Massive Pension Fund Crisis in the US By Henry C.K. Liu
This article appeared in AToL on October 31, 2008 as: _Black Hole Gapes for Pensions_ (http://atimes.com/atimes/Global_Economy/JJ31Dj02.html) More than three years before the current financial crisis, in a series _Greenspan, the Wizard of Bubbleland_ (http://www.atimes/global_economy/GI14Dj01.html) that began on September 14, 2005, I warned: Through mortgage-backed securitization, banks now are mere loan intermediaries that assume no long-term risk on the risky loans they make, which are sold as securitized debt of unbundled levels of risk to institutional investors with varying risk appetite commensurate with their varying need for higher returns. But who are institutional investors? They are mostly pension funds that manage the money the US working public depends on for retirement. In other words, the aggregate retirement assets of the working public are exposed to the risk of the same working public defaulting on their house mortgages. When a homeowner loses his or her home through default of its mortgage, the homeowner will also lose his or her retirement nest egg invested in the securitized mortgage pool, while the banks stay technically solvent. That is the hidden network of linked financial landmines in a housing bubble financed by mortgage-backed securitization to which no one is paying attention. The bursting of the housing bubble will act as a detonator for a massive pension crisis. Now in October 2008, while the US government is busy bailing out wayward banks, public pension funds operated by states and municipalities are facing their worst year of loss in history, exacerbating cumulative funding shortfalls of past decades of credit bubble and putting pressure on distressed state governments to shore them up to avoid pending default. In the nine months to the end of September, the average state and municipal pension fund lost 14.8% of its market value. The loss has deepened as global financial markets fell sharply in October. The loss has more than double previous highest loss for state funds, which registered 7.9% for the full year in 2002. Few market analysts expect equity prices to bottom any time soon, let alone a recovery, and many are resigned to the prospect of years of asset deflation and economic stagnation. California’s Calpers, the biggest public pension fund in the US, in the week ending October 24 reported a loss of 20% of its asset value, or more than $40 billion, in the quarter between July 1 and October 20, 2008. State and local pension funds comprise a patchwork of 2,700 funds that manage $1.4 trillion on behalf of 21 million public employees, including teachers, firefighters, policemen and other municipal workers. About 40% of these funds are under-funded, meaning that they would not be able to pay the future pensions promised to public employees. State governments have raised pension benefits to keep up with inflation, betting on a growing wealth effect from fund investments to meet higher payments. It was part of the flawed rationale that called for the privatization of social security. Just like the social security trust fund, pension funds are money that belongs to the workers who are required to contribute into them out of their payroll deductions and matched by public funds as part of workers’ employment benefits. These funds are not charity payments from government employers. They are compulsory savings of public sector workers. full: _http://henryckliu.com/page173.html_ (http://henryckliu.com/page173.html) **************Make your life easier with all your friends, email, and favorite sites in one place. Try it now. (http://www.aol.com/?optin=new-dp&icid=aolcom40vanity&ncid=emlcntaolcom00000010)
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