Cambridge is a town which has a strange relationship to reality. I have at least three faculty friends, for example, who haven't opened their TIAA-CREF pension reports in many months. And I can't imagine that there are not many more.

But the news has surely not escaped them that their retirement accounts have been severely depleted by the long market plunge which has not yet ended.
Today's Financial Times has an article by Deborah Brewster, writing from New York, who reports that US public public pension funds face big losses. No surprise! The stock market goes up so do these funds. When it goes up so do the funds.

California's Calpers, "the US's biggest pension fund," reported a drop of just 20 percent of its assets from July 1 to October 20. I say "just" because I believe other pension funds are down by far greater percentages, especially private ones. To say nothing of the those corporate retirement instruments that were funded by stocks in their own companies.

Brewster tells us that 40 percent of state funds are underfunded, one reason being that, "state governments have lifted pension benefits--a move that is politically popular--but have often failed to put in more money to pay for them."

I think the bad news of underperformance is much worse than is being admitted. Why?

Because big pension funds, public and private, besides being invested in public securities that are marked to market every day at 4 p.m. Eastern Standard Time, also have investments in private equity directly, in private equity funds, in hedge funds or other aggressive vehicles. Their true value must be less than is acknowledged. Certainly private holdings don't do mark to market daily accounting. But even the accounting for funds only in public stock is not really real. As soon as these funds have to repatriate investments (every fund has its own rules) they have to sell stock, further driving equities southward. Some of the funds investing in other funds ("fund of funds") have rules about how large a percentage of their total investments can be. So even a high performing investment vehicle--and there are a few of them--might be forced to sell stock to meet its "repatriation" obligations and thereby put pressure on its own nicely performing equities.

Every so often during these last months I've reflected on the recent Republican enthusiasm for Social Security funds being invested in stock. There were various models for how it could or would be done. Imagine!  And which is the reckless party?