This essay by Eric D. Wanger was originally published in a newsletter for the financial clients of the multifamily office he ran in Chicago. By 2013, the underfunding of public pensions had fallen to $968 billion.
Sept 29, 2010
Teflon is really cool: Nothing will stick to it. It’s the slipperiest, slickest, most friction-free stuff around. The stickiest, messiest, gooiest mess slides right off. Teflon is used in industry whenever friction simply won’t do. Because nothing sticks to it, its applications seem endless. In the pantheon of chemically engineered gods, Teflon stands near Zeus.
When people are referred to as “Teflon,” it means that nothing sticks to them in the political sense. Ronald Reagan was sometimes referred to as the Teflon president. He was such a masterful politician that he could jump fully clothed into a vat of pure nasty and climb out smelling like a rose. He dodged scandal after scandal, gaffe after gaffe, like some kind of Muhammad Ali of politics, floating like a butterfly and stinging like a bee. In public life, Teflon is the x-factor that separates the very good from the truly great. Political careers are made and destroyed in the public forum, without a judge or a jury. Political Teflon is that amazing ability to stand calmly and assertively while political opponents hurl chamber pots filled with blame, only to watch it all slide off without leaving so much as a stain on one’s suit. And that brings us to the subject of public pension funds.
Public pension funds around the country are in disarray. According to the Pew Center on the States, employees’ public pension and health insurance funds were underfunded by more than $1 trillion in 2008. Negligent financial mismanagement, irresponsible return assumptions, and imprudent risk-taking have combined with chronic underfunding to leave a swath of destruction. State governments around the nation have failed to stash away anything close to the amount of money their (often elderly) beneficiaries are owed. Had these fiduciaries operated in the private sector, they would have been fined or even jailed under the Employee Retirement Income Security Act. One study found that the average funding rate across 59 city and state pension plans was 54 percent. Another study estimated that teacher pension systems across the nation are underfunded by $484 billion. The Pew Center on the States rated state pension funds on a 4-point scale and gave zero points to Alaska, Colorado, Illinois, Kansas, Kentucky, Maryland, New Jersey and Oklahoma. In the private sector, there would be FBI raids, press conferences, and men in suits hiding their faces behind handcuffed wrists on the evening news.
But has anyone been punished because $1 trillion (some estimates place it at $3 trillion) has gone astray? No.Will anyone be punished in the future? It’s doubtful, but the lawsuits have just begun to fly. Why? The individuals that approved the overblown rates of investment return are faceless, the committee members that approved the underfunded budgets have moved on, and the deficits are so big they have no meaning to the average person. The public debate has nowhere to go but to other issues—issues that can be used to win legislative seats, sway elections, enhance prosecutorial resumes, or buy voters with pork. That’s Teflon in action. Despite crisis, there is nothing political for it to stick to. All of the blame and embarrassment will simply slide off.
Examine the political debate regarding public pensions: It has been cleverly shifted to the current salaries and benefits paid or promised to existing state and federal workers. That’s sleight of political hand, but diverts us from the real issue. Teflon is at work and the taxpayers will be left to clean up the mess.
No discussion of Teflon would be complete without acknowledging the most non-stick man of the last century, Wernher von Braun. Read Michael Neufeld’s excellent biography of him. It’s excellent and done to standards which should make the Smithsonian proud.
Wernher von Braun was a German rocket scientist straight from central casting—a real-life Dr. Strangelove. Von Braun was a founding father of U.S. rocketry: both ballistic missiles for war and the manned space program for peace.
As an architect of our manned space program, he was the father of the Saturn V rocket (still the most impressive rocket in human history) and the tall, handsome, blond-haired, blue-eyed, German-accented face of the “dream of space” for a generation of Americans. His entire professional life was devoted to the dream of putting men into orbit and onto the moon. “I aim at the stars,” he is famously quoted.
But few Americans know the extent of his amazing and bizarre history: He was the pampered son of a German baron, the director of the Nazi Peenemunde rocket development site, the man behind the infamous Nazi V-2 ballistic missile, a “colonel” in the SS, and a recipient of the Fuehrer’s Knight’s Cross medal. After choosing the United States over the Soviet Union at the end of the European war, von Braun was a key player in the U.S. Army’s own ballistic missile program, a senior NASA administrator, an influential congressional lobbyist, a public face of the U.S. manned spaceflight program, a guest on Walt Disney’s television programs, and the father of the Saturn V rocket (which made possible the Apollo program and moon landing). If Neufeld is correct, von Braun was within days of receiving the Congressional Medal of Honor from the president before someone figured out that he had been personally decorated by Hitler! As Tom Lehrer famously sang, “Nazi schmazi, says Wernher von Braun.”
So here is a man who was born to the greatest luxury known in pre-war Europe, who spent the war eating good food, drinking good wine, and going to parties in a tuxedo (or his SS officer’s uniform when required). He was a post-war “guest” of the U.S. army, ultimately rising to the highest levels of the U.S. space establishment and becoming its public face. He appeared on television and in print and he testified before Congress. He dined at the White House. He died a hero after helping to dedicate the Smithsonian’s National Air and Space Museum.
Teflon is thriving: Goldman Sachs will survive congressional hearings and hundreds of millions in fines. Sarah Palin abdicated the governorship of Alaska in order to free up time for speaking tours and book publishing. Michael Jordan’s gambling? Bill Clinton’s perjury? Teflon people, truly non-stick humans.
But what of our public pension funds? If only Tom Lehrer were here: “Fiduciary, schmiduciary,” he would sing. Remember Peter Sellers in Dr. Strangelove? If one can learn to love the bomb, one can certainly learn to love huge deficits and the taxes we will have to pay to reinflate them. Real Teflon is amazing stuff. It is so slippery it can let the responsibility for the V-2 missile slip off. In the words of comedian Mort Sahl: “I aim for the stars …but sometimes I hit London.”
Eric D. Wanger, JD, CFA,