Reversal of Fortune: Inside Pensions and the Erosion of Retirement
DAVID MEIKLE: I did enjoy teaching. I thought that a contract would be honored and then to have it changed, it hurts. ROGER LOWENSTEIN: We've seen now in the last bunch of years, pensions are having a great deal of trouble. The problem right now is quite severe, about half of the states, 24 to be precise, are severely underfunded. EDWARD SIEDLE: It is a crisis, a retirement crisis. I am, to the best of my knowledge, the only person in the world who has spent his life investigating trillions of retirement plan failures.
PAULA BAILEY: We don't do it for the reward. We certainly don't do it for the money, and we don't do it for the pension, but it was promised and what are we going to do if we don't have a pension? LEO KOLIVAKIS: We're one crisis away from a major disaster. There's 100% probability in the next crisis, a lot of pensions will go under. ROGER LOWENSTEIN: States like that have trouble keeping populations, because they ended up having to tax more and provide fewer services and so on. It's almost worse than a blow up, because it's death by a 1000 cuts.
LEO KOLIVAKIS: Massive ripple effects on the economy. Everything from private sector to public sector to the financing state budgets to the services that people receive. It's got a massive ripple effects. It will affect everyone in material ways.
EDWARD SIEDLE: I often tell people when trying to explain the work I do that it's very similar to the TV show, CSI Miami. The show often opens with there being a dead body and the question is, did the body die of natural causes, or was there foul play? The work I do involves looking at dead or dying pensions and investments, and I ask the question, did the investment fail because of foul play, or was it simply unforeseen market forces? My experience with my father led me into international work, into investigative work. I recently won the largest SEC and CFTC awards for blowing the whistle on a JP Morgan matter, but also resulted in me having one foot firmly in retirement and aging issues.
This was the research book that my father wrote, and of course he was killed before that was ever published or printed. My father in the 1960s realized that America was preparing for a massive demographic shift, where the elderly population in this country would mushroom so he thought perhaps African traditional societies, how they cared for their elderly might provide some answers to American policymakers. He also worked with the intelligence community. Some of the information that he developed in his field research in Africa was used by -- JASON ZIEMIANSKI: What we're showing you here on our YouTube channel is just the tip of the iceberg. No matter where you are in your financial journey, whether you're a beginner just looking to break into the market or a financial professional looking to up your game, Real Vision has something for everyone.
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We look forward to seeing you there. EDWARD SIEDLE: He also worked with the intelligence community. Some of the information that he developed in his field research in Africa was used by the American intelligence community. Because he had disappeared and was presumed dead, but his body had not been found, his estate could not be probated.
His life insurance company would not pay the life insurance benefits and the Social Security Administration would not pay survivor benefits. I was basically penniless and orphaned at age 17. That made me realize at a very early age that I had to become fully capable of taking care of myself and fighting for myself, advocating for myself and that is why I went to law school.
Being presented with an enormously complex international crisis in my life made me realize that I had to hone those skills that would enable me to survive. Law, investments, forensic work, class action cases and whistleblower cases are things that I've been involved with and created an unconventional career doing that. TERESA GHILARDUCCI: If we go back in the time when we had our industrial revolution, and people moved off the farms and became workers, let's say, after the Civil War in this country, what did retirement look like? Well, it wasn't even an idea. Most men were working and most men died in their boots. They were dying on the job, or while they were still in the labor market. NEIL HOWE: Retirement used to be almost a derogatory expression.
That changed with the Progressive Era, and many of the leading lights began to think that in a modern industrial society, we should have some place for those who were the superannuated individuals who were Americans. TERESA GHILARDUCCI: We saw progress in our economy, progress in our longevity, public health change. We have more and more people retiring with a pension.
ROGER LOWENSTEIN: Not with big pensions, but employers such as schools. They couldn't offer big salaries but they wanted workforces who would stick with them for a long time. Schools, firefighters, police forces and so on, began to offer pensions as well. TERESA GHILARDUCCI: It's a guaranteed stream of income for the rest of your life. You can plan your whole work life around that.
SPEAKER 1: Do you test the government by the way in which it is looked after the aged people of this country? Tell me what pension you're getting today? TERESA GHILARDUCCI: Retirement was part of what a growing democratic economy provided along with clean water, good food, improving medical care. In the 1980s was a time where we suffered a lot of productivity slowdown. SPEAKER 2: The present recession is bottoming out without resorting to quick fixes. TERESA GHILARDUCCI: You saw a resurgence of support for what's called a defined contribution or a 401k type model. Instead of workers getting a pension plan, some of their pay being diverted into a collective pool of assets, we moved to an individual directed voluntary commercial retail model of handling it.
JIM LEECH: The drawback is that the entire risk is put on the employee, they assume the entire risk of how much money is going to be earned, how the money is going to be invested, and how much is in that box to live for the rest of their life. One of their problems is it's very inconvenient to run out of money 10 years before you die. LEO KOLIVAKIS: The advantage of pension fund is no matter when you retire, you know you have safe predictable stream of income that's coming in every month.
This is a huge advantage as opposed to worrying about the whims and fancies of the stock market. TERESA GHILARDUCCI: The big change we saw between a growing pension system before the 1980s to a do-it-yourself system is the root cause of the downwardly mobile, older person in America. Now, over half of middle class workers can expect to be a poor or near poor retiree. That's a reversal of fortune. ROGER LOWENSTEIN: The shame is that pensions remain one of the best societal tools but we've seen now in the last bunch of years, pensions are having a great deal of trouble. The problem right now is quite severe.
DAVID MEIKLE: We don't like living in financial thin ice. We try not to talk about it. I did not know this was going to come down the pike. I thought that a contract would be honored, and then to have it changed shortly after I retired, it hurts. My name is David. I taught in the Kowloon School Department for 37 years.
I taught Physical Education from grades one to six. Thankfully, I'm very handy which helps the tight budget but I've re-shingled the front of the house and stained it. I've stained this north end over the garage. I did the ceiling of the driveway which was going to be about 500 bucks.
I did it for 200 and my time and pair of jeans and a T-shirt. I didn't think I would need to go get a part time job to supplement our income. I'm still looking, I had two great interviews but unfortunately with my age and my education, no one wants to hire me. SPEAKER 3: We're going to look at states in crisis right now. Rhode Island considering a plan to slash pension benefits.
SPEAKER 4: Raising the retirement age and flatlining current pensions. SPEAKER 5: In Rhode Island, they have rolled back pensions to people who've already retired. DAVID MEIKLE: The pension cuts did come as a surprise to me.
I thought that anyone that retired prior to the date would be completely immune to the new format. It makes me concerned for my financial future. I would think it would make the state rethink because if they're not getting teachers, who they're going to have teach the kids in the classroom? I did a projection here, and over the past year, I've lost over $11,000 in income, so that's a quite substantial hit. Well, I naively thought that the pension fund, along with the unions had a fiduciary relationship but where the pension's money is, is suspect.
I don't think anyone really knows except for maybe the few people at the top. EDWARD SIEDLE: The three main drivers of the health of pension, the first is contributions or money into the pension. The second is management of the money that's in the pension and the third is money out which is generally in the form of benefits paid to participants. Many times, politicians will say particularly when the market was booming back in the '90s that they could avoid making certain payments of the pension. The other issue that typically comes up is benefits, money out, there are clear instances where pension benefits are just grossly excessive.
Your average state worker gets a pension that's about $16,000 a year. There's very little attention being paid to how the money in the pot is managed over time, and part of that is because it's seemingly complex, and part of it is because of the lack of transparency. One of the surprising things that I uncovered in my forensic investigations is as pensions falter, the worst off they get, they actually engage in a riskier behavior. The higher the fees they pay, the higher the risks they take, and the more secrecy they embrace. That type of risk taking behavior is the exact opposite of what prudence would dictate. ROGER LOWENSTEIN: The origin of pension investing was extremely conservative.
They owned mostly bonds, but going into the '60s, '70s and '80s, pensions diversified increasingly into stocks. TERESA GHILARDUCCI: The governor of Indiana appointed me to the pension board. In 1997, I was reading the academic literature, and I had a pretty good feeling that there was a bubble in the stock market and we didn't buy a bunch of stocks and I couldn't have been more vindicated. Later on, the Indiana fund was noted as the one fund in that financial crisis that didn't require a lot more contributions from the employer because we weren't that volatile.
EDWARD SIEDLE: The first jolt happened during the tech crisis, and they got caught up in the bubble, and when the bubble burst, they got hit. ROGER LOWENSTEIN: Then we had a couple of very nasty crashes and pensions, institutional investors got cold feet. Wall Street came along, realizing that what pensions wanted was to have it both ways. They want to be able to keep making high returns, but pretend that they weren't taking any risk.
Wall Street began to sell them a bunch of products that they called alternatives, and pensions said, well, this is terrific. We're not just boring investors in stocks and bonds anymore. We're investing in alternatives.
It sounded really great. It sounded sophisticated. It sounded like the pension fund managers were earning their keep because after all, anybody can invest in stocks and bonds.
By the way, they were paying outrageous fees to these Wall Street managers, but the pension managers weren't paying the fees. That was coming out of the either taxpayers or the workers, ultimately, who were supporting those pensions. LEO KOLIVAKIS: Roughly 25% of total losses on investment alternative investments, which are hedge funds, private equity funds, real estate, infrastructure, some private debt as well. What you saw is more and more money kept pointing to hedge funds, the returns of hedge funds started to go lower.
This is a rule that you will generally see in the pension world is as more and more money goes into any asset class, the future returns to that asset class falls. ROGER LOWENSTEIN: In the 10 to 15 years, first 10 to 15 years of the 21st century, pension funds were assuming they were going to make 8%, 8.5% and the returns came in 5.5% or so percent, which is why they continued to be in such trouble today. TERESA GHILARDUCCI: If you put in $1, and you're getting 5%, but the fees are 2%, you're only getting 3%, and over time, how much you would have gotten and how much you are getting because of the fees is going to be very significant. One of the reasons you're asking me about all these fees is because nobody knows. You're not asking me about the price of milk.
You know how much the price of milk is, so why do you have to ask a professor about prices of milk? You already know, but you're asking me about fees, because nobody really knows how much money they're spending. WYLIE TOLLETTE: We share your interest in getting better information and disclosure around private equity fees in particular. JJ JELINCIC: Not even disclosure, it's not knowing that's really troublesome to me. If we knew and weren't disclosing it, that would be one issue, but not knowing is frightening. EDWARD SIEDLE: The Rhode Island pension reform was to reduce pension benefits to participants, supposedly to shore up the pension.
In fact, what was happening was a wealth transfer. A lot of this is just understanding what things are. It's not that it's hard to necessarily always get the information, often the answers are right in public view, it's just nobody knows what it means. SPEAKER 6: The General Treasurer of Rhode Island and Providence Plantations, Gina M. Raimondo. EDWARD SIEDLE: The treasurer had announced a program tuned to get involved in high cost, high risk hedge funds for the first time so I knew that the fees were going to skyrocket.
Just the stated investment shift meant that fees were going to go from maybe half a percent to 4% or higher. When I first, sitting in Florida, took a distant look at the Rhode Island pension fund and saw that the pension fund was disclosing fees of $8 million a year, I knew, sitting here, that was wrong. Within six months of confronting the pension fund about their understating fees, the pension disclosed fees of $80 million, 10 times greater than they had previously disclosed before I arrived on the scene. That's how dramatic the hidden excessive undisclosed fees Wall Street was making off that pension were. Here you go, this is all it.
This is investment manager fees, professional fees and operating expenses. Here it shows a total 82 million. Okay. I said that I estimated that the true fees were either were or would soon be 100 million. Well, they're still no-- there's, again, this was in 2013.
They're still not disclosing fees of 100 million, they're disclosing fees of 80 million but I would be willing to wager that the fees are probably close to 100 million at this point. These investments have produced worse performance. Pension has lost half a billion dollars, which is far, far greater than the 10s of millions they cut the payments to workers. It's very clear that they could have afforded to continue to pay the workers their full benefits, the benefits they've been promised.
PAULA BAILEY: I believe a promise was made to me by the state of Rhode Island and they did not fulfill their promise. A lot of people I know had to resort to subbing or seeking part time jobs. Some people asked if they could work in the gym.
They needed, agreed, or they'd be willing to go at five o'clock in the morning and check people in. I'm Paula Bailey. I was a teacher in Rhode Island for 22 years, and then I became an administrator. My starting salary I think was about $7,500. In 1970, your salary wasn't competitive with things like Raytheon, which is a company in Rhode Island who would be looking for women in math, or engineers.
I considered the fact that I would get a pension at the end. It was a consideration, absolutely a consideration, but that pension isn't enough right now. Once you retire, you can't go back into the state of Rhode Island and teach again, you're done. The choice is to go out of state, so I went out of state while living in Rhode Island and I secured a full time position in Massachusetts, teaching math. I feel cheated all around.
I thought there were people watching out for me, but they ended up not doing something that was in my best interest. EDWARD SIEDLE: I've been to Rhode Island probably five or six times. I come here at the invitation of workers basically, whether it's retired teachers who asked me.
What I hope to tell them is that the fight for pension justice takes a long time, years and that they shouldn't lose hope. In 2007, Rhode Island's current governor and former state treasurer, Gina Raimondo was a co-founder and partner in a very small local venture capital firm. Miraculously, Gina succeeded in convincing the $8 billion state pension to invest 5 million in a brand new fund established by her nascent unproven firm. Even more miraculous, the pension agreed, for some unknown reason, to pay Gina's firm a higher fee than it asked for.
DAVID MEIKLE: In addition to our ITA sending your reports to the FBI and SEC, what more can we do other than burn the state house down? EDWARD SIEDLE: I would drop all other efforts and just focus on transparency. I don't think there's any issue in the state of Rhode Island where transparency is more important. This is the biggest pot of money in the state, am I right? There is no pot of money in the state that requires transparency more than this one. TERESA GHILARDUCCI: What is illustrative of communities where people's pension has fallen is to show what happens when incomes fall in the community.
What happens to a household when they were expecting $1,000 but they only get 700? I can see it on paper what happens, they skip lunch, there's hunger problems, nutrition problems, and they get sicker and they die sooner. I can see that in my databases. JIM LEECH: If I'm a garbage collector or whatever in the city of Chicago, and I lived up to my deal, my deal with you city was I'm going today in and day out, I'm going to put 8% of my income into this pension plan and you told me that when I retire, I'm going to earn this much money. I get to the end of retirement life and I say, okay, start paying me and you, the city of Chicago default, where have you left me? I lived up to my deal, how come you guys haven't lived up to your deal? That's the issue. It's going to be those broken promises and putting the cost on the backs of the future generation.
I think that leads into income inequality, which is not a good place to go. LEO KOLIVAKIS: When you're raising contributions, but you can only raise them so much and when you're done from the options, you can't cut benefits more to retirees without people coming out with pitchforks, the only other choice that is you're going to try to raise taxes but guess what, even taxes, you want to be elected as a politician, you can't raise them too much. A lot of states, what they're doing is increasing real estate taxes to be able to make their public sector pension payments, and that will have huge ramifications on the overall economy. ROGER LOWENSTEIN: States like that have trouble keeping populations because they ended up having to tax more and provide fewer services and so on. It's almost worse than a blow up because it's death by 1000 cuts. LEO KOLIVAKIS: It can be anything from paving roads to other services, and that will have effects on everyone.
When you run out of all options, the only other option is to go to Uncle Sam and say, hey, we need a massive bailout on our pension system. We can't do anything about it, and we're contractually obligated to meet those pension payments. It will bail these pensions out not because they're particularly worried about pensions and retirees, they will bail them out because they want to bail out Wall Street, private equity funds and hedge funds and make sure that they get money in perpetuity over the long run so that they can grow richer and richer and pay these politicians more and more money for their campaigns. I am being cynical, but that's the reality of the situation, but notice, they will never change anything structurally. EDWARD SIEDLE: I think my father would be thrilled that I have followed in his footsteps. I think he would be intrigued that I focused on the investment program, which is critical to the entire aging retirement process.
It's in everybody's interest that all Americans have a decent retirement. The initial best way to clean up public pensions is to let the sunshine in and show what's really going on. NICK CORREA: Thank you for watching this interview. This is just a taste of what we do at Real Vision. To learn more about the complex world of finance, business, and the global economy, click on the membership link in the description.
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