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The Public Pension Pay Problem October 29, 2007

Posted by David Bookstaber in Finance, Government, Pensions.

The WSJ outlines a predicament facing public pension funds: With many billions of dollars in assets, the effect of the fund managers on this public welfare can be enormous.  But government entities have a hard time paying the going rate for financial talent — successful private fund managers with billions in assets will certainly make seven figures each year, but the highest public-sector salaries are traditionally in the low six figures (often customarily bounded by the salary paid to the governor).

My philosophy is that government shouldn’t be in the business of money management.  Pension liabilities should be outsourced to insurance and investment management companies.  After all, it’s a competitive private industry.  There’s no reason to think that government could do it better (and there’s bountiful evidence that political meddling drives performance down).  And there is no reason for taxpayers to shoulder the risk of underfunded defined-benefit liabilities, which occurs frequently in public pension systems.

Of course, governments will pay for good money management one way or another.   If they outsource it the politically unpalatable salaries will be disguised behind management fees, but they will still be there.


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