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Since the fervor on the topic of public sector pensions seems to be ongoing, I thought I would add another element to the discussion in pursuit of a fully informed readership. That element is the investment of pension fund assets with the intent that investment income will help pay for pension promises made.
Investment income is an important component of the financing of pension funds and future earnings must be forecast in order to develop employer and employee annual contribution rates. Public retirement funds often use an annual investment return estimate of 7% to 8%. A recent study of the State PERS retirement system by a group of Stanford University graduate students used what researchers felt was a “more realistic” 4% rate of return and the results more than doubled the forecast unfunded liability of the fund. Some anti-public pension organizations and advocates feel this proves that the fiscal health of public sector retirement funds is worse than admitted and that a future pension tsunami is a certainty, while others view the use of such a low rate of return as a tool to grow the hysteria over public pension fund financing.
One of the many criticisms directed at public sector retirement funds is that the estimated rate of investment return they use to determine how much each employer and employee must contribute to the fund each year are unreasonably high, thereby producing a lower annual contribution requirement for the public agency employer and the employees. Public sector retirement funds tend to base their estimated average annual investment return on their own rate of return experience or history over time. Thus there is a track record that the estimate being used has been what has been achieved in the past. The issue seems to boil down to whether using past results to estimate the future is realistic in today’s world. And if it isn’t, what is a reasonable approach to develop an assumed rate of investment return?
The following investment return information is illustrative of the wide range of return rates that have been realized in the past:
- The June 13, 2011 issue of Fortune magazine, in a story titled “Retirement Guide 2011- Take Control and Win” reports that “The S&P 500 has returned an average of 9.1% annually over the past 20 years, yet the average equity investor earned only 3.8% annually over that period, says research firm Balbar”.
- The Orange County Employees Retirement System (OCERS) reports that its investment rate of return in 2009 was 18.52%, and in 2010 it was 11.7%. My review of OCERS data led me to conclude that over the last decade the funds’ rate of investment return was 6.52%, including the unprecedented recession-driven loss of 20.71% in 2008.
Are there any fiscal experts out there in O-Juice land who would like to stake their reputation for accuracy on any particular investment return forecast going forward over the next 20 years or so? Please enlighten us!
If you do not know how the investment works perhaps you should not write any copy a paste article about it.
As long as you will have socialists creating market environment in which an investment can’t grow you will have no investment.
If you want to invest you must buy low and sell high.
If the market stays low you can’t sell high.
That is as far as I would like to go into it with a leftist who does not understand money and capital.
This country use to be investors heaven.
Now there are other countries.
So fix it!
BUMPER
If investment returns are so great than why are contribution requirements skyrocketing?
Reading OBNO headline, I thought I was tuning into a new aspect of the disscussion:
“What does society recieve in turn for their investment in public pensions”!
While OBNO’s direction is fodder for investment guru’s and wall street wannabee’s (and the real wall street kings), my aspect asks a more important question:
What do taxpayers get in return for a highly compensated public employee base?
In the case of firefighters we know we get a well rested staff, who are versed in XBOX 360 games!
What about the case of say the average County Healthcare worker or Auditor clerk? I don’t portend to claim thier work is uniportant, but why the pensions? Why the healthcare benefits, especially those who game the system.
Whats the ROI for JOE TAXPAYER?
Past experience is not an indicator of future performance.
Assuming a rate of return above 6% seems very risky to me, what with banks paying less than 1% on saviings/CD’s etc. these days.