Pension Warning…

It is not going to be another column on the Open Pension Fund, but on the signs of upcoming (and already existing) pension problems in the western world; as well as on the issue related to pension problems, namely, whether trade unions should exist in the public sector. Today, I would like to write about the United States. I used to pay attention to the scale of problems in American cities and always used the example of Pittsburgh – a city well-known to me – whose pension liabilities towards employees of the public sector constituted (at that time) nearly 600 billion dollars (more or less the annual GDP of Thailand with the population of tens of millions of inhabitants!). I said that Pittsburgh and other cities did not manage to gather enough financial assets to be able to pay these pensions to people in the future.

I had foreseen fast growing problems. And they came. Detroit went bankrupt and is now trying to renegotiate the scale of pension liabilities, which (without reduction) will consume more than a half of annual expenditures from the city’s budget. There will be numerous court proceedings, because unionists do not want to give up and not-so-clever lawyers quote a rule, pacta sunt servanda (agreements should be executed), which has been hallowed since Roman times.

It is a very worthy rule, and I am myself its supporter when an agreement is concluded between two independent parties (e.g. two firms with two different owners). But in the case of the public sector – agreements between trade unions, representing employees, and local (or state) governments, representing employers, create a situation that does not take place!

Both parties have the same goal, and authorities and taxpayers, protecting local and state budgets, seem to be absent! Under the pressure of unionists, local or state governments gave up fast – after all, they are not private owners, who protect their firms against the threat of bankruptcy, but elective clerks financed by taxes! Tax payers are going to pay for these or other pay and benefit rises, and in 10, 20, or 30 years, they will pay for pension benefits when present paper-pushers are no longer on their posts.

However, the day of a confrontation with reality comes sooner or later, and it has just come in the USA. Financial Times, which realised the existence of the problem with a 5-year delay, pities President Obama’s pet, the Mayor of Chicago, where problems are similar to the ones which caused Detroit’s bankruptcy. It writes that both Chicago and Illinois do not have future pension claims well secured by the right pension funds: more than 30% and about 40% relative to future claims.

It is well-known why continuous shortages of these funds come about. First, local and state governments accept pension claims which are impossible to fulfil at a certain level, and later on they give less money from local or state budgets, because they do not have anything more there. Then, they start to “blow” anticipated results of investment (i.e. unrealistic returns on investments!) so that financial resources anticipated in the future seem as big as possible. Even such estimates of future profits cannot be balanced: e.g. at the state level they constitute not much more than 70% of required resources.

This is the fictional world of the public sector, whereas private actuaries claim that deficits are more than four times bigger than it is indicated by institutions connected with the public sector (i.e. more than 4.5 billion dollars). This is the American-style funded fiction (but as we can see – only partially funded!). Maybe it is worth sparing a thought on the European fictional world, in which nearly all future pensions are just records on the accounts of insurance systems…?

Translation: Anita Stradomska