered progressives
chose to save capitalism – by creating a new system of regulated financial
markets. They substituted caveat vendor for caveat emptor.
19
22. In a burst of legislative innovation, the Roosevelt Administration:
• Created the SEC to oversee our financial markets, giving it authority over
accountants/accounting. They also required accountants to be independent
and mandated truthful disclosure and honest accounting by public companies.
• Strictly controlled stock sales by Wall Street underwriters and new public
companies seeking money from investors.
• “Insider trading” by big stock holders and corporate insiders was prohibited.
• Glass-Steagall broke up the big banks and separated commercial/investment
banking.
• Strictly regulated the sale of mutual funds.
• Empowered investors to sue to recover losses.
These new laws were administered by aggressive federal agencies and
actively enforced by a generation of progressive federal court judges. They
supported efforts of federal regulators and allowed victims to sue violators.
Whitney, on way to prison, had claimed “grass will grow on Wall Street” if the
“New Deal” legislation was adopted. He was wrong. Overtime, this new
regulatory framework created the greatest age of economic growth and
prosperity in the history of the world.
21
23. Despite occasional recessions and bear markets – there were no investor
wealth destruction events or financial crises requiring taxpayer bailouts.
America became an economic colossus. Our financial markets became the
most liquid and safest in the world. This economic miracle, the greatest in world
history, occurred in the context of a –
• comprehensive federal regulatory framework; and
• a legal system that provided for accountability of perpetrators and gave
powerful remedies to victims of financial misconduct.
Of course, as the U.S. became the world’s financial powerhouse – no one got
more powerful than the Wall Street banks and the corporations they financed.
And as they regained their financial strength and power they set about undoing
the very regulatory framework that had spared them from extinction. Now they
complained that the regulators that had spared them was restricting American
competitiveness and economic growth. They also hated lawsuits of all kinds.
As politics came to depend on massive infusions of cash, no one provided
more of it than corporations and the Wall Street banks.
22
27. Our citizenry – their collective memory of the past carnage having faded – was
seduced by these promises of greater growth and prosperity. Government,
which had actually been the key to the solution, became portrayed as the
problem. Wall street captured Congress.
And, so with time came the regulatory teardown –
• Early on they deregulated the S&Ls – permitting them to venture into long
forbidden areas.
• In 1995, Congress enacted the most severe cut backs on investor protections
since 1933-1934 and sharply curtailed the ability of defrauded investors to sue.
• Later, Glass-Steagall was repealed – allowing the long forbidden financial
colossuses – investment and commercial banks – to recombine.
26
31. The Wall Street/Corporate Phalanx also used its power to see that federal
regulatory agencies passed into the hands of political appointees who were
openly hostile to the regulations they were supposed to oversee and enforce.
So rules were diluted or rolled back. Regulators permitted more mergers
(especially of banks) which grew ever larger. They then allowed these giant
banks to greatly increase their leverage. The also allowed the sale of
increasingly complex and risky financial products. They permitted mutual fund
advertising. Also, these “anti-regulation” regulators sharply curtailed legal
enforcement blocking many cases – and agreeing to slap-on-the-wrist
settlements. The legislative and regulatory framework erected to control
financial risk and protect our citizens was torn down.
30
35. The deregulatory juggernaut also used its influence to get both Republican and
Democratic Administrations to pack the federal courts with procorporate judges.
By the 1900’s, we ended up with the most pro-business, anti-regulation and
anti-litigation Supreme Court since the 1920s.
The courts gutted the antitrust laws – mergers mushroomed – concentrating
economic power. Legal actions against banks and corporations on behalf of
defrauded investors were sharply curtailed. The ability of stock holders to sue
corporate managers or directors from malfeasance was restricted.
The result: Behemoth banks; less regulatory oversight; less legal accountability.
In many ways, the American economic/legal framework in 2000 looked a lot like
the “Robber Baron” era of 100 years earlier.
In 1995, I testified before Congress and warned them of the consequences of
cutting back on the investor protections of the federal security laws. But they
ignored the warnings.
34
39. So, what came from this era of de-regulation? Increased competitiveness?
Strong - sustained economic growth? Greater wealth or prosperity for all
Americans? No. Instead we got waves of fraud and repeated wealth
destruction events. You will remember:
1) The massive S&L crisis of late ’80s epitomized by Lincoln Savings and Loan.
2) Telecom fraud waves. The 2001-2002 dot.com epitomized the Enron and
WorldCom.
3) Then, the 2008-2009 financial institution crisis involving several of the “Too
big to fail,” financial behemoths, epitomized by Lehman Brothers, Bear Sterns
and AIG.
All these fraud waves involved massive doses of fraudulent accounting and
insiders self dealing by corporate insider and Wall Street bankers.
38
44. For the U.S. economy overall – the 2008-2009 financial crisis resulted in the
worst wealth destruction in generations, leaving us with near ten percent
unemployment – the highest in 50 years.
For years now, worker wages have stagnated.
Yet at the same time CEOs and Wall Street banker pay soared out of sight.
Now CEOs’ salaries are 500 times that of ordinary workers.
43
48. And the banker and CEO bonuses are – well – obscene. As the earnings
disparity between ordinary workers and executives skyrocketed, the rich got
richer – much richer.
Yet the U.S. stock market suffered one of the worst 10-year periods in history.
47
51. It’s not hard to connect the dots between deregulation and these disasters. We
just don’t learn from our history. Curtailing regulation and accountability breeds
abuse.
Even the staunchest free marketers have admitted they were wrong and that
lax regulation caused these financial implosions.
50
55. There is another emerging crisis that is also a result of this rush to de-regulate
– the impairment of -- and the likely collapse of -- our pension and retirement
systems.
In short -- Wall Street has captured and abused these honey pots of cash –
pocketing huge profits for themselves – but leaving retirees facing the loss of
their promised benefits, workers with the prospect of increased contributions
and ultimately taxpayers with another huge bailout bill. Another “gift” to the rest
of us from Wall Street.
54
57. The post-World War II era saw the pervasive rise of retirement plans. In a few
years, public employee, corporate and Taft-Hartley pension plans abounded.
These plans soon accumulated trillions of dollars.
56
58. These plans involved promises of future benefits made as trade-offs to
demands for current benefits – like higher wages. The easiest promise to make
is one you do not have to keep. So it was an irresistible temptation for
politicians, executives and labor leaders making the promises to be generous,
because they were not going to be around when the time came to pay for them.
But pay for them now we must.
57
59. The time to keep those promises is upon us. In the next several years, some
77 million U.S. baby boomers will hobble into retirement, expecting that their
retirement dreams will be fulfilled. But it’s likely that fulfilling their dreams will
create a financial crisis the likes of which we have never seen before.
Unfortunately, the U.S. pension system area has become a fraud-infested
house of cards – a ticking time bomb - a financial monster.
58
62. A pension or retirement system is a bet on the future –
Some money is set aside currently, but not nearly enough to pay all the
promised benefits later. So, how pension funds are invested/safeguarded is
key.
Of course as Pension Funds’ investment portfolios grew, Wall Street money
managers captured them. And then by assuring fund trustees that the
increased prosperity and growth flowing from the ongoing deregulation would
result in ever-higher stock prices – Wall Street guided trillions of dollars of
retirement savings of workers into the stocks of the public companies that Wall
Street bankers promote. Increasing stock prices they promised, would pay for
the retirement obligations of the Pension Funds.
61
63. At first, it looked like it might work. Fueled by the rosy promises of increasing
prosperity due to deregulation, the greatest bull market in history pushed stock
prices to all-time highs by the 1990s. Individuals with fat 401(k)s thought they
were on “Easy Street”. Based on inflated stock prices corporate pension funds
actually looked over-funded.
62
64. Of course corporate executives exploited this. They slashed contributions to
the plans to further boost reported earnings and their companies’ stock prices –
and, in turn, their own bonus takes and stock option profits.
63
66. As Wall Street money managers promised that continuing equity gains would
keep the plans more than adequately funded, executives often raided corporate
plans, taking retiree dollars and diverting them to other uses.
65
67. But it didn’t last. After the S&L debacle and its investor losses, came the great
market crash of 2000- 2002.
Corporate pension plans suffered a huge financial hit. $300 billion was lost in
just nine months. As a result, by early 2003, corporate plans were over $400
billion under-funded.
66
69. To evade making required contributions to plans, corporate CEOs manipulated
pension accounting. One study confirmed widespread pension accounting
manipulation by executives to boost corporate stock prices. One-half the
biggest corporations put no money in their plans, despite bear market losses
2001-2002. By this trick they inflated corporate profits, their stock option trading
profits and their bonuses as well.
68
72. Now after the 2008-2009 financial crisis and collapse, the 100 largest corporate
plans alone were $217 billion underwater. All corporate plans were over $400
billion short. The Financial Times calls them “Vampire Pensions,” which
threaten the U.S. economy.
71
75. Several years ago, when corporate “green eyeshades” realized how huge the
true costs of their corporations’ pension plans would turn out to be,
corporations and their Wall Street allies got Congress to create the 401(k) –
individual retirement scheme.
74
76. Corporations love 401(k) plans. If they set one up to replace a corporate
pension plan, they no longer have to contribute to the federal pension
insurance fund, saving tons of money. Also, because a 401(k) scheme requires
workers to fund the individual pension accounts corporations save billions
more. But the 401(k) retirement plans are also turning out to be disasters.
75
78. The 401(k) system makes individuals – no matter how unsophisticated – make
their own investment decisions. All to many have become “pigeons” for fast
buck artists. Most were simply captured by the mutual fund arm of Wall Street,
an industry infested with self-dealing and excessive fees and which is by
definition always heavily invested in the stock market. The equity investments
of 401(k)s have been predictably disastrous - losses of $2 trillion in the recent
market collapse.
77
81. Imagine the carnage if the Bush Administration had “privatized” social security
– a Wall Street bonanza that the bankers still lust for.
80
82. There is a joke – what begins with F and ends with K and means “screw your
employees?” 401(k) plans are also subject to a special abuses.
The pressuring of employees to put their retirement savings in the stock of the
company they work for is a terrible abuse – violating the common sense rule
against investment concentration. Enron, WorldCom, and AOL Time Warner
are just a few examples of where workers got killed because their 401(k)s had
been stuffed full of “company stock.”
81
87. The pension plans that cover “ordinary workers” -- Taft-Hartley plans -- are also
in terrible shape. Due to stock market losses, they have only 60% of the funds
they need to satisfy their obligations. They are in even worse shape than
corporate pension plans.
Over 640 Taft-Hartley plans are in “critical status” or “endangered” – billions
and billions of dollars underwater. A bailout is already needed here – but its just
the tip of an iceberg.
Unfortunately, our entire private pension system is a “sinkhole.”
86
91. And the situation with our public employee pension funds – the ones that cover
state and local workers, teachers and the like – is even worse. These plans are
everywhere – in every state and large city – and they have become the largest
concentration of pension monies in the world.
90
92. The public funds also lost billions in the 2001- 2002 market crash, victims of
that fraud wave when it decimated the equity markets.
After that market crash, 50% of all public funds were under-funded. But these
funds remained overexposed to equity markets and really got killed in the
2008-2009 collapse.
91
94. After the huge 2000-2002 losses, politicians refused to increase state
contributions to funds to help cover their funds’ increased deficits. A GAO study
found less than half state funds received the amount of funding their own
actuaries said was required – leaving funding at its lowest levels in 15 years.
93
96. The 2008-2009 investment losses of public funds have been stupendous –
CalPERS – lost $72 billion – one fund lost that much!
109 state funds lost $865 billion in about one year – the worst losses in history.
These funds are grossly underfunded. New Jersey and Illinois are $50+ billion
under water.
It’s really impossible to describe how financially damaged these public
employee funds are. They have also become “sinkholes”- and at a time when
state and local government finances are in the worst shape since the 1930s.
95
100. The Pension Crisis is also a global problem. These wealth destruction events
hit foreign pension plans too.
Large European corporate pension plans are also underwater – another $400
billion hole.
99
101. So, why has this happened? Why are our – and much of the world’s -- pension
systems and plans in such precarious financial condition?
For sure, promises were made – that should not have been made – especially
to public employees.
Firemen, policeman - even clerks – get pensions of $100,000-$150,000+. And
they “game” the system to boost “final year” compensation to “goose” their
lifetime pensions.
This is obviously an excess that must be addressed. But, before condemning
workers remember..
100
102. Corporate executives have been pocketing giant salaries and bonuses for
decades. And, on top of that many corporate executives gave themselves huge
specially funded pensions, structured so as to not be voided or cutback by
bankruptcy like worker pensions are. Remember as well, generous pensions
for public employees were promised as a trade-off for lower wages – something
corporate executives know nothing about.
101
105. Let’s place the fault where it really belongs- the real responsibility for this
disaster rests with Wall Street.
As pension funds accumulated huge amounts of money they attracted the Wall
Street sharks who smelled an opportunity to profit.
In short order, the vast bulk of pension funds’ monies were managed by Wall
Street money managers. After they captured the funds, they exploited and
abused them.
104
106. Quite sensibly, originally the laws in California and many other states required
pension funds to invest the retirement savings they managed mostly in safe,
interest bearing bonds. But Wall Street couldn’t make as much money as they
wanted from that. So they bankrolled initiatives and lobbied to get legislation to
repeal these safeguards and permit pension funds to be invested in all kinds of
the stuff they make big profits peddling.
105
107. Pension fund trustees were told by Wall Street to use the bulk of retirement
monies to buy corporate stocks.
This, they are told, would position funds to benefit from the supposed historic
over performance of the equity investments Wall Street specializes in. They
were told the stocks would go up – and thus pay for retirement costs. This led
to an “equity addition” – where up to 80% of pension plan assets end up in
stocks.
This conventional wisdom was neat and very profitable for Wall Street. And it
was completely wrong!
1) We have seen three major equity wealth destruction events in last 20 years.
2) The SP 500 – down 5% in 10 years ending in 2009 – a terrible 10-year
performance.
3) Equities actually lost ground in ‘30s, ‘70s and in the last 10 years – about
50% of the time.
106
112. Who makes money on this equity addiction? Who manages the trillions of
dollars of pension fund money? Who manages mutual fund portfolios that hold
trillions in 401(k) monies? Who takes pension fund trustees to play golf? And
on so-called “educational” weekends at lush resorts to enjoy lavish dinners?
Wall Street does.
The myth of equity out-performance is a Wall Street lie. Bonds – safe and
boring bonds – have frequently outperformed equities – but Wall Street can’t
pocket gobs of money from simple, safe, dull bonds.
111
113. The UC Pension Fund – a $60+ billion fund – is an example of the dangers of
Wall Street capturing these funds.
For decades this fund was managed internally and emphasized long-term
bonds and a very few high quality stocks.
Up until 2000, it was fully-funded. For 20 years no University or employee
contributions had been required.
Then, control of the Fund passed into the hands of a pro-Wall Street group.
The fund then hired Wall Street money managers -- paying $32 million in fees a
year!
Soon the fund ended up with huge equity investments, suffered great losses
and now faces a giant funding deficit!
112
114. The UC Pension Plan may be imploding. Recent reports are that it is $40
billion short.
113
115. Now the University and many of its employees will be required to make large
contributions. And benefit reductions may be necessary.
114
117. The U.S. Pension Benefit Guaranty Corporation, which partially insures Taft-
Hartley and corporate pension plans, is itself way underwater. During the Bush
Administration, the Wall Streeters got control of this government agency’s
investment portfolio they pocketed huge fees and they put its funds in stocks.
It’s investment fund killed in 2008-2009. Billions in losses.
A government insurance fund to protect private pension funds that suffer losses
due to stock market declines ends up invested in stocks! This is insanity!
116
121. Of course pension fund insiders have known for years they were losing their
shirts in equities.
After the 2001-2002 debacle, they did what losing gamblers often do when they
lose – they took greater risks.
120
122. Incredibly and again guided by Wall Street, after their 2001-2002 wipe-out
Pension Funds took much greater risks to make up for the losses Wall Street’s
equity investments had caused them.
Pension fund fiduciaries poured billions in to hedge funds. Billions more into
“private equity.” And into speculative i.e. “raw” real estate. Billions more into
that special Wall street invention – collateralized debt obligations (“CDOs”).
They also engaged in securities lending schemes. They leveraged their equity
exposure via “Alpha” investments. Then just a few years later the 2008-2009
financial crisis erupted – and these funds suffered their largest losses ever.
121
127. So now – having suffered hundreds of billions of dollars of losses and ended up
with trillions in funding deficits – and I am not making this up – Pension fund
trustees – fiduciaries are still relying on Wall Street money managers – and are
taking even greater risks. “Double-up to catch up.” “Reaching for yield.” - Going
to Vegas.
They are playing right into the hands of the avaricious bankers, who having put
them in equities and other exotic investments that blew up – are now only too
happy to put them into even riskier investments to try to make up for losses.
More Private equity. More hedge funds. Commodities. Even buying “toxic
waste” from the banks.
You can always create greater returns from greater risks -- for a while. But,
these kinds of strategies have produced huge losses before – and they likely
will again.
126
132. But this is much worse than just un-sophistication negligence or even
incompetence of Pension Fund Trustees. The Pension Fund field caught the
Wall Street contagion – financial corruption. It’s called “Pay to Pay.”
131
133. The SEC saw it years ago – but, of course with “free marketeers” in charge, did
nothing.
In time a nationwide system of political contributors, payoffs/kickbacks emerged
involving politically well connected “Placement Agents.”
The biggest funds have the worst problems. And, not surprisingly, the
investments obtained by “pay-to-play” kickbacks and contributions have
often generated horrific returns. This is an ugly scandal.
132
139. Here is how this systemic corruption worked:
138
140. The head of the New Mexico Pension Fund (the Governor's Campaign
Manager) resigned after a $350,000 loan to him from the father of a man also
who got $22 million in fees for “finding” hundreds of millions of Fund monies for
Wall Street Managers.
139
141. The scandal reached California. A CalPERs investment officer was forced to
resign – he got an all expense paid trip to NYC from an investment group that
got $600 Million from CalPERs. He was cheap. The middle men on that deal –
two former top CalPERs officials – got some $20 Million to arrange this
placement – on which CalPERs lost millions and millions.
140
142. And Alan Hevesi – the former head of the New York State Pension Fund –
pleaded guilty to doling out billions in that Fund’s assets to favored managers
in return for huge payoffs.
141
143. New leadership at the SEC claims it has finally outlawed this system of bribes
and kickbacks. But the damage has already been done by Wall Street to the
Pension Funds.
142
144. The horrible funding deficit numbers Pension Funds admit to – actually hide an
even worse reality –
How do you to determine if Fund is “funded”? You estimate (guess) how much
your fund will earn in its investment portfolio in the future. Its called “the
assumed rate of return.”
Guessing what a fund will earn on its investments in future years is like asking
pitcher during salary negotiations – “How many games will you win next five
years?” And the people who make these estimates are just as self-interested.
143
145. Of course the estimate for the rate of return is subject to manipulation.
Today, almost all Pension Funds assume 7.5%-8%, even 9% annual growth for
every year for ever in the future. That's over 100% compounded every 10
years! Now given the lessons of history just how realistic is that?
144
146. The horrific $400 billion corporate pension funds deficit assume future
investment returns that are grossly unrealistic. Assuming unrealistic future
investment returns on their corporate pension funds allows CEOs to pad
corporate profits – and protect their bonuses and the value of their stock
options.
145
147. In truth, public and private pension funds and their financial advisors are
engaged in massive deceptions to conceal the true nature of their pension
liabilities. They are concealing the massive black holes that haunt corporate
balance sheets and public budgets.
146
148. These ridiculous 7.5%-9.0% assumed rates of return continue to be used even
though Pension Funds have had huge losses in many recent years – not gains.
This is no “little white lie” – it’s a Matterhorn -- Everest-sized whopper. If the
three big California Public Funds (CalPERS/CalSTRS and Univ of Cal) used a
4.5%-5% rate of return instead of the 7.5%-8% rates they now use, these three
Funds would be $500 billion underfunded – 10 times the shortfall they currently
admit to. Since this is a nationwide deception – in both corporate and public
plans – try extrapolating that out.
147
149. In fact – this deception got so ridiculous that the SEC sued New Jersey for
financial fraud in misrepresenting its pension liabilities when selling bonds to
investors. But this “Toothless Tiger” then immediately settled – in return for a
“promise” that New Jersey would not do that anymore.
148
150. Some States claim they are taking steps to repair the finances of their Pension
Funds. But they are fibbing again, counting billions in savings that might be
achieved over the next 20+ years – as real savings right now. Just more
financial chicanery.
149
151. To show you how absurd this is – in the face of massive losses – New Jersey actually
raised its assumed rate of return to 8.75% from 7% to avoid making a $1.5 billion
payment to its pension fund.
Tragically, everyone in the system has an incentive to cover-up:
Corporate executives – to inflate short-term profits, and their stock options, bonuses
and stock trading profits.
Union leaders – to avoid giving up wage/benefit gains, or increased employee
contributions.
Public Fund Trustees/Politicians – to avoid tax increases or increased use of
government funds to bolster funds.
Wall Street advisors – to justify past practices and keep hold of the Pension Funds
they use as dumping grounds for the financial products they profit by selling.
Everybody is trying to avoid exposure of their complicity in this disaster.
150
152. Some day – these assumed rates of return must be cut. The deception cannot
be maintained.
151
153. I want to reemphasize a point. CalPER’s says its going to take even more risks
with the life saving/pension monies of its beneficiaries to overcome its huge
losses. How do you think that will work out?
152
154. This house of cards is likely about to be submerged by a Tsunami of retiring
baby-boomers.
The precarious financial position of pension funds I have been describing has
been created BEFORE these Pension Funds face the task of actually paying
out billions and billions as millions and millions of baby-boomers retire in the
next several years.
153
156. Several adverse mega-demographic trends will converge as the boomers
retire.
First: Some 77 million boomers will leave the workforce/curtail their
contributions to plans/curtail their investments in the markets and become
consumers of capital, including pension plan assets.
Some call it the “Geezer Glut.”
155
158. Pension systems are going to come under incredible financial strain as the
“generational storm” of the aging baby-boomer population overtakes them.
In 2000, there were 82 million people under the age of 20 in the U.S. –
dwarfing the 35 million over 65’ers. By 2030, 77 million baby boomers will be
retired. But, while we then will have twice as many retirees – there will be only
18% more workers.
157
160. As the boomers retire, huge amounts of cash will be needed to pay for their
retirements.
The retirees and the pension plans they rely upon – both former large buyers of
stock – may transition into sellers.
As the pension funds become sellers of equities, who will buy them? The next
generation will – but it does not have nearly the economic clout that the baby-
boomer population did. And de-regulation era has left the American economy
impaired – its industrial base gutted – its potential for economic growth
curtailed.
159
162. If the immutable law of supply-and-demand turns, stock markets -- which long
benefited from pension funds’ buying demand - could be negatively impacted
by selling/supply pressure for many years!
I don’t know when this house of cards will collapse – but it will and then --
We will see reduced benefits – increased employee contributions – increased
taxes.
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171. The dreams of happy retirement are fading as retirement savings have been
decimated.
Many have had to delay retirement.
Many others have had to go back to work.
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174. Lets hope that a late retirement/early death option or patricide doesn’t become
a reality.
While we joke about it – it’s really very sad – and it’s primarily the fault of Wall
Street and deregulation.
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176. Don’t kid yourself – this is going to spark a major political battle –
And will perhaps result even in generational warfare as well.
The conservatives are going to “scape goat” public employees as a privileged –
protected – class.
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177. And you can be sure younger tax-payers are going to grouse loudly when their
taxes go up to make good on these pensions for old folks.
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178. But like it or not, one way or another taxpayers are going to end up paying for this fiasco.
Rather than sit by and await the disaster, why not try to deal with it proactively? There is a
solution that could help protect retirees and at the same time help finance the huge federal
deficit we face.
• First - stop allowing Wall Street money managers to speculate with workers’ retirement
savings.
• Second, create a new, 6- 7% (inflation indexed) US Treasury retirement plan bond with
staggered maturities – 5 - 10 - 20 - 25 years. Only qualified retirement plans can buy them.
They must be held to maturity.
• Third, over a 5-7 year period – require 70% of all pension retirement plan assets to be put
into these U.S. Treasury retirement plan bonds.
• This restructuring of retirement plan investment portfolios will provide safe, low cost returns to
funds and stop Wall Street speculation with the life savings of workers.
• And this will also help finance the huge federal deficit we face. At least the interest payments
on these bonds that will be paid by U.S. taxpayers will go to support U.S. retirees – not China
and other foreign governments.
While the interest rate on these bonds are high – remember – taxpayers are going to pay to
bail out the funds some day anyway, this is a rate that will let funds meet their obligations and
the interest payments are going to U.S. retirees who will spend the money in the U.S.
It’s a simple, elegant solution - but Wall Street and the politicians they control will never permit
it.
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