Wednesday, March 10, 2010

Paying Governors

Previously I wrote about the New Jersey pension crisis.  Admittedly, this was not about the New Jersey pension crisis, but about how tax laws around pension plans amount to a massive wealth transfer to hedge funds.

Yesterday's NYT article raises a different "crisis"--that public pension plans have portfolios with what the author perceives as much higher risk.  (Notice the careful wording.  I'm not judging the risk, I am expressing the author's view.)

There's an interesting single sentence paragraph in the article.  Buried in a parenthetical statement toward the end the author states: "Corporate plans do their calculations differently, and for them, investment returns are a less important factor."  Interesting statement, to say the least.

Why are they different?  States play games.  They think they can tax endlessly to cover shortfalls.  They routinely buy votes by expanding benefits.  Imagine a company that transferred all its profits to it's employees in the form of retirement benefits.  Shareholders would flee.

Alternatively, CEO's need to generate profits.  They're paid (in stock) to generate growing, stable earnings.  Too much pension volatility and they torpedo their own compensation.  Too generous benefits (think GM, Chrysler and Ford) and they destroy their earnings potential over time.

Let's start paying governors long term incentive contracts based on the growth of their state economy, and we'll see far less monkey business with pensions.  Oh, and don't let them move out of state!

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