Following the Money in the Wisconsin Pension Battle: Wall Street's Fifteen Percent Cut

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.

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Why is it that if my 401k loses money that's life... but when a pension loses money it must be replenished to the amount "owed"... this line of thinking is ridiculous. Pensions are basically dinosaurs in the Private world yet these "entitlements" at the expense of taxpayers have to be paid in full?? How about getting rid of pensions altogether and start financing their own futures.

By Conshycrush (not verified) on 18 Feb 2011 #permalink


Sure, conshycrush, that sounds great. Now lets start this process by giving them all raises so they can afford to do that.

A pension must be replenished to the amount owed because it is part of the compensation they were to receive for performing their jobs. Would you think it fair for your boss to stop paying your salary because the market tanked? I'm not talking about him firing you, you still have to work for him, but now it is for free. That's what you're proposing in essence. Your 401K is your private investment and what you do with it is up to you. If your employer pays into it as part of your compensation, then their obligation ends with the payment.

By Lynxreign (not verified) on 18 Feb 2011 #permalink


Exactly... get rid of this "compensation" and throw them the extra money as salary. Then it's up to them to finance their future.

By Conshycrush (not verified) on 18 Feb 2011 #permalink

@1: The difference is that a 401(k) is a defined contribution plan and a pension is a defined benefit plan. "Defined contribution" means that your employer agrees to put a certain amount of money in the plan up front, as Lynxreign says (usually it's a match based on what you, the employee, put in), and it gets handed over to some plan administrator to be invested (you generally have a few options, but only a few). Your payout in retirement is based on how well your investments did in the meantime, and if you had it all in Enron stock in late 2001, too bad. "Defined benefit" means they agree to pay you a certain percentage of your pre-retirement income (which may depend on age at retirement and years of service), and there are laws in place that require them to make up any shortfalls (there is a federal agency to provide a backstop in case your employer goes under in the meantime). Naturally, the trend has been toward defined contribution plans precisely because you, the employee, bear all of the risk in that case, whereas the defined benefit plan has a risk of blowing up in the employer's face.

Annuities, which are often suited to defined benefit plans and could be the sort of thing the Wisconsin pension managers are invested in, often have relatively high expense ratios compared to mutual funds. Not just Vanguard (FD: I'm invested with them as well); even the average stock mutual fund, as Vanguard's literature points out, has an expense ratio in the neighborhood of 1.5%, which is a bargain compared to the deal Wisconsin is getting. Heck, even a hedge fund typically charges 2-and-20, which is a much better deal than Wisconsin is getting. No way should the state be paying that kind of expense ratio with the kind of money they are putting in.

By Eric Lund (not verified) on 18 Feb 2011 #permalink

So if private employers have smartened up and put the risk on the employee, then why is the public sector so slow to transition that way too? Why take the chance to have the benefit plan blow up in your face when there's a perfectly good alternative?

By Conshycrush (not verified) on 18 Feb 2011 #permalink

@5, Because with a pension, if the market tanks, the people aren't out all their money. How'd your 401K do in the recession? How would you like it if you were retired and now broke? It'll take you longer to recover than if you had a pension. (And alot of this "pensions are killing us" BS is a result of local and state govt. not meeting their obligation to fully fund the pensions, but raiding the money to pay it back later.)

By Sideshow bill (not verified) on 18 Feb 2011 #permalink

Hey - It's "SCOTT" Walker. I can't believe I am going to defend him since I voted against him and donated to his opponent. Wisconsin's government employees are compensated far above normal. Walker is actually really facing up to a fiscal crisis which is real, is NOT the result of a tax cut (funny it was just as bad in projection when Democrat Doyle was governor). Walker is going to win this battle.

The people of the state are sick and tired of seeing State employees making far more than they are making even if they have a job. This is the other side of the coin - if the private sector wages are smashed into the ground than no way people are going to support higher wages for public employees. Plus there was a tremendous scandal in Milwaukee County where some County workers were getting a quarter of a million dollars and more in lump sum payouts and then pensions top, which plan was instituted by the predecessor to Walker as County exec. So he is coming in on a campaign to stop this, and has huge support. I can see Wisconsin being Republican for the rest of my life, just because of this. Ugh.

Wisconsin is schizo in politics - Joseph McCarthy at the same time as Milwaukee's mayor was Socialist is only one odd combination.

@6 First off, I didn't lose any money when the recession hit b/c you don't lose money in the stock market unless you take out... which i can't til i retire... secondly, I know you're not that naive about the stock market itself which if you haven't noticed has almost doubled since the recession. Last year I had almost 20% return on my money. Granted i'm young so i've got most of my 401k in stocks but most people with even low risk funds made at least 10% on their money.

The difference you see is that if i lose money it's mine not taxpayers. And older people aren't "broke" when they have other income coming in... SS? Of course pensions recover faster since they just tax the property owners more. This is unfair and you know it. State and local governments not being able to "fund" like you say is ridiculous since the funds are coming from us... the taxpayers!

By Conshycrush (not verified) on 19 Feb 2011 #permalink

You say "smartened up", I say "discovered a clever way to screw their employees out of being able to retire". But whatever.

Markk @ 7:

The people of the state are sick and tired of seeing State employees making far more than they are making even if they have a job.

Except those of us who reside in reality know that this is a false statement, a bit of misinformation handed to you so you will do the plutocrats dirty work for them.

Wise up.