Stock Market Not Helping Pension Funds

FEB. 10, 2012


California Pension Reform just suspended its attempt to put an initiative on the November ballot. It ran out of money — sort of like the pension funds themselves.

Meanwhile, the stock market seems to be recovering from the slump of the second half of 2011. As Profit Confidential wrote, “The S&P 500 Index is at the 1,350 level, which is where it was last spring. This, in my mind, represents an impressive recovery from the stock market correction that began last July.”

This is good news for California’s public pension funds, especially CalSTRS and CalPERS. In 2011, the funds soared in the first half of the year, but lost those gains in the second half, as we have reported here.

But actually the 2012 performance isn’t so hot. The following chart is from It uses the similar Dow Jones Industrial Average. It shows that this “recovery” of the stock market is the worst on record, dating back 112 years.

Look for the red dot in the bottom left corner:

Bad news. No wonder CalSTRS, for example, recently scaled back its anticipated portfolio gain from 7.75 percent a year on average to 7.50 percent. CalPERS may well do the same.

The Stanford study said that a 6.2 percent rate — or less — is more realistic.

Of course, it’s always possible that the stock market could soar again, as in the 1980s.

Then again, recessions or depressions strike on average about every five to seven years. The last one hit us in 2007, already four years ago. If another recession hits in the period 2013 to 2015, without the economy and the market having recovered sufficiently from the 2007-09 slump, then these pensions funds will be in big trouble. It’ll be a double-recession whammy.

And taxpayers will be on the hook to make up the difference.

Voters won’t get to vote directly on pension reform this November. But they’ll get to vote indirectly. Because the $7 billion in tax increases Gov. Jerry Brown wants would just go to fund the pensions. So would the $10 billion in tax increases being pushed by wealthy liberal lawyer Molly Munger.

Do these initiatives guarantee that most of the money would go “for the children.”

Of course, and that’s just where it would go. The guarantees are iron-clad. The money goes to the kids. That is, after the pension funds take their cut. And after the pension funds take their cut, the only thing left will be a couple pieces of chalk.



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