| There are several problems with this analysis. The first major problem is that the article presents "promised benefits" - equal to the sum of all future pension payouts, which can span as many as 50-60 years into the future - and compares them to ANNUAL state revenue; a comparison which will obviously seem ridiculous. A more accurate comparison would be expected annual payouts vs expected revenue allocated to pensions. An even more accurate comparison would be expected payouts at year X vs (contributions + (expected returns at year X * balance of pension fund at year X) + expected revenue allocated to pensions). After all, pension payouts are funded by a mix of contributions, investment returns, and any state revenues allocated for pension payouts. Another error is that in the linked analysis where they say they looked at every state's level of underfunding, they state:
"According to a recent report from the Hoover Institution, on
average, public pensions (state, local and federal employee
pension plans) assume that they will achieve a risk free 7.6%
return on investment per year, every single year." This seems very stupid if it were true, but it's not. The Hoover Institution paper actually states that the 7.6% figure is the return these pension funds are expecting, which is reasonable given the historical S&P 500 annual return of 11.83% (since 1928). The Hoover paper makes no mention anywhere that pensions are expecting the return to be "risk free." Furthermore, the paper makes no mention of inflation or "real" returns, and pensions are tied to nominal wages rather than real wages, so it's reasonable to assume that the 7.6% figure is NOT adjusted for inflation - but even if it were, it would be reasonable, given the historical average inflation rate since 1928 of 3%. Moreover, the Hoover paper rests on the rather dubious assumption that "The appropriate discount rate for a guaranteed nominal pension is the rate on a government bond with a guaranteed nominal return of that same maturity, so for the average plan it would be a Treasury bond with a roughly ten-year maturity." They are saying that pensions should always value their expected returns at the 10-year treasury rate, which is absurd. The only use for using the 10-year T rate is to estimate taxpayer liabilities if everything fell apart. The real question should be, is it reasonable to expect these returns and inflation rates going forward? I would argue that 11.83% is too high to expect, although if it encourages you to save as much as possible to maximize possible gains, so be it; but that 7.6% is much more reasonable. If I were a pension fund manager, I would expect a more conservative target like 5 or 6%, and allocate anything extra either to an "emergency pension fund" in case of years with a revenue shortfall or allocate the extra to be refunded to the taxpayers. Sources:
https://ycharts.com/indicators/sandp_500_total_return_annual http://www.calculator.net/inflation-calculator.html?cstartin... |
https://www.varetire.org/Pdf/Publications/VRS-Stress-Test-an...
There's a reason that non-taxpayer funded entities have to use much more conservative discount rates, based on high grade bonds. Might be a around 4% or 5%. No reason for taxpayer funded pension plans to be using anything riskier.