The lack of transparency in our nation’s public pensions makes it easier to commit fraud than with cryptocurrencies. Pension plans have long been hailed as a source of retirement security for American workers, ostensibly promising employees that if they contribute a portion of their current income to the plan, they will be guaranteed a steady income in retirement. As stated by Public Plans Data, the 2020 U.S. Census revealed that approximately 6,000 public sector retirement systems hold $4.5 trillion in assets on behalf of 25.9 million government employees and retirees and distribute $323 billion annually. This enormous pot of money is known for drawing Wall Street wolves, such as fund managers and financial consultants who take advantage of regulatory gaps and administration flaws to profit themselves at the expense of pensioners.
Unlike business plans 401(k), or IRAs, public pensions are not subject to ERISA, the federal legislation that protects pensions, or any analogous comprehensive state regulatory framework.
Pew Charitable Trusts reported in 2016 that the Government Finance Officers and Governmental Accounting Standards Board provide few guidelines and standards for plan management and fee disclosures in their Best Practice for Public Employee Retirement Systems Investments. Some state and local government pensions embrace increased plan transparency, while others appear to be more concerned with shielding Wall Street from public scrutiny about fees and unscrupulous industry practices. By 2013, public pension funds allocated to alternative investments (including hedge funds, private equity funds, and real estate funds) had increased from 11% in 2006 to 25%.
This drastic shift away from publicly traded investments is worrisome due to the widespread perception that alternative investments are high-risk and expensive. These investment vehicles offer Wall Street fund managers a gap they use to demand secrecy and undermine state public information laws. Alternative fund managers assert that the high and fictitious fees they charge pension stakeholders are “trade secrets” immune from disclosure.
Compare these private investments to Russian nesting tea dolls: The pension plan pays to invest in a fund, which pays to invest in another fund made up of multiple high-risk financial instruments, each of which may charge additional poorly reported or concealed fees.
Updated research published in August by the Center for Retirement Research at Boston College confirms that even if meaningful regulatory safeguards have been enacted since the Pew study, they are of little consequence because the fiscal year 2023 saw “… record investment losses and rising pension outlays…” According to a recent Reason Foundation headline, unfunded state pension liabilities are expected to reach $1.3 trillion by 2023. In response, the number of class-action lawsuits has increased dramatically. The Society for Human Resource Management has reported that more than 200 ERISA class-action lawsuits and another 100 breaches of fiduciary responsibilities for fees charged to plan members have been filed since 2020, and additional cases are expected. Since ERISA does not apply, class action lawsuits alleging public pension mismanagement are nearly impossible to initiate under state law.
There are numerous underlying causes of pension fund mismanagement, but lack of openness is nearly always the leading cause. It would be much more challenging to conceal fraud if pension plans and investments were fully transparent.
The world’s first cryptocurrency, Bitcoin, operates on a transparent network called a “blockchain” that has been demonstrated to be immune to fraud and hacking by design. She continues blockchain technology can drastically transform the pension fund playing field in favor of participants.
Blockchain is a novel way to keep track of little facts, and it solves several issues with our present data management systems, particularly regarding data privacy and security, she says. Blockchain is a decentralized network that holds digital data in blocks. Each new information block is timestamped, sequentially numbered, and attached to the previous block to form a chain. By running a copy of the program on their computer, anybody anywhere can contribute to maintaining the blockchain network. These computers, known as “network nodes,” reproduce the complete blockchain transaction history. Before being encrypted and added to the Blockchain, each transaction is validated and approved by at least 51 percent of network nodes. Once recorded, the software prohibits changes, giving a complete audit trail. According to various sources, Blockchain has proven to be impenetrable by malicious actors since the network has reached “decentralization,” meaning that no individual or group controls how it operates.
There is consensus that both the bitcoin and Ethereum blockchains have achieved decentralization, despite debates over what decentralization implies. Prime Minister Justin Trudeau could not prevent the transmission of bitcoin to Canadians during the trucker protest. To destroy the bitcoin blockchain, which spans the breadth and depth of the planet, you would have to permanently switch off the global internet.
Every transaction on publicly accessible blockchains, such as Bitcoin and Ethereum, is fully transparent for public examination. Once a person is associated with a transaction, their activity may be tracked up-chain, down-chain, and cross-chain.
If done this way, every government transaction would be recorded on a decentralized, immutable, publicly available blockchain. Because it is the ultimate truth-telling machine, there would be no more unknown line items or black budgets.