Buffett: Public Pensions Are a 'Financial Tapeworm'

The legendary investor warned US employees, public officials, and taxpayers of ongoing risks posed by public pension plans.

(March 3, 2014) — Warren Buffett voiced his concerns about what he sees as growing crises among US public pension plans in his annual Berkshire Hathaway shareholder report.

The 83-year-old business magnate predicted public pensions would continue to plague some government balance sheets. “During the next decade, you will read a lot of news—bad news—about public pension plans,” he wrote.

According to Berkshire Hathaway’s CEO and board chairman, major problems have arisen from empty promises made to employees and the complexities of actuarial calculations.

“Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford,” Buffett said. “Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans.”

However cryptic the accounting, public pension ratios, liabilities, and management fees have increasingly drawn the attention of mass media.

Rhode Island’s $8 billion plan was 58.2% funded and had an unfunded actual accrued liability of $4.5 billion as of 2012. Both North and South Carolina have been under scrutiny for high—and allegedly unreported—management fees. The two pension plans of the bankrupt city of Detroit faced $3.5 billion of debt and $11.5 billion in unsecured liabilities as of July 2013. The Illinois pension plans are currently wrestling a deal with lawmakers to relieve of over $100 billion of underfunding.

Buffett had been aware and warned of such perils of poor pension investing since October of 1975.

In a 19-page memo to Katharine Graham, the then publisher of the Washington Post, Buffett outlined the “irreversible nature of pension promises.”

“The first thing to recognize, with every pension benefit decision, is that you almost certainly are playing for keeps and won’t be able to reverse your decision subsequently if it produces subnormal profitability,” Buffett wrote in 1975.

“Rule number one regarding pension costs has to be to know what you are getting into before signing up,” he continued. “Look before you leap. There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude. And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs.”

Buffett also showed concern for accounting practices: “Actuarial thinking simply is not intuitive to most minds. The lexicon is arcane, the numbers seem unreal, and making promises never quite triggers the visceral response evoked by writing a check.”

The Washington Post‘s pension fund was around 141% funded when the paper was sold to Amazon in August last year.

Related content: Buffett on Pensions in 1975: Has Anything Changed?, US Endowments Beaten by Public Pensions in FY2013

By Sage Um

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