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Groupthink and the public pension industry

- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.

William Whyte coined the term “groupthink” in a 1952 article in Forbes Magazine(1). Whyte felt the pendulum had swung too far in terms of “rational conformity,” or the idea that group values should trump individualism. Later (in the 1970s), research psychologist Irving Janis expanded the concept and conducted research about how cohesive groups of people make and justify faulty decisions.

Groupthink is a term that has been used to describe such various public policy fiascos as the failure to anticipate Pearl Harbor, the Bay of Pigs invasion, the Challenger shuttle disaster, and more recently the collapse of the housing bubble and the handling of the Penn State child molestation case. In each case, even though individual members were brilliant and ethical, group dynamics led to decisions with devastating consequences.

Are U.S. public pensions going to become the next big public policy groupthink debacle?

Clearly there are beliefs and practices unique to the U.S. public pension industry that appear very questionable to anyone looking in from the outside. Yet they are genuinely held, sincerely defended and “generally accepted” by those on the inside.

These include clinging to an unrealistically high investment return assumption; changing actuarial and modeling methods to get the desired results; and taking on increasing levels of risk without even asking whether such risk is acceptable.

Questions about public pension assumptions and practices have been raised by the Society of Actuaries; credit rating agencies; the former head of the Securities and Exchange Commission; and even by Warren Buffett. Accounting standards for public systems in other countries are drastically more conservative(2). If they’re right and the industry is wrong -- and we keep adding more and more employees to systems that may ultimately implode -- it could become the biggest financial and personal disaster in U.S. history.

The U.S. public pension industry is a tightly defined and powerful industry, controlling $3.7 trillion in assets and supported by millions of members and politicians who want in the worst way to believe what they are being told. It exhibits many of the symptoms that Janis described as indicating groupthink(3). In fact, we can go right down the list and provide examples of each as relate to the public pension industry:

  • An illusion of invulnerability – the government can’t go bankrupt; taxpayers have infinitely deep pockets.
  • Discounting of warnings – the assumed high future annual return assumptions (avg. 7.5 percent) can be justified based on history, so we shouldn’t worry about it.
  • Belief in the rightness of their cause – public employees have tough jobs and deserve a great retirement no matter the cost.
  • Stereotyped views of out-groups – people just don’t understand the public sector is different from the private sector; groups that question public pensions are funded by “shadowy” outfits.
  • Direct pressure on dissenters – an actual blacklist has been published by one national organization that exhorts public pension systems to avoid doing business with many reputable entities that have raised uncomfortable questions(4).
  • Doubts not expressed – national organizations provide only confirming information and studies; insiders who raise questions are distrusted.
  • Illusion of unanimity – 42 large public plan administrators signed a letter of complaint to the Academy of Actuaries objecting to a study being undertaken by that group to probe the causes of public pension underfunding.
  • Protection from information that is contradictory – information about the substantial risks imposed by today’s practices is not shared with plan trustees or others who are making decisions by default.

Is it possible to penetrate a group this heavily insulated?

In an interesting recent article(5), one writer called for a sequel to the movie, “The Big Short,” a film that colorfully documents how groupthink led to the collapse of the housing market. The sequel would depict the implosion of the U.S. public pension industry. Re-watching “The Big Short” is an entertaining way to learn how groupthink works, but maybe it will also make it easier even for insiders to identify the warning signs.

Meanwhile, ordinary people – including members of these plans -- need to keep asking the questions, and not assume that everything is okay just because we are told it is, and because we want it to be.

(1) William H. Whyte, “Groupthink,” Fortune Magazine, 1952. Reprinted in Fortune Magazine July 22, 2012. http://fortune.com/2012/07/22/groupthink-fortune-1952/

(2) Andrew Biggs, “U.S. State and Local Pensions Couldn’t Survive Under Tougher International Accounting Standards,” Forbes Magazine, June 2, 2016. http://www.forbes.com/sites/andrewbiggs/2016/06/01/u-s-state-and-local-pensions-couldnt-survive-under-tougher-international-accounting-standards/#3e00ac0c4fb1

(3) Psychologists for Social Responsibility, “What Is Groupthink?"  http://www.psysr.org/about/pubs_resources/groupthink%20overview.htm

(4) National Conference on Public Employee Retirement Systems, Code of Conduct, Appendix http://www.ncpers.org/content.asp?contentid=616

(5) Ed Ring, “We Need a Sequel to The Big Short to Critique Public Pensions,” Reason.com, April 10, 2016 http://reason.com/archives/2016/04/10/we-need-a-sequel-to-the-big-short-to-cri

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