Public pension plans faulted for lofty return assumptions

For more than a decade pension plans have been using unreasonable investment return assumptions in their funding plans. Since no one wants to admit this or face the increased contributions needed to catch up to capital requirements, the hole just keeps getting bigger. This article offers a good update:

While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”

Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic. But lowering their investment assumptions, even slightly, means turning for more cash to local taxpayers — who pay part of the cost of public pensions through property and other taxes.

In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.

But to many observers, even 7 percent is too high in today’s market conditions.

“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”

Eventually we all have to face the math, meaning cuts to benefits, and increased contributions–in pensions and elsewhere.  Having wealth stored for future needs requires forgoing present consumption and profits in order to save more for later– that is just the way it works.   See: Public pensions faulted for bets on rosy returns

This entry was posted in Main Page. Bookmark the permalink.

3 Responses to Public pension plans faulted for lofty return assumptions

  1. Since when did projections become guarantees? Just because a pension fund manager “promises” 7 or 8% returns, that does not mean the public should be obliged to make up the difference when public pensions funds do not meet their targets. Who tops up private retirement plans when markets go south?

    The only fair solution is to increase contributions or decrease benefits, or both. The risks should be borne by those who stand to benefit. This ingrained attitude that there should be returns without risk must end. People need to grow up.

    When economic growth comes primarily from an unsustainable expansion of credit for an entire generation, much of what people think is their wealth is illusory; the nominal was inflated beyond the real along with the rest of the economy.

    It is grossly unfair to force innocent people to turn the wishes and dreams of others into reality. The reality is, there is just not enough actual wealth to fulfill the promises––promises that were predicated on a false paradigm in the first place.

  2. aliencaffeine says:

    Past performance is NO GUARANTEE of future results (especially in a PONZI SCHEME).
    Go ahead kiddies, keep buying those I-Phones and all that gobbly-de-gook doodads of growing up. By the time you get old, you will be throwing up you didn’t have the common sense to realize the Ponzi your parents played on you and begun to save like crazy.

    More champaigne! More filet mignon! Our kids are carrying us home!

  3. Roberta says:

    Over 10% of private employees took a 100% cut in pay and another 20% or more took a 20% or larger cut in pay. The goobermint ruling-class employees keep getting raises and retiring at age 55 with full pay and benefits – private employees MIGHT get a few dollars out of Social Security (if they can keep the banksters from “privatizing” it) and many people claim SS is welfare after the worker paid into it all his life. It’s sick. BUT it is going to come to an end sooner or later.

Leave a Reply

Your email address will not be published.