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Buffett Warns of Pension Crisis for Decade

Image: Buffett Warns of Pension Crisis for Decade

By Todd Beamon   |   Saturday, 01 Mar 2014 07:38 PM

Billionaire investor Warren Buffett warned on Saturday that the growing crisis in public pension plans will continue — with "a lot" of more bad news to come.

"Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford," Buffett, the chairman of Berkshire Hathaway Inc., said in a letter to shareholders. "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.

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"Unfortunately, pension mathematics today remain a mystery to most Americans," Buffett said.

"During the next decade, you will read a lot of news – bad news – about public pension plans," he added. "I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist."

The predictions were tucked away on page 21 of Buffett's 24-page letter to shareholders. Berkshire Hathaway held its annual meeting on Saturday in Omaha, Neb., where his company is based.

Buffett, 83, has run Berkshire since 1965, and the company now has more than 80 businesses — encompassing business categories including insurance, railroads, utilities, and ice cream. It also holds more than $117.5 billion in stocks.

Pension funds differ from plans like 401(k) retirement savings plans in that employers guarantee a certain retirement benefit. A 401(k) plan includes no such promise — if employee's investments goes sour, the money has been lost.

Many pension plans became underfunded because of the financial crisis. This has left many state and local governments still struggling to meet their financial obligations to retirees, especially since the crisis put huge burdens on state and municipal budgets. Poor decision-making by fund managers and governments have also been a factor.

For instance, Detroit cited a $3.9 billion deficit in its pensions when it filed for bankruptcy last year. Its emergency manager, Kevyn Orr, estimated that pension and retiree health-care liabilities made up half of the city's $18 billion in debts cited in the July bankruptcy filing.

In fact, local officials in at least 10 states from New York to California now are trying to cut the pensions of municipal workers — or eliminate the plans outright — pointing to Detroit's bankruptcy as an example of what could happen with spiraling retirement costs amid a struggling economy.

In his letter, Buffett made reference to a memo he wrote in 1975 to Katharine Graham, who was chair of the Washington Post Co., about the problems arising from the promises made by pension programs and the importance of a strong investment policy.

The first rule in monitoring pension costs, Buffett said in the memo, was "to know what you are getting into before signing up.

"There probably is more managerial ignorance on pension costs than any other cost item of remotely similar magnitude," he wrote. "And, as will become so expensively clear to citizens in future decades, there has been even greater electorate ignorance of governmental pension costs."

In the memo, Buffett said that it was "next to impossible to decrease pension benefits in a large profitable company — or even a large marginal one."

He said that language allowing companies to terminate or alter their pension plans had been gradually eroded by law.

Graham, who died in 2001, took Buffett's advice — seeking a manager for the Post's pension funds that shared his strategy on increasing investment returns while lowering expenses and risk — and as recently as 2012 the company ended the year with its pension fund overfunded by about $600 million.

Buffett joined the Post's board in 1974, stepping down in 2011. Last year, The Washington Post newspaper was sold to Amazon.com founder Jeff Bezos for $250 million.

Buffett, the world's fourth-richest person,  is seeking to sell his $1.1 billion stake in Graham Holdings, which had been the parent company of the Post newspaper.

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