Thursday, June 12, 2014

Public Pension Watchdog: Only Unrealistic Returns on Assests Can Save Public Pension

Center For Retirement Research have an important study on public pensions. The Testosterone Pit explains:
Public pension plans of states and cities have been in a heap of trouble for years. Promises of juicy pensions after a relatively short time on the job, with many decades of life expectancy remaining, are easy for politicians to make and buy votes with, and for unions to demand to please their membership. But they’re a tad expensive to live up to. Some have been involved in bankruptcies of their municipalities, including those of Detroit. Others are headed that way.

Now the Center for Retirement Research at Boston College released a study, based on 150 public pension funds, that sheds light on just how essential a permanently booming economy and everlasting bubbles in the stock and bond markets are to the survival of these funds – and how they’re already integrated into the calculus.

The best-case scenario, which is also the base scenario, assumes return on investment is 7.7% for all plan assets combined, for all years to come. So we’re in the biggest credit bubble in history, when 10-year Treasuries yield 2.6%, and paper with short maturities yields close to zero. Even many junk bonds don’t yield 7.7%, and defaults are excluded from the scenario. So stocks – over 50% of the assets in these plans – and other assets have to make up the difference. Last year they did, and in some of the prior years they did, but then there was the crash of the financial crisis, and before then, it was the crash of the dotcom era, and in the future, the swoon will have some other name, but there will be a swoon.

But there is no swoon in the future of these plans. Assuming the unlikely scenario of an eternal return of 7.7% annually, some of these pension funds are in worse trouble than others. A small coterie, like the Louisiana State Parochial Employees fund, is funded over 100%. But most plans are in trouble. Some of the worst sinners: Alaska Teachers with a funded ratio of 47.9%, Connecticut SERS (41.2%), Illinois Teachers (40.6%), Chicago Municipal employees (37.0%), Illinois SERS (34.2%), Chicago Police (30.9%), or Kentucky ERS (25.8%). Some of the sinners are relatively small plans, but several are large, such as the Illinois SERS, Illinois Teachers, and Connecticut SERS. If markets were allowed to swoon, these babies would be wiped out.
Just a reminder.