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A Financial Tapeworm

Posted on May 7, 2019

“Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them.” – Warren Buffett

2019-05-07_pills.jpgOur current Weekly Insight series is about the retirement crisis in America. We’ve claimed that that the problems we’re facing really stem from misguided and unrealistic expectations, which as Seneca points out are at the root of all heartache. In our last post, A Political Hot Potato, we profiled the current state of our country’s social security system and described how it would be unrealistic to expect that the system could survive in its current form. Social Security reform is coming; it’s just a matter of how close to defunct the program will get before Washington deems it urgent enough to address. This week we highlight another area of our country’s financial underbelly where mismanagement and poor leadership has created what Warren Buffett once described as a “financial tapeworm”. We’re talking about public and private pensions.

Nearly three years ago in our post There Will Be Cuts, we profiled the current situation over at the Central States Pension Fund. As one of the largest and more important multiemployer pension funds in the country, Central States Pension Fund has over 400,000 participants spread across more than 1,500 employers. Like so many other public and private pensions in our country, funding levels have been set using future return assumptions that are far too aggressive. Years of underperforming those expectations has left the Fund woefully under-funded and projected to go bankrupt by 2025. Multiple attempts have been made to right the ship, but structural reforms involving cuts to benefits and/or increases in participant funding are just too controversial to gain traction. Participants don’t want their benefits cut, nor do current workers want to contribute more to fund payouts to retirees.

Prominent in the navigation bar of the Fund’s website is a link entitled “Congressional Campaign.” Upon clicking on it you are taken to a page with a video and the following image: 

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It’s interesting how the problem is being framed here. The Fund “has become” severely underfunded, and “unless Congress takes action” it will fail. Really? This is a private pension fund. Employers and employees agreed to put money into a Fund, invest it and then pay it back out to themselves. As it turns out, the amounts that were put in were far too low to properly cover the amounts that were agreed would be paid out. This is due to the fact that the actuaries of the Fund made investment return assumptions that were way too aggressive (here, again, we see that expectations are the root of the heartache). These problems developed years ago, but the parties involved have not had the guts to address them and make the necessary adjustments. Now the Fund and its participants are framing the issue as if it’s the government’s problem to solve. They didn’t contribute enough money into the plan to fund the promised withdrawals, and now they’d like taxpayers to backfill the difference rather than making the necessary adjustments themselves. Wow.

Unfortunately the Central States Pension Fund is but one example of the financial tapeworm that is pervasive throughout the country’s retirement organism. Underfunded pension plans are truly national issue that are just beginning to come to a head. The average funded status of state pension plans has been estimated to be in the 40-60% range on total pension liabilities of several trillion dollars…not a small issue. Unfortunately there is no easy fix, and certainly no politically attractive one. Hard decisions will have to be made, and they will have to include some give and take from all vested parties.

If you ask me what I am most concerned about from a financial/economic perspective I would have a hard time identifying something that would top this issue. I am typically a level-headed guy, but quite honestly the more I understand the ins and outs of this crisis the angrier I get. The problems we face today are the result of decades of poor leadership, bad decision making, empty political promises and a growing spirit of greed and entitlement at all levels of society. The writing has been on the wall for many years, yet no materially corrective action has been taken. Many innocent stakeholders will be financially injured as a result. It’s time to stop kicking the can down the road and for the generations of workers and political leaders who created this mess to make the tough decisions necessary to right the ship. Not everyone will be happy with the solutions, but the money will have to come from somewhere. We need to remember that if left untreated tapeworms can be lethal.


david_headshot_bw.jpgAuthor David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.


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