May 10, 2011

Still Underpreparing for Pensions

Justin Katz

So, Rhode Island League of Cities and Towns Executive Director Dan Beardsley is warning of the large dollar amounts that state and local taxpayers are going to have to begin paying if the state Retirement Board approves actuarial recommendations:

The Retirement Board, which is chaired by General Treasurer Gina Raimondo, is set to vote Wednesday on whether to accept the new numbers — and the higher annual funding they will require. "My vote's going to be the toughest vote I've ever had to cast in my 20 years on the Retirement Board," Beardsley said.

You'll recall that the board recently voted (pretty much along a union/non-union line) to lower its predicted rate of return on pension investments from 8.25% to 7.5%. Personally, I'm with Konrad Steuli, of Sunderstown, in wondering if even that's appropriately realistic:

... while talented state General Treasurer Gina Raimondo deserves credit for lowering, for planning purposes, the assumed rate of return for pension fund investments from 8.25 percent to 7.5 percent (net of inflation), the latter is still a “junk bond” level of return, and maybe worse.

In other words, we are still kicking the can down the street. Who gets that kind of a return for an appropriately safe investment loaded with the retirement expectations of Rhode Islanders?

As the Providence Journal reported even 7.5% is well above experienced returns, which were 2.47% for the past decade, 6.23% for the past 15 years, and 7.13% for the past twenty years. Surely, we are all hopeful that the American economy will recover and return us to the prosperity to which we've grown accustomed, but given the numbers, it would seem that we'd have to see that and more for our pension system even to come within range of plausibility.

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How is this any different than trying to legislate the weather? Shouldn't the estimated return be determined solely by previous performance of different classes of investment over a long period?

Posted by: mangeek at May 10, 2011 8:31 AM

All of those rates of return include one of the worst periods in the history of the US stock market. That's like worrying about the rare of return in 1931 because the previous few years were so bad. It turned around.

I think 7.5% is a fair rate of return as I showed the data in comments to a post that Marc made a month or two ago, the full average of the market has been 7.48%. Raimondo should be able to beat the market average by two hundredths of a point.

Posted by: Patrick at May 10, 2011 9:56 AM

Those who insist on using "historical" rates of return are missing something. Our world has changed dramatically - for the worst. The demographics of this country, Japan and even China, where the best returns were gotten, bode ill for the future. There are few other economies of size to produce returns of a meaningful scale to make a difference. Take a look around the world and see the levels of debt that were incurred, that now must be paid back. That debt is the result of a false economy that produced juiced up - and misleading returns. The levels of government and consumer debt that must be paid back going forward, will only come at the expense of economic expansion.
A more reasonable expected rate of return should be 5% for the long haul.
Anything more is an illusion.

Posted by: Mike Cappelli at May 10, 2011 2:02 PM

So it's different, *this time*?

Never heard that one before.

Posted by: Patrick at May 10, 2011 2:20 PM

Feel free to cherry pick your data to fit your delusion.
There is one way to fix this mess - cut benefits dramatically.

Posted by: Mike Cappelli at May 10, 2011 3:15 PM

I never cherrypicked anything quite the opposite, actually.

Posted by: Patrick at May 10, 2011 4:47 PM

Mike Capelli is the Genius Of The Day winner.
The "historical" average was not at times when we were spending as a nation 5 BILLION a day more than we have. When we are about to hit a debt-GDP ratio of 100% (and rising), a rate which no place in the history of the planet has been able to sustain growth at. When we give checks, free apartments, citizenship, food stamps, education, babysitters, etc. to any Third Worlder who can sneak into the country. When the stomach turning, disease spreading filth of male sodomy is now considered "superior behavior". When all 3 of our major entitlement programs are broke.
We're done-make sure your kids learn Mandarin cause we are going the way of Greece, Rome, Byzantine, the Ottomans, Hapsburgs and Soviets. Count on it.

Posted by: Tommy Cranston at May 10, 2011 7:10 PM
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