Reddit January 22 February Cover Story State and local public pension funds across the country are in political and economic crisis. At stake is a comfortable and deserved retirement for millions who have spent their lives serving the public—teaching our children, picking up our garbage, running our libraries. The crisis could also profoundly affect the budgets of state and municipal governments, already weakened by decades of austerity. The Right decries this parlous situation and demands savage cuts.
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Reddit January 22 February Cover Story State and local public pension funds across the country are in political and economic crisis. At stake is a comfortable and deserved retirement for millions who have spent their lives serving the public—teaching our children, picking up our garbage, running our libraries.
The crisis could also profoundly affect the budgets of state and municipal governments, already weakened by decades of austerity. The Right decries this parlous situation and demands savage cuts. Crisis-driven cuts have only made the situation worse.
During the New Deal, unions advocated for an expansion of Social Security to fund pensions. What they got instead is the current pension fund system, one that is in thrall to both the vagaries of Wall Street and prevarications of politicians. Perhaps, with crisis looming, the time is nigh to consider scrapping the current system and going back to the idea of publicly provided pensions for all—a universal basic retirement income.
Currently, pension funds work similarly to individual retirement accounts. Participants set aside some current income to provide for the future, with interest, dividends and capital gains offering an assist. Governments, too, are supposed to pay in, but for years they have been stinting on contributions. Faced with an unpleasant choice between raising taxes or cutting services to meet a budgetary pinch—or, in some cases, to finance tax cuts—elected officials often decided to skimp on pension pay-ins.
To get the books to balance, public officials assume that markets will essentially boom forever, providing an effortless gusher of cash for retirees.
The problem is that the markets may not cooperate, and now that the Baby Boomers are retiring in large numbers, long-deferred bills are coming due.
Worse, the pursuit of unrealistic returns has led union pension managers to invest heavily in hedge funds and private equity, sectors with a viciously anti-worker agenda. This practice forces workers to bet against fellow workers.
Generally, they assume the future will be more or less like the past. Yes, over the very long term, stocks return close to 7 percent a year after inflation. But stocks are also very volatile, and 7 percent is far from a guarantee. For example, money invested in would accrue annually by an average of 7. By the magic of compound interest, the investment yields almost quadruple the final balance of the investment see graph above. These hypothetical returns are just estimates, of course. This is especially true now, with stock prices having quadrupled since their Great Recession low in March , to some of the highest levels in history relative to underlying corporate profits.
Historically, high stock valuations portend crummy future performance. According to Joshua Rauh, a professor of finance at Stanford, state and local pension systems assume an average annual growth of 7. He looked at pension systems—systems that account for more than 97 percent of total state and local pension assets. Rauh also found that the average worker contributing to a pension fund was about 10 years from retirement. If you assume a 7. Unfortunately, as Rauh points out, 7.
Because Treasury bonds are the safest and most predictable investment available, pegging promises to their interest rates would be the surest way to estimate how much a fund needs to set aside to meet future obligations without a bailout. The year Treasury bond rate is currently about 2.
But his math is correct. You could argue that 2. Financial history, however, suggests the 7. Yes, the Right wants to make the pension funding situation look dire, but union leaders avoid the consequences of this uncomfortable math either because they are reticent to face up to its implications for their members or because they have become apologists for the giddier assumptions.
Above: A thousand dollars invested in the market may be 15 times that down the road, or sometimes, pretty much the same amount. Although distinctions can blur, hedge funds are aggressively managed—run by professionals intent on making boatloads of money quickly, which means they can also lose boatloads of money suddenly.
That instability has greatly increased the precarity of the working class, fueling, for example, the housing bubble that led so many to lose their homes to foreclosure.
Private equity PE generally has a longer time horizon, with fund managers investing in a business for several years. In the interim, PE funds often take cash out of the business through dividends and fees. PE can be a very lucrative line of work, and managers enjoy special tax breaks on top of their big paychecks. By mid-decade, the unionized supermarket chain was suffering increased competition from lower-cost nonunion stores.
In , the company went private in a leveraged buyout engineered by boutique investment house Kohlberg Kravis Roberts KKR. In a leveraged buyout, a small group of investors in partnership with corporate management , borrows lots of money to buy out a business. In all, 63, people lost their jobs. The human toll was detailed by Susan Faludi in a article for the Wall Street Journal: suicide, alcoholism, heart attacks, bankruptcy and broken lives.
Displaced workers had a hard time finding new jobs, and those who did saw their pay cut by, on average, more than half. In its early days, KKR had trouble raising money for its adventures, such activities being seen as disreputable in the sleepy pre-Roaring Eighties culture of Wall Street. With a respectable institutional investor like that in its stable, other institutional investors including other public pension funds opened their wallets, and KKR was on its way.
On its website, KKR marks —when Oregon was joined by the Washington and Michigan public pension funds—as a milestone in its history. The special relationship between the Oregon fund and KKR continues today. We always start with you. In late and early , for instance, unionized workers represented by the Communications Workers of America at Momentive, a chemicals manufacturing company in upstate New York, went on strike after the company tried to cut pay and health benefits, as well as eliminate pensions and health benefits for retirees.
Momentive brought in scabs during the strike, a tactic the union says is responsible for a dramatic spike in oil and chemical spills during that period. After the buyout, however, the new owners put the squeeze on workers. The restructuring, which is typical of companies bought by PE firms, included the slashing of worker benefits that triggered the strike. In February , Momentive workers ended their day strike, accepting cuts in health benefits and vacation time for current workers, as well as the elimination of health insurance for retirees.
That is only one example. The new owners announced layoffs the very next day. The bloodletting continues. Enriching the Rich Alternative financial instruments wreak additional social havoc by nourishing the political agendas of private equity and hedge fund billionaires. Many have invested heavily in the privatization of public institutions like schools and prisons. Hedge funders and other financiers sit on the board of directors of its parent organization, Education Reform Now, and have poured billions into both groups.
Almost every time a charter school opens, it represents a decertification of a teachers union, as the charter school movement aims to replace traditional public schools with its nonunion model, which is precisely what attracts hedge funders to the charter school cause.
Teachers unions have pressured a few hedge fund managers into halting their involvement in school privatization. The contradiction of pensions investing in private equity—that is, workers relying on worker exploitation to fund their retirements—is a distillation of the illogic of workers investing in Wall Street.
The economic fate of workers gets tied to the performance of the stock market, a market that rewards companies for vicious assaults on the working class and accelerates the upward flow of wealth.
Private pension systems thus help undermine solidarity, the foundation of any hope for working-class power. For example, current and retired New York state workers identify each other in conversation by which of the six tiers of the pension system they belong to. What is to be done? This is similar to some right-wing schemes to privatize Social Security by creating individual retirement accounts for each worker. Instead of debating rates of return, we should look to transform the pension system itself.
We need to free it from the snares of the financial markets and turn it into a real public benefit instead. Instead, unions wanted an expanded Social Security system. Unions should make that expansion a primary political demand, backed up with the argument that the more employed and prosperous everyone is, the more robust Social Security will be. The system is based on the reality that there will always be another generation of workers to support the current generation of retirees, and, in fact, notwithstanding a birthrate panic now and then, there always are.
Our society as a whole can only guarantee its future security through social and physical investments. Investing in the stock market achieves the opposite; it expands the wealth and power of Wall Street, which likes tight budgets and low levels of public spending. When we instead put people to work building public infrastructure, when we have strong education systems and robust healthcare, and when we have strong unions and decent wages, we create a prosperous society that can fund a comfortable retirement for everyone.
Now is the time to fight for big, universal government programs that benefit all working people, rather than accepting grudgingly provided scraps for a fortunate few. The Bernie Sanders campaign, the explosion in membership and organizing of the Democratic Socialists of America, and the ascendance of Medicare for All as a political demand supported even by some pretty dismal neoliberal Democrats all suggest momentum moving in a left direction.
Workers of the world, divest! She is a columnist for amNY and a contributing editor at The Nation. Want to stay up to date with the latest political news and commentary?
Wall Street : how it works and for whom
One of the most striking characteristics of the American financial world is its ideological rigidity. Backed by the intellectual legitimacy of neoclassical economics and the wealth of the upper classes, the managers of money resolutely cling to beliefs bordering on the absurd. The stock market is understood as a vehicle for raising capital although it is primarily a place to buy and sell existing shares of stock and allocating it rationally although phenomena like panic buying and selling are common ; capital is understood as a purely neutral entity independent of concerns such as power and justice. Anyone not put off by his self-conscious performance as a gadfly and possessing an even slightly open mind will find his inventory of the financial instruments, players, and consequences of the stock market a refreshing and informative break from the usual claptrap of financiers and respectable journalists. This guy actually thinks that the distribution of wealth matters in a society, that there are legitimate concerns regarding incomes beyond keeping wages down and return on capital high, and that assessments of the financial system should not be divorced from such issues.
Thanks for covering this. At least someone in the media is trying. Thank you for all your work. But I think you are missing some key facets regards to the occupy wall street movement.
Mautilar This is especially so since many of these acquisitions are paid for with stock, rather than cash. I guess this is an example of the free-rider problem—I loved the ads, but someone else footed the bill. To see what your friends thought of this book, please sign up. Public Affairs Event Format: Check out the page for summaries of each weeks guests and topics.