How Safe Is All That Money In Your Pension?

so many people, the goalpost keep moving. Millions of Americans, including public employees and people working union jobs, are counting on a pension to provide them with a steady stream of income when they retire. But some corners of America's pension system have gotten a bit rickety. Pension plans can be underfunded or they underperform, and that's a problem even if you don't have a pension, because when they get into trouble sometimes the government has to step in and

bail them out with taxpayer dollars. President Joe Biden, you heard just now, that's exactly what he did at the end of last year, given thirty six billion in federal funds to shore up the Union pension plan. Why is this happening and what can be done to fix it? By colleagues Neil Weinberg, Susanne Woolley and Kala Gardner are here to explain. Neil, Susanne, Akala, thanks for being here. Good to be here. Likewise, thanks for having us. Susanne.

Let me start with you. Pensions have always been considered very safe. You didn't have to think about it. Your employer put away the money, and when you retired it was there for you. And yet in recent years, both public pensions and pensions run by private companies have run into some pretty rocky terrain. Can you tell us just what is the general landscape of what's happening with pensions? Sure?

Sort of the holy grail of retirement for many people would be the defined benefit pension because you get, you know, a set amount of money every year for the rest of your life. It's guaranteed. That has largely gone by the wayside in the private sector and it's been replaced by defined contribution plans. Yes, you're four O, one K and FOREI one case are great, but the returns aren't guaranteed.

And with the old defined benefit plans they were managed by investment professionals, you know, big pools of money, and now you're four owen k you are all of a sudden expected to be the investment manager and handling all the risk for saving enough, you know, and saving in the right things for your retirements. So there's been a lot more risk foisted onto individual retirees in America and a lot of that safety and surety of a steady

stream of income has been stripped away. And pensions, of course eliminated that risk because it, as you say, the money would just be there. But Neil, you've just written a big story about public pensions and how the investment professionals who used to run pensions that Suzanne was just talking about have now been replaced in a lot of

ways by amateurs. Well, a lot of the pensions that serve state and local employees were set up around World War Two, in some cases well before that, and it's usually in state law that says the people who are going to be the directors of these pensions are people who are rank and file members. These are state employees, teachers, policemen, they are government officials, they are members of the public, and they are chosen largely because they're members of these group.

They're not chosen because they know anything about investing. Over the last twenty years, these pension systems have gone from having a pretty plain, vanilla sort of portfolio of investments. It was government bonds and common stock too much more exotic things, private equity, hedge funds, private real estate. And the result is you have people who are not investment professionals who are overseeing an phenomenally complex, multibillion dollar investment systems.

And this is a huge mismatch, which leads to the question of you know, who's guarding the handhouse. It's almost like it's parallel to the individuals who are now forced to manage, you know, a lot of investments and risks and are sort of pushed into being their own investment manager,

and they don't have any background in this either. One of the really interesting things we were talking about recently is the fact that if want to invest in some of these so called alternative assets as an individual, you need to be accredited an accredited investor, meaning you have to have a certain net worth or a certain financial sophistication as deemed by the Securities and Exchange Commission. The people who are overseeing these multibillion dollar pension systems are

not in many cases accredited investors. They couldn't buy this stuff for their own portfolio, for their own retirement, but they're buying it for tens or hundreds of thousands of people. And what is an example of these alternative investments. This would be private equity or hedge funds. It could be private real estate, It could be something else that is

exotic so called real assets. Yes, things like that. One of the key aspects of these investments is that they're opaque and they're not sort of easily tracked by the average individual. And also they tend to be more expensive than more standard investments, and that raises the question of you know, are you getting a much higher return for

that investment that you're paying a lot of money for. Well, critics would argue that there's a lot of smoke and mirrors going on and the returns are not really that good. Supporters would say, you get what you pay for, although some people in the investment community say you get what you don't pay for in terms of expenses. So the upside is you can make a lot of money, big return on these investments. To downside, you can lose a

lot when you're playing with people's retirements. That's pretty risky stuff. And I guess all of what you're saying raises the question is why are these funds not being run by the smartest investment minds. Why don't they just hire really great investment managers to manage this much money? Well, there's

a couple of reasons. One, I would say, you know, these large pension systems tend to have very professional staff, and so many of these people who are working either on the staff of these state and local pensions, their consultants, their money managers. These are all financial professionals, but they are overseen by lay people who may not be in

a great position to evaluate the advice they're given. When you have this many people's retirements at state, Obviously, the federal government takes in interest to make sure that a lot of people don't get stuck out in the cold. You cover the White House. What has the Biden administration would have passed administration's done to oversee all of this money? I would say even more than just the federal government, But like Joe Biden specifically has a vested interest in

keeping union labor leaders happy. You know, he sort of ran his campaign really wanting to get Pennsylvania back after Trump wanted in sixteen, and so he's really sort of hedged his campaign as presidency, if you will, um sort of being this person who kind of walks the line between progressive politics but also appealing to people in the Midwest who have really been hit hard by you know,

economic headwinds. And I think it's important to talk about that as well, because many of these money managers are dealing with the same issues that people on Wall Street in general are are dealing with. You know, last year we saw stocks have the worst years since two thousand and eight, and so these are pretty widespread issues, and Biden has been really a consequential economic leader because of

these headwins. Actually have a lot of voters in those states that you just mentioned who have mentioned plans are looking towards retirement wondering if the money is going to be there totally, and Biden sort of, you know, again, he wanted to to win Pennsylvania in and so his first big event was at a Teamsters union hall. So he's really been sort of continuing to do events with union leaders. We saw him in Boston just a couple of months ago with union leaders and then also in

Oregon boosting Democratic candidates there for the mid terms. So he's really made an effort to sort of be seen um with unions like the International Brotherhood of Electrical Workers, and really felt like, you know, he's really prioritized these relationships and these allies because he wants them to come out and vote for him again. Obviously should he run for re election in four Neil, So we just you describe a situation where you have professional staff but run

by amateur directors. Why not just have professionals period? Why did it happen that amateurs were in charge of this thing? Well, a lot of this goes back to state law that is many decades old, and I think the logic of this originally was, well, who is most affected by this? And obviously the answer is public workers, your fireman, your police, your teachers, the public employees who are professionals. It might be the treasurer or some other executive in the state

government or the city government. And then you had members of the public. And in some cases these members of the public were sought out for some financial expertise. In many cases they were not how much money are we talking about invested in these public pension funds that you write about, We are talking about four trillion dollars is roughly,

which is a lot of money. The largest system in the United States is the California Public Employees Retirement System commonly known as KELPERS, which at the last count had four hundred and forty eight billion dollars in assets. And so it was the idea that the people who aren't professional money managers but are in charge are kind of keeping an eye out on what's happening to be overseers in the sense that they have skin in the game,

and so they're just trying to be honest brokers. Well, as these systems have evolved and the sort of division of labor has mutated as well, what you find is for most of these systems, job number one is deciding how to invest these billions of dollars. However, they also

have a lot of other interests. If you are a public employee and you want representation, because these pension systems are involved in how long you have to work to have a pension, what is the final formula used to guarantee your pension, and a lot of other labor related issues. Now they don't have the authority to actually make all these changes, often its state legislatures, but they certainly want to weigh and they certainly want to seat at the

table when these things are being discussed. As well as just the basic administration, sending out the checks, answering the phones, making sure the customer service is good for people who are working or people who are tired so they can get answers. So originally those were all sort of parts of the responsibility, but more and more, as these pots of money have increased in size and importance, it's become very much an issue of not only overseeing money, but

overseeing money that's going into these expensive alternative investments. My conversation with a Kala, Neil and Suzanne continues after the break. For years and years, union workers have been driving trucks from factories of stores, bagging groceries, constructing the buildings and the bridges and the roads and use that we use every day, and so much more. Imagine if you're not a union worker, you have a good job, you're retiring, about to retire, and you find out your pension plan

is gonna be cut. Imagine what that does to you. So We've just write how some of these very big pension funds are not run by investment managers. What are the effects of that, Neil, So have they run into trouble as a result of this? In some cases they have, And I think it would be a bit of a simplification to say, oh, well, they have lay people on their boards, therefore they've run into problems. There's been a

multitude of problems. Some of this is demographic if you look at the number of working employees has gone way down compared to the number of retired employees. You've seen some changes in law which in some cases have made it more difficult for these pension systems. But clearly the problem of who is ultimately at the top of these systems is a real issue. And yes they do have professional staff, and yes they do have outside consultants and

money managers. But arguably it is in the benefit of all those people to increase the complexity, maybe not to reduce the cost. They may not have the same interest as the overall system. You also have a system where if you have representatives for various groups on these boards, they may have an interest in representing the union or

the politician who appointed them to the pension board. It might not be that their primary interest is to the whole pension system and making sure that it's run according to pardon the phrase, fiduciary duty. Let's put some numbers on this. How big a shortfall have some of these pension funds run into. It depends on which system you're talking about. Some systems are quite well funded and some

systems are almost bankrupt. And there have been a few cities, including Chester, Pennsylvania, which recently declared bankruptcy, largely because of its pension obligations and inability to fund them. Overall, I think there's roughly a trillion dollars in money that is needed to fulfill promises that is not available. That's a trillion out of four trillion which they do have in

their kitties. So it's a significant underfunding, you know, roughly, and it definitely got worse in twenty twenty two as markets tanked. To give a sense of scale in terms of underfunding, General Electric in twenty nineteen said it would freeze its plan for twenty u S employees and shift to a defined contribution plan a fowing K type plan to help produce the deficit of its underfunded pension by

as much as eight billion. So a lot of private sector pension plans over the years have frozen their plans, meaning that the people that accrued benefits in those plans will get paid out eventually, but no one else who is joining the company as a new employee will be allowed into the pension plan. And for the most part, people who are still have that pension from you know, years of former work with the company, they won't accrue

any more benefits. In the private sector, I think about twelve percent of employees have access to one of these traditional pension plans where you get a monthly check. It's considerably higher in the public sector. And public sector employers have also started to reduce the benefits for new employees. Often by law, they can't cut the benefits of previous employees existing employees. But if you become a teacher today, you're not going to get the same suite deal that

the teachers a generation ago did. Right, They might cut your cost of living adjustment, you know, limit that in some way. People used to get retiree medical healthcare benefits. That was a really juicy perk and that has been slashed. And these private pension plans that you describe running into troubles,

they are run by professionals. So how much of this has to do with the public pension structure which is complicated and has a lot of different hands in it, and it just being a very difficult thing to run a pension. It is a difficult thing to run a pension, and it probably doesn't help that in the private sector you have a law which basically says if a corporate pension plan is significantly underfunded, the company is obligated to

put money in. In the public sector, this is all done on the state level and there is no national law. And in some cases you've had public sector pensions where the people who estimate how much is needed tell the state legislatures and the governor and so on how much they have to put in, and they are just ignored. So they, you know, just don't put the money in because as they have more pressing needs they need uh

bridges and roads and schools. Kayla Niela is talking about how some of these public pensions have run into trouble. One very big one you recently wrote about where Joe

Biden had to step in. Can you describe what happened there. Yeah, absolutely, So basically, the Central States Pension Fund was at risk of getting cut up to sixty of those monthly payouts to their members, and so Biden swooped in with this measure and the American Rescue Plan UM it's also known as the Butcher Lewis Act, and gave him thirty six billion dollars over for a long term period for them to start sort of replenishing their deficit to those users.

So this was like a bailout exactly. And I think bailout is the word that Republicans would use because they've really criticized this measure and said, you know, this is not related to the pandemic, you know, as the American Rescue Plan was originally intended. But this was just a way for Biden to please union leaders. You know, they don't want to tell our own members that we're cutting

your benefits. The interesting thing about Central States Pension Fund is it's a multi employer pension funds, so it's a group of multiple companies who are all sort of putting in money towards giving these monthly payments out to their members. And what kind of workers are in that mostly labor industries, but trugging is pretty big for Central States, and most of these employees are in the Midwest. Some of the biggest numbers are Michigan, Ohio, Missouri, Illinois, which also happened

to be battleground states for Biden as well. I thought it was also interesting when President Biden announced this, he said that the financial problems Central States pension was having

were due to changes in the economy and attacks on unions. Uh, he didn't say anything about how well or poorly they may have been managed, and I think he doesn't want to upset them, right, He wouldn't say that specifically, but I do think, you know, White House officials are also saying some of these multi employer pension funds they've lost employers and worker so there's less people, actual individuals who

are putting money intowards these programs. And there's also been, you know, a loss of some of these industries, like like trucking, like even the auto industry. So some of these plans used to have maybe twenty companies twenty years ago, and now that's sort of dwindled down to maybe ten or twelve. We'll be right back Neil in you're reporting, you show the shortcomings of the way public pensions are run. But everybody was taking a hit on their investments last year.

How much can you really lay at their feet versus it just been a really bad year for investing. Well, I certainly wouldn't blame pension funds because we all had a bad year in the markets. But I would say that it's certainly an open question whether it's you're going to maximize your returns by having people who don't know much about investing at the very top of the pyramid at these public pension funds. I looked at Canada they have largely replaced these novices with financial experts at their

large plans. And I also looked at the Netherlands, where interestingly they started a system after the Great Financial Crisis where the directors of public pension funds have to be accredited by their central bank. Taylor, Are there any plans in the US by the Bidy administration all to take a hard look at the way pensions are being run to prevent things like what happened with the Central States

pension fund. Well, I think it's it's important to say that the bailout that the Central States spended pitted from is available to other multi employer pension plans as well, so they are able to actually apply for this through the American Rescue Plan to sort of shore up their own pension plans. So that's definitely available still for them.

But the Biden administration says that they believe that there was over two hundred multi employer plans that they thought were going to be insolvent by at least six and they said that this program would ensure that at least through one that these plans should be well to stay in place with that assistance. So, you know, there's definitely

a lot of money. This thirty six billion dollars was just for Central States, and so there has to be at least a couple more billion dollars for these other plans, being that these applications are still open. Neil and Suzanne, you talked about how taxpayers are kind of creeping up paying the bill for this. As more and more money goes toward funding pensions, are we likely to see pensions looking to more government money in order to help them out. I don't know many people who turned it down if

it was available. Is that another way that kind of all of us are going to wind up footing the bill here. I think we already are, and I think that is sort of wrapped inside that number that I gave you, where the amount of payrolls for public organizations that is going to pay pensions rather than salaries has gone up fivefold in recent years. So it's sort of like we're all getting a thousand cuts, death by a thousand cuts, or taxes by a thousand cuts. The public

burdens certainly is going up. And that's not just for people with pensions, but if you have just for one k it's affecting you too in that way absolutely. I mean your local taxes, your property taxes might go up because of that. I talked to somebody who's on the board of a public plan in Pennsylvania, a state senator, and when she was campaigning, she said that was one of the most common complaints she got when she knocked on doors was people saying, the pension system is causing

my taxes to go up. Suzanne, how were it should people who have pensions in general b that the money is going to be there for them, well, people who

have private pension plans and plans that are frozen. There is, of course, the federal agency, the Pension Benefit Guarantee Corps, who is sort of a backstop if a company goes bankrupt and can no longer pay its pension obligations, and so there is that they often don't pay the full amount, right, they'll get some some percentage, and a lot of people will have wound up on a very short end of the stick in the last couple of decades, especially high

income people, because there's a cap on how much they'll pay. So if you are getting a very modest pension, you'll probably get all or most of your pension. If you were to coin a common example, an airline pilot with a lot of years of experience, you're gonna get a big haircut. Yes, it's definitely not a replacement, and it's incredibly hurtful for people who have planned their entire retirement out very judiciously, but all of a sudden, through no faults of their own, see one huge part of their

planning just completely evaporate. Yeah. I just wanted to jump in here too and say that this is also like a part of the Biden brand, Like he calls himself regularly the most pro labor, the most pro union president in history. So it's definitely a part of a wider strategy in his administration, sort of almost co opting Trump's

a America First, his America First initiatives. And so we had this Big Chips Bill, which is basically an allocation from Congress of about fifty billion dollars to sort of encourage foreign countries to invest in America, to create these semiconductors, you know, these little chips that are in cell phones and washing machines, and sort of bring more investment back to America that has been lost to places like China.

And so he's definitely sort of using this message that was specifically Trump branded in places like Ohio and Michigan, where Trump, you know, once did really well, and he's sort of trying to kind of re appealed to those to those voters, many people that have felt disenfranchised by the Democratic Party. And we've seen him just continuously go

on trips to places like Pennsylvania. He's always talking about, you know, where he grew up in Scranted in Pennsylvania, and so yeah, he's just trying to relate with these communities. He talks about how his grandfather worked in the coal industry and so it's definitely a part of the Biden

persona protecting the incomes of Americans. Of course, it has to be noted that Biden has some work to do shoring up his support among unions after the big railroad strike, where a lot of rower workers felt like they were not done right by the deal that they eventually had

to take. I think if you look at the politics of this, you can also draw an analogy with the bailout or the reduction that people got for their student loans, where basically we had a system in place and it was supposed to work in some way, and the Biden administration decided, presumably in part due to political calculations, that it was a good idea to offer people a bail

out beyond what was written on paper. And the interesting thing that you you bring up about this to and load of forgiveness is the same sort of criticism that Republicans had for the bailout is the same ones that they said for the student will forgiveness plan, which is basically, this is no longer about the pandemic. You're using the pandemic as an excuse to sort of push these big social spending bills and to sort of benefit your constituents.

With the student loans program, it's it's young people, um.

With the spailout, it's union workers and labor leaders, and so it's just it's definitely a continuous criticism that the Republicans have had, and it's certainly a question of whether or how long can bin and say programs are because of the economic situation of the pandemic Neil, given the rough time that some of these pensions have been through, do you expect there to be changes in the way they're run to prevent these kinds of shortfalls in the future.

Is this just the way it's going to be? I think they're kind of ongoing in part, as we mentioned, the new employees, new teachers and firemen and police are not getting nearly as generous pension benefits as their predecessors did. In some cases, you're seeing lots of tinkering around the edges to make this system less costly, because in most states, in most cities, it's virtually impossible to take back promises once you've made them. Oh Weinberg, Suzanne Wally, Kayla Gardner,

thanks so much for talking with me today. Thank you, thank you, thanks for having us. You can read more reporting from Suzanne Woolley, Eil Weinberg and a Kayla Gardner at Bloomberg dot com. Thanks for listening to us here at The Big Take, the daily podcast from Bloomberg and I Heart Radio. For more shows from my Heart Radio, visit the Heart Radio app, Apple Podcasts, or wherever you listen.

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