Why Is Nobody Listening to Warren Buffett?

Berkshire Hathaway Annual Letter Contains Dire Warning

When Jeff Bezos bought the Washington Post last summer, he had Warren Buffett to thank. The explanation for this strange connection lies in an appendix to the recently issued Berkshire Hathaway Annual Report for 2013. Here, Buffett inserts a memo he wrote in 1975 to Katharine Graham, the longtime matriarch of the Washington Post Company, in which he gave a lucid explanation of the threat that improperly managed pension plans posed to corporations. It was thanks to this memo, and the subsequent stewardship of the Post’s pension plan by Buffett (a longtime director of the company), that Bezos was able to buy the newspaper without inheriting a crippling overhang of unpaid pension obligations.

Buffett alludes to the memo, composed on a typewriter long ago, in this year’s letter to his stockholders. This reference, tucked into eight sentences at the end of the 24-page letter, is easy to miss among the recitation of the triumphs of the extraordinary collection of companies and investments housed within Berkshire Hathaway. If there’s one message to heed in Buffett’s epistle to his followers, it’s his dire warning about the condition of public, rather than corporate, pension plans across the United States.

It is hard to overstate the size of the public pension issue -- a problem that will pose a much bigger challenge to the country than the housing collapse of 2008 or the meltdown of the stock market in 2000 and 2001. It will impede growth, it will cause a cutback in vital services and it means that most people in America will never improve their real standard of living. If young people understood the implications and scale of the promises made by others that they will now be forced to meet, they would be erecting barricades. It makes you wonder why nobody is listening to Buffett.

Sadly, the condition of a public pension system is an issue that’s easy to sweep under the rug unless you live in a city like Vallejo or Stockton in California, Detroit or the state of Rhode Island – places where public services have already been slashed, police departments have been cut and emergency calls go unanswered. Right now, some of the loudest yelps are coming from the state of Illinois and Rahm Emanuel, the mayor of Chicago, and their cries will only get louder. For almost every governor and mayor in the U.S., their public pension system is their gravest problem. Most are skittish about attacking the issue. A precious few, like Gina Raimondo, the state treasurer of Rhode Island, or Chuck Reed, the mayor of San Jose, Calif., are brave enough to spell out the truth.

It isn’t very fruitful to assign blame for an issue that is so polarizing. The reality is that today we’re in a pickle and we’re all going to need to pitch in. Pensioners will have their plans adjusted, businesses and individuals will pay higher taxes and politicians will have to cut spending. Unless you are an actuary, it is hard to understand the gulf between pensions based on current income or future income. Unless you are an economic historian, it is tough to grasp that a steady 7.5% annual rate of return from an investment portfolio is impossible to maintain if you are charged with managing public monies. Suffice it to say that every state and city whose leaders claim they have a budget surplus are engaged in voodoo accounting. If they properly measured their unfunded pension obligations, their budgets would drown in red ink. All anyone needs to grasp is that, for generations, promises were made to employees that could not be kept and these were matched by projected investment returns that could not be met.

Take a look at Buffett’s letter. It’s between pages 118 and 136 of his report. If your appetite is whetted, then it’s worth learning about the public pension system in Australia. A quarter of a century ago, the country down under faced a similar predicament to the U.S. and addressed it after much wrangling between government, business and unions. The result: today Australia’s public pension system is in great shape and ours is worse than ever.

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