As folks who invest in stocks and bonds know, the years between 1988 and early 2008 were pretty good in terms of investment return, averaging around 12% per annum. Others will be quick to point out that the years right before and after that weren’t quite so good. That’s the beauty of the markets—they work hard to prove the adage that what goes up must eventually come down, and visa-versa.
But if you are someone who looks at that 12% number and invests for retirement based upon the belief that you can count on a continuance of 12% returns, you might just wake up one day in your refrigerator-box-home and realize that perhaps the past is not always an accurate harbinger of the future.
The fact is that in order to get 12% returns on a steady basis, you’d have to do two things:
- Invest in some very risky assets since risk and reward go hand-in-hand.
- Almost always be right.
A recent report published by the Center for Economic and Policy Research ranked states by the percentage of workers age 18-64 who worked for state or local government in 2009. There were 15 states in which more than 15% of the total workforce were public employees. No state, except for the non-state of DC, has less than 10% of its workers employed by the public sector.
With 10% or more of the total working population employed by state and local government, and with plenty of those folks counting on those governments to provide them with promised pensions, it is shocking to read that pension fund managers in some states are working on expectations of average yearly returns approaching 8%.
Despite howls of protests by actuaries calling for more conservative long-term investment growth expectations, these managers and their political handlers are bowing to pressure from state and local governments to keep rate expectations high. Otherwise state and local government employees would themselves be forced to make higher dollar contributions to their pension plans in order to help offset the potential shortfall.
According to a Wall Street Journal article titled “Public Pension Funds Are Caught in a Squeeze,” Wilshire Associates, an investment consulting firm, projects public pension plans will realize a median annual return of 6.5%, far short of the 8% or so that pension fund managers are counting on in projections. If Wilshire is correct, public employees and their families will bear the brunt of those miscalculations in the form of underfunded pension accounts.
Wilshire Associates isn’t the only group predicting lower than expected returns. According to the same WSJ article, it’s argued by other finance professionals and educators that public pension rate expectations should be based on nearly risk-free Treasury yields that are currently hovering around 4%. Even corporations, not always the most risk-averse of institutions, use lower interest rate yield expectations for their pension fund calculations.
Okay, so maybe everyone needs to take some risk and perhaps using 4% Treasury yields as the basis for expected rate returns for public pension funds is a bit too risk-averse. That said, pensions are a special sort of asset. People count on them. Perhaps state and local leaders would better serve their workers by lowering future expectations a bit. Instead of bowing to the fantasies of their spreadsheets, where it’s much too easy to tweak numbers in order to tweak results, perhaps it would make more sense to bow to the realities of the marketplace itself.
Call or write your state and local politicians. They need to know your concerns about this issue. Make sure they understand that your future, and that of your family, may well count on the actions they take—or don’t take—on your behalf today.
Photo credit: goodyear.gov