January 6, 2012

The Pension Questions Still Not Asked

Justin Katz

So, I'm watching General Treasurer Raimondo's speech upon accepting the Manhattan Institute's Urban Innovator Award (via Ted Nesi). She keeps talking about "solving the problem" and "fixing the pension," and some of the inevitable questions had to do with "what's next" — the assumption being that the state pension problem is fixed.

Still, I don't hear anybody asking two very important questions:

  1. You mentioned that you began with a $7 to 9 billion unfunded liability and that your reform saved taxpayers about $4 billion. Where is the other $3 to 5 billion going to come from?
  2. The gentleman who introduced you noted that the state had been assuming a rate of return (discount rate) of about 8% while achieving 2%. You said you've adjusted the assumption to 7.5%, yet you answered a previous question by admitting that neither the 10 year nor the 20 year returns hit that number. What happens when the number has to be adjusted down again, thus multiplying the annual payment required?
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I suspect the questions are not asked because no one really wants to hear the answer. That would be soo negative.

Posted by: Warrington Faust at January 7, 2012 9:18 AM

Yes, it's more fun to slap ourselves on the back for our courage, put the treasurer on a pedestal, and then let everybody forget about the problem for a few years.

Posted by: Justin Katz at January 7, 2012 9:52 AM

Economic reality has a way of answering these questions - it just isn't always in the time frame or the form we hope for. A prudent society corrects problems on its own terms instead of letting economic reality force the issue, but then Rhode Island never was a prudent society.

Posted by: Dan at January 7, 2012 10:14 AM

1. From the taxpayers but mostly at inflated 2030's and 2040's money.
2. I guess if that happens there won't be any COLA's for a long, long, LONG time.

Posted by: Tommy Caranston at January 7, 2012 3:10 PM

1. Inflation is built into the calculations, and most of it will occur outside of COLAs --- in salaries.
2. Putting off COLAs can only do so much, especially since the liability numbers assume them to be flat for many years, already. The question is what level of investment return will cross the line at which the money will be needed before the lack of COLAs matters.

Posted by: Justin Katz at January 7, 2012 3:59 PM

Justin, here's my attempt at an answer to the first one:


Posted by: Ted at January 7, 2012 5:44 PM

Justin, I tried to post a link to my answer to #1 over on my blog, but your comment system told me it was spam. Is that an anti-MSM bias I detect!

Posted by: Ted at January 7, 2012 5:45 PM

Ted, you didn't read the "important note" next to the entry field. Full URLs in the body will count the comment as spam.

Posted by: Justin Katz at January 7, 2012 9:20 PM
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