Government Worker Pensions ARE Wall Street

In an editorial posted in January 2011 entitled “Wall Street & Public Sector Unions,” we identified an irony still lost on the occupy movement’s rank and file – Wall Street is financed by the pension funds of unionized government workers. Every year, taxpayer funded government agencies pour hundreds of billions of dollars into Wall Street investment funds.

Occupy Wall Street? Why not “occupy” Wall Street’s union paymasters, the government employee pension funds?

Here’s a summary of the dynamics between Wall Street, unionized government workers, and the taxpayer:

(1) The government workers provide services vital to the taxpayer, and charge the taxpayer, on average, about 40% of their income (middle class worker, all taxes – state, federal, social security, medicare, property, sales) to receive these services.

(2) The government workers receive, in addition to their normal pay, funded by these taxes, pensions that are, on average, five times better than what taxpayers get from social security (the average government pension is $60K per year with an average retirement age of 55, the average social security benefit is $15K per year with an average retirement age of 65).

(3) The government workers tell the taxpayers – don’t worry – you don’t have to pay additional taxes for us to get these generous pensions, because we’ll invest the money on Wall Street, and Wall Street will earn 7.75% per year on these investments.

(4) Wall Street invests the taxpayer’s money, funneled through the government worker pension funds, demanding a return of 7.75%. To achieve this return, they invest in hedge funds and other manipulative, highly speculative investments. This increases the volatility of the markets, crowds out small investors, and drives down returns for small investors.

To fund government worker pensions, what has happened is the government workers have taken the taxpayer’s money, and essentially lent it back to the taxpayers at a rate of 7.75% – at a time when 30 year mortgages are below 4.0%, the 10 year treasury hovers at around 2.0%, and the rate of GDP growth is at or below 3.0%, which is roughly the rate of inflation.

Taxpayers provide the seed money for pension fund investments, these investments are aggressively managed which undermines the individual retirement investments the taxpayers make for themselves, then when the pension funds ultimately fail to meet their 7.75% targets, the taxpayers are assessed to cover the losses. Triple jeopardy.

Every time another public sector union or government pension fund spokesperson claims that taxpayers do not bear the brunt of funding public sector pensions, read between the lines, and this is the rest of the story.

The truth is contagious.

On November 18th a prominent Southern California blogger of indeterminate political leanings (certainly no rock-ribbed conservative), Will Swaim, published an expose of his own entitled “How the revolutionary California labor movement became Wall Street’s biggest gambler.” Here are some excerpts from Swaim’s inimitable prose:

“CalPERS is to Wall Street what a whale is to a Vegas Casino. A high roller. A player. The biggest swinging male appendage in the room. With $235.8 billion in assets, it is the nation’s largest pension fund, and among the biggest investors in the world. And it’s largely on the expected gains in its Wall Street investments that CalPERS has been able to persuade officials in many California cities and counties that they could pay rising pension benefits to their public employees…”

“It wasn’t always this way. For decades after its 1931 founding as a pension program for state workers, CalPERS—then called the State Employees Retirement System (SERS)—made stodgy, sure-thing bond investments. That changed in 1953 when the legislature allowed SERS to invest in real estate. Thirteen years later, there was another loosening of the restraints on the agency’s investments when state voters passed a union-backed proposition allowing CalPERS to invest a quarter of its portfolio in stocks. In 1984, high on the fumes of the Reagan Revolution, labor pushed Prop. 21, allowing CalPERS to invest anything/everything in Wall Street. CalPERS had become a whale…”

“You can begin to see the confluence of forces that would generate a pension problem when you also consider that, with life-expectancy rising and retirement-age falling, California offered public workers more generous pension benefits. In 1932, that benefit was 1.4 percent per year of service; the percentage increased to 1.6 percent under Gov. Warren, and to 2 percent when Gov. Ronald Reagan took over the Governor’s Mansion in Sacramento. It’s between 2 percent and 3 percent today…”

“CalPERS has a reputation as an activist investor. The organization has insisted on quid pro quos: in exchange for investment cash, it has pushed for caps on executive pay and transparency; has led the way for human rights, environmental and labor standards in emerging markets; and participated in class-action lawsuits against major health insurance companies, including UnitedHealth Group…”

“Leveraging that tradition, the city’s workers could reform their union and its bloated pensions. They could start by demanding that CalPERS invest their pensions in solid/stolid/boring U.S. bonds rather than in the speculative junk that fueled Wall Street’s rapid, unprecedented rise through the 1990s and its post-scriptural crash in 2008. That might—might—mean more modest retirements, of course, but it would certainly end union members’ hypocritical reliance on Wall Street—their affection for gambling when Wall Street inflates their pensions, their hatred of the market when it shapes the contours of their daily work…”

4 replies
  1. Darrin says:

    This article is a mess. Are you discussing public state unions or federal EEs?

    Why compare social security’s modest benefit to, I guess, state public union workers’s retirement arrangements? What’s the point except deception on your part by comparing apples to oranges.

    Funny how Wall Street can destroy the underlying trust investments of the tax qualified retirement plans yet you blame the rank and file workers …for what again?

    Again, your work…it’s not good.

  2. Editor says:

    Darrin – Thank you for your comment. Our editorial refers to the pension plans operated on behalf of unionized state and local government workers. In our attempt to distill the dynamics of the political and financial process at work here, we referred to “government workers,” when it would have been more accurate to refer to “government worker union leadership and their hired public relations spokespersons.”

    The connection between the apples (public sector retirement plans) and the oranges (social security) should be obvious. Both are taxpayer supported defined benefit plans. But the average social security benefit, which can be rendered sustainable via minor incremental adjustments to the withholding and benefit formulas, is literally one-fifth as expensive as public sector pensions. Don’t you think if the government is going to tax all citizens to provide everyone a retirement safety net, the same formula should apply to all citizens?

    As it is, government worker unions have colluded with Wall Street brokerages to funnel hundreds of billions of dollars per year into government worker pension funds. As described in the editorial, these funds are aggressively managed, they are undermining our markets using the tactics that the Occupy protesters have resolved to reform, and they are holding taxpayers accountable when they fail to achieve rates of return that were benchmarked during the bubble booms (internet then real estate).

  3. Darrin says:

    The benefits for SS and public pensions are funded entirely by the pay of the workers.

    SS is supplementary retirement income. Public pension plans are primary. Apples to oranges.

    Traditional DB plans do not reach critical mass of their own volition.

    The plan’s trust investments were stolen by the perfect storm: a president that will not enforce federal anti-predatory laws to keep the ownership society rolling, A Congress that legislates on behalf of the top crust 1%, and Wall St acting as a casino.

    That’s what did it. Not the paltry benefits paid to rank and file workers.

    If you believe that the middle class public worker brought this country’s pension schemes to ruin, you are not looking in the right place.

    I recommned you correspond with me. I am an ERISA attorney with 15 years experience. Here’s my email address:

  4. Karl Marx says:

    Occupy Wall Street IS protesting the fact that pensions are connected to Wall Street. The only purpose of this article is to create a discrepancy where there isn’t one. If you want to know what Occupy Wall Street is about go to their website. You won’t get their message on the corporate media or

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