Funds worth trillions of dollars start to plummet in value. Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protectedwake up to a sinking feeling of uncertainty and gloom.
Sound like the great mortgage-fueled financial crisis of 2008? Sure. But it also describes a calamity likely to hit as soon as 2009. State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations. . . . Traditionally, public investments and union-based corporate pension funds were managed according to strict fiduciary principles designed to protect workers and taxpayers. For the most part they invested in safe government securities, such as bonds or U.S. Treasury bills. Professional managers oversaw the funds with little political interference.
But during the last 30 years, state pension funds began playing the market, putting their money into riskier and riskier securities—first stocks, corporate bonds, and foreign investments, then real estate, private equity firms, and hedge funds. Concurrently, baby boomers whose politics were forged in the 1960s and ’70s began using those pension funds to advance their social visions. Investments designed for the long-term welfare of retirees began to evolve into a political hammer. Some good occasionally came from the effort, as when companies were pushed to become more accountable in their practices. But advocacy groups often used their clout to direct money into pet social projects with dubious fiduciary prospects. Sometimes the money went to the very companies and financial instruments that, in the wake of the market meltdown, are now widely derided.
Read the whole thing, which, sadly, won’t come as a big surprise to InstaPundit readers.
UPDATE: A reader emails:
Thank you for another great article. I believe (as I suspect you do) the pending pension crisis will be worse for the country than subprime loans.
In fact, because of this, I have begun making changes to how my family leads our lives. Thanks to my hard work, we find ourselves in the top 5% of income earners. I expect our taxes to skyrocket when the day of reckoning arrives for public pensions (we both know payouts will not be cut). So, we have decided to stay in our house, which will be paid off when I hit 42, and we are socking away as much cash as we can. I have also downgraded the type of new car I am going to buy this year. I expect my cash flow to be greatly reduced by much higher taxes as we move into 2010 and beyond, and I want us to be ready. Atlas shrugged?
I have also decided to run for city council where we live. The Army of Davids needs to get off the sidelines and get into the game. Our elites have made such a mess it is time for all of them to go.
Any other folks out there thinking the same way?