A World of Underinvestment

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By Michael Spence

May 20, 2015 – MILAN – When World War II ended 70 years ago, much of the world – including industrialized Europe, Japan, and other countries that had been occupied – was left geopolitically riven and burdened by heavy sovereign debt, with many major economies in ruins. One might have expected a long period of limited international cooperation, slow growth, high unemployment, and extreme privation, owing to countries’ limited capacity to finance their huge investment needs. But that is not what happened.

Instead, world leaders adopted a long-term perspective. They recognized that their countries’ debt-reduction prospects depended on nominal economic growth, and that their economic-growth prospects – not to mention continued peace – depended on a worldwide recovery. So they used – and even stretched – their balance sheets for investment, while opening themselves up to international trade, thereby helping to restore demand. The United States – which faced considerable public debt, but had lost little in the way of physical assets – naturally assumed a leadership role in this process.


Dealing with a world of underinvestment and declining retirement security; Bolstering state retirement plans

June 18, 2015 - Over a half-decade beyond the global financial markets meltdown, Michael Spence, a Nobel laureate in economics and Professor of Economics at NYU's Stern School of Business, has written an interesting article  for Project Syndicate, A World of Underinvestment.  (Nod to  In this piece, he notes the post-WWII global investment pax  that helped the world recover from war and depression, and argues for a similar reinvestment regime today.

The next article highlights comments from a speech by Laurence D. Fink from BlackRock at the Pensions & Investments' Global Future of Retirement conference.  He believes the country is at 'a crossroads' due to a lack of savings toward retirement.

Back at home, the defenders of public pension plans won a huge battle when the Illinois Supreme Court turned back the attack on the Illinois retirement system, asserting that lawmakers had shorted retirees and diverted funds for a century.  Now, some states, including Governor Tom Wolf's Pennsylvania, are exploring new pension bonds to bolster the retirement programs for their public employees.

Borrowing to Replenish Depleted Pensions

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By Mary Williams Walsh

May 27, 2015 — HARRISBURG, PA — Facing a shortfall of more than $50 billion in his state’s pensions, and with no simple solution at hand, Gov. Tom Wolf of Pennsylvania is proposing to issue $3 billion in bonds, despite the role that such bonds have already played in the fiscal woes of other places.

And he is not alone. Several states and municipalities are considering similar action as they struggle with ballooning pension costs.

Interest in so-called pension obligation bonds is expected to intensify in the wake of a recent Illinois Supreme Court decision that rejected the state’s attempt to overhaul its severely depleted pension system. The court ruled unanimously that Illinois could not legally cut its public workers’ retirement benefits to lower costs, forcing lawmakers to scramble for the billions of dollars it will take to keep the system intact.

While the Illinois ruling is not binding on other states, analysts think it may influence lawmakers elsewhere to look to alternatives to cutting public pensions. The Illinois justices offered a list of all the times since 1917 that state lawmakers had ignored expert warnings and diverted pension money to other projects. They said, in effect, that the lawmakers had to restore the money.

Pennsylvania and other states and cities fear similar restrictions.

“My reaction was, ‘Yeah, that’s going to play here,’ “ said John D. McGinnis, a lawmaker in Pennsylvania, which has also been diverting money from its pension system, setting the stage for a crisis as more and more public workers retire. The state has no explicit constitutional mandate to protect public pensions, as Illinois does, but that is irrelevant, said Mr. McGinnis, a Republican and former finance professor at Pennsylvania State University.

“The judiciary in Pennsylvania has been solidly of the belief that there are ‘implicit contracts,’ and you can’t deviate from them,” he said. If lawmakers in Harrisburg were to unilaterally cut pensions now, he said, they could be taken to court and be dealt a stinging rebuke, like their counterparts in Illinois.

Against that backdrop, pension obligation bonds may appear tempting, even though such deals have contributed to financial crises in Detroit, Puerto Rico, Illinois and other places.


GFOR: BlackRock's Fink says country is at 'a crossroads'

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By James Comtois

Laurence D. Fink

June 16, 2015 – Laurence D. Fink, BlackRock (BLK) chairman and CEO, believes “we're at a major crossroads” in the U.S., because “we have a real absence of savings toward retirement” in the private sector.

Mr. Fink was speaking at Pensions & Investments' Global Future of Retirement conference in New York on Tuesday.

“As companies migrated from DB to DC, obviously they rid themselves of the economic responsibility,” Mr. Fink said during a session at the conference. “But they should never assume they rid themselves of the moral responsibilities.”

He also said “the lack of participation in DC (plans) is stunning. (Participation) is still not high enough.”

Mr. Fink noted the lack of DC savings “will become the leading drag to the U.S. economy in the future,” and “be a far bigger crisis in this country than health care ever was.”

He added that he hopes retirement will become a “major component” of the next presidential election.

In addition to the crisis of savings in the U.S., Mr. Fink said money managers need to speak to regulators more. He explained that money managers have “done a good job of staying out of the news, and that is the problem.”

“Most asset managers don't want a voice. Most just want to stay out of the news and collect their fees,” he said.

Because money managers serve as fiduciaries to their clients, “we owe it to (the clients) to speak up.”


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