“Once upon a time, state and federal government pensions were considered somewhat sacred, a bulwark against economic forces that battered conventional retirement savings plans. But, due to unprecedented economic shifts, those with government-sponsored retirement plans may be less secure than ever.”- Brian Swerdlow.
By Brian Swerdlow
In a business environment where Wall Street executives seem impervious to losses while the rest of us watch our savings evaporate, even once-sacrosanct government pensions are imperiled.
As asset losses mount, firms managing pension money are increasing fees and placing client money in riskier positions. Private equity firms (think Blackstone and others) continue to use pension fund money to acquire and restructure companies and then sell them at a profit.
This business model means that for all intents and purposes, a private equity firm can “make up” alleged values and profits that they then tell their pension investors. While this may seem like a sound strategy, the main problem with doing business this way is that private equity firms fall short of providing transparent valuation metrics. Such valuations are often inflated, particularly when the private equity firm seeks to gain new investment funds. Although nearly everyone would like to know what private assets are TRULY worth, getting to the truth is much more challenging than you may think.
For instance, valuations and fees in the contracts negotiated between private equity companies and public pensions are conveniently exempt from open records laws. Such secrecy may induce private equity firms to grossly exaggerate the worth of their assets. At the same time, since fees are often a percentage of an account’s “value,” these companies are raking in tons of money, regardless of the fund’s actual valuation. Overpaying fees means that when the time comes to sell off assets and pay retirees, some government pension funds may discover they have much less money than they thought. This situation will result in government funds needing to cut benefits, raise taxes, or even eliminate some social programs to compensate for the shortfall.
Some government benefits advisors are sure these scenarios will play out, especially since several larger private equity funds report significant declines in earnings. For example, one investment banking firm said that in 2021 transactions, their private equity assets sold off for only around 86% of the original valuation.
Yet, despite earnings declines and misleading valuations, many state and local lawmakers want to pass laws allowing them to put even more pensioner money on Wall Street. More government pension funds than ever are engaging in the risky and speculative investing associated with hedge funds, private equity, and private real estate funds. A 2018 study discovered that US pension systems had spent over $600 billion in fees in the previous decade alone.
Are you a government employee counting on your pension in retirement?
Having all your eggs in one basket, even one as historically reliable as a government pension basket, is probably not a perfect plan. I advise my clients to seek vehicles outside their pensions that will act as a Plan B. Products such as insurance, annuities, CDs, and other safe money products will help fill any gaps in your government benefits and help ensure you don’t run out of money once you retire.
Even if you believe you have a “Cadillac” pension plan, you can add peace of mind and offset some of the risks by adding equity-indexed annuities or other safe money instruments you control. Not only do these money tools offer you greater use, liquidity, control, and transparency than your government pension, but you’ll also discover that many are highly tax-advantageous.
Summary: Government pensions face severe threats as major worldwide economies continue to cool off and volatility increases. Over-blown valuations, underfunding, long periods of slow economic growth, and weak markets could negatively impact what retirement systems expect to earn from their investment plans. This situation could result in taxpayers and public workers being forced to contribute more to pension fund costs, ultimately leaving less money to spend on social programs and infrastructure. Pension plans could perhaps fail altogether, leaving retirees stranded in retirement. While the total collapse of the US pension system is probably not inevitable, you can count on changes that could affect your life once you retire.
These are all good reasons to sit down with a qualified government benefits advisor and determine what you can do to buffer against pension woes and ensure you have the best possible outcome now and in retirement.
