interesting point about all those unfunded pensions

[Azazello1313]

governments generally assume that pension funds will earn 8 percent a year. That’s roughly the historical return of the stock market. Using that assumption, the Center for Retirement Research at Boston College estimates a current funding gap of $700 billion for all state and local governments.

...

But 8 percent still seems like an aggressive assumption for state and local governments to be making.

 

If state and local governments instead assumed a future return of 7 percent, their funding gap would nearly double, to $1.3 trillion, according to Alicia Munnell and her colleagues at the Boston College retirement center. If they assumed a 6 percent return, the funding gap grows to $1.8 trillion.

 

Even if you believe — as I do — that government workers are not grossly overpaid, you can see that states and local governments have not set aside nearly enough money for their employees’ retirement.

[bpwallace49]

Great point. That does seem like an overly aggressive rate of return.

[sundaynfl]

Something that may exacerbating the gap even more is that the pension fund manager's are trending towards riskier investments to try and make up that gap! Giving the government money to manage is bad, giving the government "make believe money" to manage is even worse!

[muck]

I know quite a few smart people (none of whom are named "Brentastic") who are calling for annualized rates of return on the S&P500 over the next 5-7 years of +3% / yr or less.

[Azazello1313]

more here

 

The cost of pension plans for the approximately 17 million state and local government workers have come under heightened scrutiny in recent weeks, particularly in Wisconsin, New Jersey and other states where governors are struggling to balance budgets and reduce costs.

 

In Wisconsin, for example, Gov. Scott Walker ® wants state workers to pay 5.8 percent of their wages to fund the pension.

 

Even under current accounting methods, state and local governments are facing massive pension shortfalls - at least $344 billion, according to calculations by the Center for Retirement Research and other groups.

 

But when the accounting is revised to value future payments more accurately, in the critics' view, the amount that pensions are underfunded grows to more than $1.9 trillion, according to Munnell's calculations for 126 large plans.

 

Those calculations have been published in part in a working paper for the National Bureau of Economic Research.

 

By comparison, the entire federal debt held by the public is $9.3 trillion.

 

"By virtually any measure, that's an enormous number," said Jeffrey R. Brown, a finance professor at the University of Illinois who has studied the issue. "When you're short that much money, at some point you have to pay the piper."

 

If the pension obligations are as enormous as critics say, virtually every state and local government running a pension will have to invest more in its pension plan - either by cutting services or raising taxes - or gamble that it will achieve a high rate of return on its investments.

 

and from bill gates:

 

During a second appearance onstage at the annual TED conference, Bill Gates spoke out against worsening state budget deficits caused by accounting "tricks" he said would make Enron's former executives blush.

 

The Microsoft co-founder and philanthropist said state budgets have received a puzzling lack of scrutiny and have been "riddled with gimmicks" aimed at deferring or disguising the true costs of public employees' health care and pension obligations, citing California's ongoing budget crisis as an example of creative deficit spending and the subsequent cuts to education spending as an unacceptable cost.

 

"[R]eally, when you get down to it, the guys at Enron never would have done this. This is so blatant, so extreme," Gates said of state governments' accounting practices generally. "Is anyone paying attention to some of the things these guys do? They borrow money -- they're not supposed to, but they figure out a way -- they make you pay more in withholding to help their cashflow out, they sell off the assets, they defer the payments, they sell off the revenues from tobacco."

...

The former Microsoft chief executive, now the co-chair of the Bill & Melinda Gates Foundation, said youth and education programs stand to lose the most as a result of the gaping holes in state budgets.

 

"It really is the young versus the old to some degree. If you don't solve what you're doing in health care, you're going to be deinvesting in the young," Gates said. "With the kind of cuts we're talking about, it will be far, far harder to get these incentives for excellence or to move over to use technology in the new way."

 

Remedying state budget crises will take better accounting, better tools, and more respect for leaders who step up to address these problems, Gates argued. "We need to reward politicians," he said. "Whenever they say there are these long-term problems, we can't say, 'Oh, you're the messenger with bad news? We just shot you.'"

 

The bottom line, according to Gates: "We need to care about state budgets because they are critical for our kids and our future."

[Yukon Cornelius]

funny thing the sconny pension is fine and always has been because it has not been raided like other state pensions. Thompson tried about 10 year ago to raid it but it was shot down by the courts.

[Azazello1313]

funny thing the sconny pension is fine and always has been because it has not been raided like other state pensions.

 

it's almost "fine" if you believe the bullchit accounting and assumptions.

[Yukon Cornelius]

it's almost "fine" if you believe the bullchit accounting and assumptions.

[Ursa Majoris]

it's almost "fine" if you believe the bullchit accounting and assumptions.

I don't see how building a historical average rate of return assumption into pensions that were negotiated decades ago was wrong. It would have been if 12% was assumed but they assumed the historical norm.

 

Whatever, all that said, there are indeed a whole raft of wacky tricks used at state level, such as giving IOUs to schools (having used the actual money to defer the inevitable), one-time accounting shifts e.g. tobacco settlements and on and on.

 

The bottom line is quite simple. The infrastructure (in the widest sense including benefits) within which we all live costs more than we are willing to pay in taxes. Either we pony up or we start dismantling the fruits of our labors. I think it's both.

Edited March 4, 2011 by Ursa Majoris

[bpwallace49]

The bottom line is quite simple. The infrastructure (in the widest sense including benefits) within which we all live costs more than we are willing to pay in taxes. Either we pony up or we start dismantling the fruits of our labors. I think it's both.

 

This is a great summary of the whole discussion.

[caddyman]

This is a great summary of the whole discussion.

Total crap. Learn to live within your means. that goes for the public as a whole and the gubment as well. The people paying those taxes are not the same people reaping the benefits.

[muck]

I don't see how building a historical average rate of return assumption into pensions that were negotiated decades ago was wrong. It would have been if 12% was assumed but they assumed the historical norm.

 

Sorta.

 

Pensions are some stocks and some bonds.

 

Assuming 8% (or 12%) would be the 'equity only' figure. Layer in bonds at, say, 3-6% / yr, and you bring down the average considerably.

 

Consider the following mythical pension fund allocations and the 'for example' assumed historic averages that could be argued:

10% US Small Cap (9% / yr)

20% US Large Cap (8% / yr)

10% International Large Cap (9% / yr)

30% Intermediate Term US Government Bonds (4% / yr)

20% Intermediate Term US Investment Grade Corporate Bonds (6% / yr)

10% Intermediate Term Non-US Investment Grade Corporate & Sovereign Bonds (6% / yr)

 

...blended target rate of return is...

(10% * 9%) + (20% * 8%) + (10% * 9%) + (30% * 4%) + (20% * 6%) + (10% * 6%) = 7.3% / yr

 

...three points of observation...

 

1) Using historic rates of return have routinely been shown to be nothing but illusory when trying to estimate future returns.

2) Those historic rates of return shown in the mythical / hypothetical example above are high.

3) Assuming a pension will earn 8% / yr over the coming two decadeds is nuts