Follow The Money


Respectfully submitted by Lawrence E. Rafferty (rafflaw)-Weekend Contributor


Over the last few years we have seen many stories and articles that discuss the problems States and Municipalities are having in paying their public pension payments and how various politicians propose to fix those “problems”.  The politicians almost always seem to blame the pension problems on the overpaid government workers and their unions. The idea that Wall Street might have something to do with these government pension plans being underfunded is rarely discussed.  Until now.

A significant portion of the funds deposited in government employee pension plans is invested with Wall Street. According to one recent study, the public pension plans are paying at least $5.4 Billion dollars each year to Wall Street.

“Currently, about 9 percent — or $270 billion — of America’s $3 trillion public pension fund assets are invested in private equity firms. Assuming the industry standard 2 percent management fee, that quarter-trillion dollars generates roughly $5.4 billion in annual management fees for the private equity industry — and that’s not including additional “performance” fees paid on investment returns. But even the $5.4 billion number could be drastically understated, according to CEM.” Reader Supported News

$5.4 Billion dollars is a lot of money, but as usual, Wall Street may be getting an even bigger piece of the pie. “If CEM’s calculations are applied uniformly, it could mean taxpayers and retirees may actually be paying double that $5.4 billion number — or more than $10 billion a year. Public officials are overseeing this massive payout to Wall Street at the very moment many of those same officials are demanding big cuts to retirees’ promised pension benefits. By comparison, the total budget of the Environmental Protection Agency is just over $8 billion.” RSN

In order to fully understand the scope of the costs these pension plans are paying to Wall Street, it may help to see how these huge fees are paid on the state level.

“California’s report said $440 million. New Jersey’s said $600 million. In Pennsylvania, the tally is $700 million. Those figures are public worker pension fees being paid annually by taxpayers to Wall Street firms, and they have kicked off an intensifying debate over whether such expenses are necessary.” RSN

When you consider that the CEM study figures that public pension plans are paying from $5.4 Billion to more than $10 Billion a year in fees, it is no wonder that so many politicians want to privatize Social Security and bring other public pensions into the Wall Street fold.  Using just the standard 2% fee noted above, just how many billions would Wall Street rake in if Social Security was privatized? How many billions more would Wall Street collect if the entire public pension asset pool was also “invested” with Wall Street?

At the least, shouldn’t these States insist on a full disclosure of the secret fees that the CEM study alleged?  And if the study is correct, shouldn’t Wall Street refund the secret fees back to the pension plans?  In one example, the State of Pennsylvania is balking at its high fees and the Governor and the Legislature are trying to find a way to make the cost of their underfunded pension plans more manageable. Both sides of the aisle differ in their approaches to solve the problem.

In New Jersey, the evidence is mounting that the Governor steered public pension money to political allies and donors.

“This week, after an International Business Times investigative series found that Republican Gov. Chris Christie’s officials were not disclosing all state pension fees paid, New Jersey pension trustees announced a formal investigation of the fee payments. Some of those fees have flowed to firms whose executives made big donations to political groups affiliated with Christie. In just the five years since Christie took office, New Jersey fees paid to financial firms have more than quadrupled. At the same time as fees spiked, Christie has said the pension funds do not have enough money to pay promised benefits to retirees.” RSN

Do you think Gov. Christie will ask his cronies for New Jersey’s money back?

In various states, one side of the discussion wants to use bonds to make the payments more palatable and the other side is pushing to put new hires into a 401(k) system where the employees do their own investing.  Of course, neither plan will quickly solve the problem of underfunded pension plans when state and municipalities have reduced or ignored payments to the pension plan for years and in some cases like in Illinois and other states, for decades.

And if the 401(k) plan that is being promulgated for Pennsylvania and other states is incorporated, who do these employees invest their retirement money with?  Wall Street, of course.

I believe that a reasonable taxpayer would think that at the least, the politicians should be able to agree on reducing the cost of the Wall Street investment fees and demand an accounting of all undisclosed fees and if possible, a refund of those undisclosed fees.   With both Democratic and Republican administrations involved in allowing or funneling public pension funds to supporters and donors,  politics and cronyism may get in the way of a real and equitable fix.  What do you think?


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65 thoughts on “Follow The Money”

  1. You are welcome Rafflaw. I always like all perspectives. And I despise Wall Street and wish Elizabeth Warren would Run.

  2. Squeeky

    That was very clever. I don’t usually agree with you on economics but that was spot on

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