“It’s like going to the ATM in Vegas and then going to the roulette wheel and it comes up red and you go back to the ATM.”

The remark was recently made by Steve Mermell.  The man retired last year as city manager of Pasadena, California.  He knows a thing or two about how borrowing to enhance pension fund returns can result in spectacular losses.

The Wall Street Journal article did not clarify whether red was a winning turn of the roulette wheel or not.  Within the article’s context it didn’t really matter.

The main point was that public pension funds are grossly underfunded.  Consequently, more and more pension funds are borrowing money to play the markets.  The goal is to boost returns to cover their massive funding gaps.

If you recall, public-sector retirement plans offer defined benefits, where retiree pension checks are calculated based on salaries and years of service.  Private employers, on the other hand, generally offer defined-contribution plans (like 401Ks), where payouts are based on market returns.

If you live long enough, and are a recipient of a public pension fund you will get out far more than you put in.  If you work in the private sector, there’s a good chance you will outlive your retirement savings. Continue reading →