1. Costs have already been cut. Employees will be making up the shortfall as well, and they’ve already been paying more into their retirement systems over the past few years. Gov. Brown’s reforms significantly increased the amount some employees will pay, while others have already increased the amounts via contract negotiations over the past few years.
2. The way these costs work, the taxpayers may or may not be spending any additional amounts. If pension contribution costs increase, it’s going to fall on the employees, too. If the employer’s side goes up, they might offset those costs with pay or other benefit reductions. [/quote]
This is quite misleading. Yes, employees are paying “more” towards their retirements relative to the past, but… so long as the assumed rate of return on plan assets is higher than the achieved rate of return on plan assets, the employer (the taxpayers) is ultimately getting screwed. This is an axiomatic mathematical certainty. The ultimate shortfall will be covered disproportionately by the employer (taxpayers) in this case.
[quote=CA renter]
3. The “fairy tale” expected return is the same return rate quoted by almost every single financial advisor out there when they tell you how much you can earn on your money. Historically speaking (and I do understand the danger in that), the current return assumptions are low.
[/quote]
You’re smoking crack if you think that the current return assumptions are too low. Everyone on Planet Earth that doesn’t have an agenda knows that the likelihood of a typical pension plan generating a 7.5% annualized future rate of return is not materially different from zero. However, there are LOTS of folks who benefit from perpetuating this fantasy, including: (1) union members and their representatives on the pension boards (see above), (2) politicians (who benefit by kicking the can down the road), (3) consultants and asset managers (who won’t be hired unless they perpetuate the lie… because their competitors surely will!), etc. etc.
Every sentient being who understands return math – including Grantham, Bogle, Buffett, Soros, etc etc… that is anyone without a dog in the fight – knows that the assumptions are ridiculous. My favorite quote on this is from Mayor Bloomberg (from last year):
“The [New York City] actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”[/quote]
davelj,
Yes, I agree that the return assumptions are too high, but based on the historical return rates for these pension plans, they are in line.
The problem with the pensions is that govt entities tend to spend everything they take in, and then some, and many make commitments (not just to employees) that they can’t keep when things go bad. The boom/bust nature of our Fed-created economic system is the primary problem. We need to fix that first, then we can address any problems with the pension systems. For as long as we allow the Fed to manipulate the economy as we do, the inevitable result will be huge overhangs and promises of all types that are made during the good times that cannot possibly be kept when things normalize or turn down.
You can add to this the movement of pension funds from the public sector, with in-house managers and “safe” govt bonds and highly-rated corporate bonds (and much more predictable and stable return rate assumptions), to private management/investment advisors who have major conflicts of interest where these funds are concerned.
