Posted By thestatedtruth.com on February 27, 2011

Ridiculous 7.5%-9.0% assumed rates of return are not “little white lies” — they are Everest-sized whoppers. They are far from reality and nearly impossible to ever realistically have happen over the medium term and even more impossible over the long term in mature economies. 

If the three big California Public Retirement Funds used a realistic 4.5%-5% rate of return instead of the make believe 7.5%-8% in which they now use, these funds would be $500 billion under-funded — 10 times the $50 billion shortfall they admit to.  Public employee funds as a whole are probably $3 or $4 trillion underwater. The massive shortfalls we now face exist despite prior “Bull Markets” and the current huge stock market rally.

There are many reasons for the pension fund debacle, but one of the biggest is the greed of Wall Street and its corporate allies. It’s a result of their dismantling of our nation’s regulatory safeguards and Wall Street’s capture and abuse of America’s public pension funds — charging them huge management fees, while losing trillions of dollars of pension fund assets in risky investments.

Inappropriate investments that caused these massive pension fund losses were not an accident. The pension fund field caught the Wall Street contagion — financial corruption. It’s called “Pay to Play.” The SEC saw it years ago but, controlled by anti-regulation political appointees, it did nothing. So a nationwide system of political contributions to elected officials who sit on fund boards and payoffs and kickbacks to politically well-connected “Placement Agents” to steer fund money to Wall Street became widespread. Not surprisingly, the investments obtained by “pay-to-play” kickbacks and contributions have generated horrific losses.

An investment officer of the California Public Employee Pension Fund was forced to resign — he got an all-expense-paid trip to NYC from an investment group that got $600 million from the fund. The middle men on that deal — two former top CalPERs officials — got some $20 million to arrange this placement. Two other former CalPERS officials have been sued by the Attorney General for taking $50 million in placement fees to steer pension investments.CalPERs lost hundreds of millions on such investments. Alan Hevesi — the former head of the New York State Fund — pleaded guilty to doling out billions in that Fund’s assets to favored managers in return for benefits. The SEC has finally outlawed this system of bribes and kickbacks. But too late — the damage has already been done to the pension funds. Nationwide, public pension funds lost billions on these types of corrupt investments with Wall Street types.

The horrible deficit numbers funds admit to actually hide a far more terrible reality. To determine how well a fund is “funded” it uses an assumed rate of return. It estimates how much the fund will earn on its investment portfolio in the future. For decades, public pension funds have assumed 7.5%-8%, even 9% annual growth, i.e., over 100% compounded over 10 years. Fat chance!

Today, pension funds are engaged in massive deceptions to conceal the true extent of their funding deficits. They are concealing the massive black holes that haunt public budgets. These ridiculous 7.5%-9.0% assumed rates of return are not “little white lies” — they are Everest-sized whoppers. If the three big California Public Funds used a 4.5%-5% rate of return instead of the 7.5%-8% they now use, these funds would be $500 billion under-funded — 10 times the $50 billion shortfall they admit to. Since this is a nationwide deception going on in virtually all public plans, try extrapolating that out. Public employee funds are probably $3 or $4 trillion underwater. The massive shortfalls we now face exist despite prior “Bull Markets” and the current rally. And the next round of excess of a still under-regulated Wall Street will produce another wealth destruction event that will erase recent gains.

www.zerohedge.com

Categories: Commentary, Finance, National News, Pensions and Retirement, Wall Street, World News
Tags: etirement Assumed Rates Of Return, Retirement Shortfalls