Tuesday, July 13, 2010

Taxpayers in Deeper Doo-Doo

We have been talking for some time about the liabilities of public sector employee pension plans. They are a stone around the neck of taxpayers and taxpayers are going down. Taxpayers are having to fund these platinum pensions at the same time markets have melted down the value of their retirement nest eggs.

Plummeting Markets
Stock markets have plummeted in North America. Google Finance shows the 10 year rate of return to be -3.95% and the TSX 10 year rate of return is 11.4%. No those are not annual rates or cumulative those are total before MER's or investment management expenses.

A recent Washington Post article points out the problem. Taxpayers Don't Need $2.9 Trillion Pension Overhaul
The trouble is the assumptions that state and local pension plans make for their investment returns are too high.

Arizona's Public Safety Personnel Retirement System expects to make 8.25 percent on its investments this year.Colorado's Public Employees' Retirement Association will make 8 percent. And the Virginia Retirement System anticipates 7 percent returns.

Eileen Norcross of the Mercatus Center at George Mason University in Arlington, Virginia, and Andrew Biggs of the American Enterprise Institute say such assumptions are optimistic, and should be much lower, in the 3 percent range.

Government pension plans across the nation assume they will make between 7 percent and 8.50 percent, with the median for 126 plans surveyed being 8 percent, according to the National Association of State Retirement Administrators. Moving to the lower investment assumptions of corporate accounting would force taxpayers to come up with $2.9 trillion to bridge the gap between assets and liabilities.

In other words, if you want to figure out how much you will need to pay your retirees -- a low-risk liability, meaning, states and localities always pay -- you must put your money in very safe, low-risk assets. When New Jersey discounts its liabilities at 8.25 percent, the state reports that its pension systems are underfunded by $44.7 billion. If New Jersey discounts the liability at 3.5 percent, the rate you can get on U.S. Treasury securities, its unfunded obligation is $173.9 billion.

If you discount the nation's public-pension plans by 3.5 percent, the unfunded liability rises from $452 billion to $2.9 trillion

Leo over at the Pension Pulse had commented on this issue a few days ago. He pointed out in his comments about the article:
I don't know when the day of reckoning will come, but we are on a major collision course and as long as the stock market keeps heading higher, nobody seems to be noticing. But this is long-term structural issue that won't go away, and will require some difficult political choices ahead (look at the UK & Greece). To think otherwise is highly irresponsible and just plain old wishful thinking.
In his blog Leo also lists some links to other very informative reports on pensions. You should check them out.

Bill Tufts
Fair Pensions For All

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