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Pension Funds Feel Burning Sensation Where Money Once Was


Taxpayers could cough up billions to cover losses.

Retiring at 65 may be a thing of the past.

Even as Americans watch their 401Ks brutalized by wild swing on Wall Street, some may now need to worry about the security of their pensions as well.

Amid the turmoil in the financial markets, the California Public Employees' Retirement System, or Calpers, is watching its billions dwindle away.

Since the beginning of the year, I've catalogued 2 instances of Calpers making losing real estate bets. The largest pension fund in the country has seen investments in both a Manhattan housing project and vacant land in California turn sour.

Where there's smoke, apparently, there's fire: Calpers has lost $48 billion, or 20% of its total portfolio in the last four months.

The fund manages around $200 billion in pension money for state employees, most of which is contributed by employers like schools, police departments, cities and other public agencies. According to the Wall Street Journal, Calpers is considering upping the contributions from its members to help cover losses. This would further cripple the state's budget, which is already reeling from lower sales taxes and the collapse in the housing market.

The problem isn't unique to California.

Calpers is actually outperforming most other pension funds, which have on average posted a 5.1% loss during the fiscal year that ended in June. According to Merrill Lynch, Calpers lost only 2.4% during that time.

And while other states have more red tape to cut through before higher employer contributions can be implemented, as losses mount, it's not unreasonable to expect California to be the first of many to pass these costs on to their members.

So why should anyone -- at least anyone who isn't depending on a state pension to fund their golf and tennis in Palm Springs -- care?

States aren't exactly flush with cash these days, as debt costs rise and tax receipts fall. In order for pension funds to cover payouts in years to come, they need more money. Short of a sharp reversal or a sustained recovery in equity markets, that money needs to come from somewhere: Higher taxes could be in everyone's future.

Recent stock market losses have thrust the argument over who manages retirement money into the spotlight. Big brokerages like Merrill Lynch (MER) and Morgan Stanley (MS) would love to take money away from pension funds and Social Security, instead trumpeting personal choice as the way to save for the future.

Washington, on the other hand, will point to the financial crisis as evidence the government should have more say over how retirement money is invested.

What's evident, however, is that, irrespective of the outcome of this heated debate, it's likely Americans (and even Argentineans) may have to figure out cheaper ways to enjoy their golden years.

Anyone for Wii Tennis?
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