The Broken Promise of Public Pensions

How blockchain technology could stop scams in our public pensions

Ric Edelman: It's Thursday, February 16th. We've been talking about scams the past couple of days. We see scams in every investment category - stocks, bonds, real estate, gold, oil, collectibles, baseball cards, artwork, crypto, you name it. Crypto has gotten a lot of criticism lately about scams, even though all the evidence shows you're no more likely to get scammed in crypto than you are in any other asset class. Crooks are crooks. They use every scheme they can think of to separate you from your money. But there's a really interesting story in Forbes - which is the bigger scam: crypto fraud or the lack of transparency at our nation's public pension plans?

According to Anessa Santos, an attorney and special magistrate who specializes in blockchain and fintech, public pension funds are the bigger scam. The reason, she says, public plans have been promising all of us that you contribute a portion of your pay to the plan while you're working and you get guaranteed lifetime income throughout your retirement. But that's a lie, she says. And I agree with her.

According to the Census Bureau, there are about 6,000 public sector pension plans. They've got about $4.5 trillion dollars in assets on behalf of 26 million government workers and retirees. They distribute over $300 billion a year to those retirees. And the returns that our nation's public pension plans are earning is not enough for them to continue paying all the benefits that they've been promising to pay. The Reason Foundation says we've got $1.3 trillion in unfunded pension liabilities. 

Part of the reason the public pension funds are not earning the returns they need is because they're not following the rules that corporate pension plans have to follow. Public plans are run by state and local governments for state and municipal workers. These plans are not subject to ERISA. That's the federal law that governs corporate pension plans.

A study by the Pew Charitable Trusts says state retirement systems get limited guidance from the Government Accounting Standards Board and the Government Finance Officer Association's best practices for public employee retirement systems. The result is that a lot of these public pension plans are investing a very large portion of their portfolios in high risk, high fee private investments, not public markets like stocks and bonds - as much as 40% of their portfolios, according to the book, Who Stole My Pension?.

According to the Society for Human Resource Management, there have been more than 200 class action lawsuits since 2020 over all of this for breach of fiduciary duties, charging plan participants, high fees and so on. The problem, according to Special Magistrate Anessa Santos, is that these public pension plans are not transparent. They don't disclose what they're investing in. Workers are too often in the dark. The irony is that Santos says the best way to solve this problem is crypto, using, in other words, blockchain technology. Bitcoin operates on a fully transparent platform. It's designed to be resistant to fraud and hacking. Pension plans could use blockchain technology for data management if pension plans recorded their transactions on a decentralized, immutable, publicly viewable blockchain. 

They would not be able to hide the fact that they're making bad investment decisions. The best way to end fraud in public pension systems is to provide full transparency about their transactions. And the best way to do that is to use blockchain technology. In other words, instead of being a fraud, crypto can help us protect against fraud. And considering that we've got a $1.3 trillion pension shortfall in public pension plans, maybe we ought to implement this as soon as possible.

So before you let anyone tell you about scams involving crypto, ask them about scams involving state pension plans. And if you are one of those employees who works for a state or local government and you are a participant in your pension plan at work, you need to discount the promises that your employer is providing you. It is unlikely that you are going to receive the full pension benefit for your full life expectancy because the pension program has not been earning the rate of return that it needs. It is not acknowledging that you're going to live as long as you probably will, and that means you need to amass your own savings and investments to supplement what the state or local government is promising to pay you. Don't be caught by surprise. Recognize that you are getting scammed.

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