If you haven’t heard, Democrats in Wisconsin have refused to allow Republican governor Rick Walker to eliminate the right of public sector employees to collectively bargain. One of the key issues is the cost of public sector pensions. But what’s interesting is this little tidbit from David Cay Johnston (italics mine):
Well, Dylan, I think this is a very revealing move. You know, Aristotle taught us the tyrants first surround themselves with bodyguards who will go after anybody who challenges what they do. We shouldn’t forget that historical lesson. You know, the pensions they want to go after, they’re not very big in Wisconsin. I just calculated the numbers. The average Wisconsin state employee gets $24,500 a year. That’s not a very big pension.
The state pension plan, 15% of the money going into it each year is being paid out to Wall Street to manage the money. That’s a really huge high percentage to pay out to Wall Street to manage the money
. And what I think is going on here is this is the state as we began where public employee unions were first by law allowed, and if this governor can break these unions then you’re going to see this happen all across the country and further drive down wages. And if you can drive down wages in the public sector, it means private employers can drive down wages in the private sector.
Fifteen percent to manage the money? Sweet Baby Intelligent Designer. The state of Wisconsin would just be better off putting the money in the mother of all Vanguard index fund accounts. Nobody is smart enough to consistently outperform an index fund when he’s charging a fifteen percent fee. Certainly not over the long haul, and, by definition, pension funds are long-term investments.
And if you don’t like Vanguard, most states would have been better off from 2007 onward buying Treasuries (pdf; p. 1):
Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today. This is by far the major cause of pension funding shortfalls. While there are certainly cases of pensions that had been under-funded even before the market plunge, prior years of under-funding is not the main reason that pensions face difficulties now.
Wisconsin’s public employees are getting it coming and going.