Imagine, you have been laid off and you can't find another job earning anywhere close to what you were making. Your savings have been decimated by the disaster on Wall Street. You may be renting now that you lost your home. Maybe your pension is a lot less, too.
That's an all-too-familiar scenario already. Then you tune into the nightly news and there is your state's governor very patiently explaining why taxes are going to have to go up--a lot--so that taxpayers can guarantee the pensions for tens of thousands of teachers in your state. That's right, teacher pension plans are losing tens of billions (for all state pensions, it's even more). If the public teacher funds go broke, taxpayers are on the hook to make up the difference to the tune of hundreds of billions of dollars.????
That prospect looks increasingly likely in the coming years and it was the focus of a recent conference at Vanderbilt University. That conference, in turn, was sparked by a 2007 Fordham Institute report outlining the dangers faced by the state teacher pension fund in Ohio. The unfunded liability of the Ohio pension fund was nearly $20 billion. The Fordham Ohio report raised the stark possibility of the need for a future taxpayer bailout, not only because investments couldn't keep up with liabilities but because teachers are retiring many years before private-sector workers. They also are living longer, increasing the future payouts. In other words, assets are falling and demands are increasing.
In 2007, well before the financial meltdown, roughly 40 percent of the major teacher pension plans, nationally, were short of cash. Public pension funds are generally considered in OK shape when their assets are roughly 80 percent of liabilities. But Jay Greene, of the University of Arkansas, who attended the Vanderbilt meeting, points out that those supposedly solid pensions assume eight percent returns.
No responsible financial manager ought to be banking on that. After all, it was only a few years ago brokers were trumpeting that the long-term return from Wall Street was 11 percent!
Greene agrees. He says it makes more sense to gauge growth, and presumably future pension payments, on the risk-free rate of long-term U.S. Treasury bonds. They are currently earning a little less than four percent. Assuming a four percent, a teacher pension that would have been 70-percent funded at eight percent would drop to 44 percent funded.
To get a significantly higher return requires a lot more risk. Of course, what teacher pension funds have been doing is gambling that they'll make well over 4 percent. Ultimately, they're gambling with the taxpayer's money. No wonder those managers are grinning like Alfred E. Neuman.
"What, me worry?"
