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Covering Up the Pension Crisis – WSJ (Watch your state tax bill) šŸ¤‘

The Manhattan Instituteā€™s Steve Malanga writes that states and actuaries are trying to stifle debate about the growing shortfall in fund assets.

PlungĀ­ing inĀ­vestĀ­ment reĀ­turns have sent debt soarĀ­ing in state and loĀ­cal penĀ­sion funds and prompted new fiĀ­nanĀ­cial concerns. MeanĀ­while, a deĀ­bate has broĀ­ken out about whether these penĀ­sion funds are acĀ­curately meaĀ­surĀ­ing their obligĀ­aĀ­tions. Though the isĀ­sues might seem arcane, the stakes are high for taxĀ­payĀ­ers who might have to bail out these funds and for pubĀ­lic emĀ­ployĀ­ees who rely on them for reĀ­tireĀ­ment…

…One cruĀ­cial difĀ­ferĀ­ence is that priĀ­vate penĀ­sion sysĀ­tems must project the fuĀ­ture growth of their asĀ­sets usĀ­ing a conservative ā€œrisk-freeā€ rate of reĀ­turn based on U.S. TreaĀ­surys, but pubĀ­lic penĀ­sion funds can adopt a higher rate. The difĀ­fer-ence, comĀ­pounded over time, can acĀ­count for enorĀ­mous variĀ­aĀ­tions in penĀ­sion asĀ­set calĀ­cuĀ­lations…

… GovĀ­ernĀ­ment penĀ­sion funds on avĀ­erĀ­age esĀ­timate they will earn 7.6% a year on their portĀ­foĀ­lios, acĀ­cordĀ­ing to a surĀ­vey by the NaĀ­tional AsĀ­soĀ­ciĀ­aĀ­tion of State ReĀ­tireĀ­ment AdĀ­minĀ­isĀ­traĀ­tors. UsĀ­ing that numĀ­ber, the funds say they are curĀ­rently about $1 trilĀ­lion short of the money they will need to fund penĀ­sion credĀ­its that workĀ­ers have alĀ­ready earned. But if penĀ­sion sysĀ­tems were reĀ­quired to use a riskĀ­less rate, currently beĀ­low 3%, the shortĀ­fall would soar to more than $3 trilĀ­lion.

Source: Covering Up the Pension Crisis – WSJ

Hey, what’s a trillion dollars more or less? Ā While some of us worry about the ever-growing federal debt, the funding crisis for Social Security and Medicare, nobody seems to pay much attention to what is going on in the states. Not only that but voters faced with such a crisis typically have three responses; support public unions, vilify any politician who dares address the problem and just raise taxes on the “rich.”

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6 replies »

  1. First, I do believe that there is a public pension under-funding crisis in American. According to WSJ article government pension funds can use the growth estimate of 7.6% for their portfolios and private plans are only allowed to use 3%.

    According to your reply in another post you stated that you are getting 7.67% returns for the last 10 years which I have never seen.

    If you are correct then there canā€™t be a public pension crisis other than where the state governments fail to make required deposits (like NJ) because their growth assumption are accurate for actual earnings.

    A pension crisis from failing to make deposits is a different issue from lack of returns.

    If I am correct that 7% returns have not happen for the past decade, then there is a major pension crisis because their assumption for fund growth thru returns is wrong.

    If you are correct then WSJ is wrong and needs to do better reporting or more accurate writing defining the problem. The returns should be equal to the predictions and the funds should grow as expected therefore there is no ā€œgrowthā€ crisis.

    It cannot be both.

    California Public Employeesā€™ Retirement System, said it earned 0.6% on its investments for the fiscal year ended June 30, 2016. They earned 2.4% in 2015 on $295 billion portfolio. At those return rates I wonder if they made back the -24.8% they lost in 2009? I assume that they have one or two people who know what they are doing (or maybe not), so I standby that 7% returns are a thing of the past.

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    • The actual annualized return for the S&P 500 from July 2006 to July 2016 was 7.458% which includes reinvested dividends, an important factor for the long term investor.

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    • First, you can’t simply look at averages and apply them to each pension fund. The return on any given fund will depend on its managers and the investments.

      There are three main things that affect these funds. The investment return assumed, interest rates which drive up or down liabilities (different from the funding) and, of course, the money placed into the fund.

      If a fund does not meet its goals then more money needs to be invested. Using a too high interest assumption understates the liabilities, a too high investment return understates the needed funding.

      You can say a fund in underfunded because not enough money has been put into it, but the fundamental problem is that the promised benefits are way too generous to be affordable or to be adequately funded with any reasonable investment return.

      In short, politicians and public unions have made promises and commitments tax-payers cannot afford to keep. In NJ for example, the total current cost (which is not enough) is over 15% of payroll including employee contributions. That is nearly double the cost of a good private plan which is typically fully funded by the employer.

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  2. Eventually, public pension systems are going to have to pay the piper. The big question will probably be settled in the courts. Are taxpayers contractually bound through state constitutions to fulfil promises made to pensioners or will pensioners be forced to forego some of their benefits? For now, the can will be kicked down the road until some future event forces the issue.
    https://www.khanacademy.org/humanities/us-history/american-civics-parent/american-civics/v/illinois-pension-obligations
    http://www.chicagotribune.com/news/opinion/commentary/ct-illinois-pensions-bankruptcy-congress-retirement-perspec-0429-jm-20160427-story.html

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  3. Eventually, public pension systems are going to have to pay the piper. The big question will probably be settled in the courts. Are taxpayers contractually bound through state constitutions to fulfill promises made to pensioners or will pensioners be forced to forego some of their benefits? For now, the can will be kicked down the road until some future event forces the issue.

    https://www.khanacademy.org/humanities/us-history/american-civics-parent/american-civics/v/illinois-pension-obligations

    http://www.chicagotribune.com/news/opinion/commentary/ct-illinois-pensions-bankruptcy-congress-retirement-perspec-0429-jm-20160427-story.html

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