Unions As Investment Advisors

There is anxiety about pension funds in the United States. A 2011 study by the Congressional Research Service pegged the combined liabilities faced by state and local pension funds at over $3 trillion.

One fund, CalPER (California Public Employees’ Retirement System), manages $230 billion. The fund now calculates that it is underfunded by $80 billion. The management arrives at this number by assuming they will make 7.5% on their investments. Joe Nation, a public finance expert at Stanford University, estimated that CalPERS’s long-term pension debt is a $170 billion if CalPERS achieves an average annual investment return of 6.2 percent in years to come. If the return is just 4.5 percent annually – a rate close to what more conservative private pensions often shoot for – the fund’s long-term liability rises to $290 billion. CalPER ranks in the bottom 1% of all pension fund managers. In the bull market of the last year, CalPERS made a 1% return to June 2012.

Just imagine how unions make investment decisions.

This is bad stuff. And the taxpayers will be on the hook to make up the shortfalls.

Here is a simple but interesting graph showing what happens to assets at different returns.