Warren Buffett’s most important comments of late are tucked away in three paragraphs on page 21 of his annual letter to Berkshire Hathaway shareholders.
It’s a warning about public pension plans:
Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. 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.
Investment policies, as well, play an important role in these problems. In 1975, I wrote a memo to Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the importance of investment policy. That memo is reproduced on pages 118 – 136.
During the next decade, you will read a lot of news — bad news — about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist.
Pensions are formally referred to as defined-benefit plans. They differ from defined-contribution plans like 401ks in that the employer guarantees a certain retirement benefit. 401k plans, on the other hand, include no such promise; if the employees 401k plan investment go sour, they’re in trouble.
The financial crisis came with crashing asset prices and many pension plans fell deep into underfunded status. Many corporate pension funds, however, rode the stock market rally back to funded status.
Unfortunately, the public pension funds appear to be in much more trouble.