Promising 7-8% pension returns is not hopeful, it is insane. It is insane today and it was even more insane in 2007. It implies equity returns of 10% or more annually for then next twenty years. Given the market is overvalued at present by every measure (PE 10, Q ratio, market cap as percent of GDP etc...) it is highly unlikely that 10% equity returns are in the cards. This has been pointed out by Buffet, Grantham and many others.

Pension funds, like Calpers, are loathe to admit their return projections are unrealistic. It would mean dipping further into the general fund or, heaven forbid, cutting back benefits. Remember Calpers return projections of 1999 implied the Dow would be over 25,000 today.

At the moment, the 30 year treasury is trading at 3%, close to historic lows. Shiller reports the 10 year p/e at 21, with a long term average at 16.5. Dividend yields are very low by historic standards. It's hard to see portfolios matching historic returns.

Just because stocks may be a bit lower priced than in the recent past doesn't make them cheap.

Ultimately, portfolio returns should be proportional to economic growth, less a discount for dilution due to newly issued securities.

As the prior poster said, 7-8% is way high (unless you're predicting very high inflation and pension obligations are in nominal dollars).

Yes indeedy, based on those 1999 projections Gov. Davis increased pensions and govt. pay....like a year before the bubble burst. Cool, eh, and Cal's "Treasurer" Phil Angelides was named Chairman of the Financial Crisis Inquiry Commission...talk about fox and the henhouse... HA HA HA.

The President of the U. of Oregon resigned because the legislature did not believe he could earn these high returns in a silly scheme to make the UofO independent from the state. The state of Oregon would borrow billions of dollars at low state guaranteed rates and invest in the stock market, with the difference between market returns and borrowing costs enough to cover the costs of the UofO. Wow. We could have called Eugene the Athens of the Northwest.

Sounds just like...Illinois...Illinois is trying to do the same thing, leveraging up assuming the high stock returns will cover bond costs. Of course this is Illinois, so anything can happen there.

It always interests me that the same people who claim that 7-8% for pension funds also claim that 401ks will average 10% a year, as that's the only way that a 401k will outperform a defined-benefit pension.

7-8% returns would be easy if we assume annual growth of 3%

That's not going to happen. We're hitting all sorts of physical limits to growth - oil, fertilizer, clean water, growth in poorer countries taking resources from rich ones.

The Dow first hit 1000 in 1968 and then didn't reach it again until 1982. That's fourteen years of 0% gains.

The Dow didn't reach its 1929 high again until 1954. That's twenty five years of 0% gains.

The Nikkei hit 39800 in December of 1989 and today it's around 8400. That's more than two decades of *negative* gains.

You want to tell me again how a crash portends strong stock market returns...

I love you, Dean, but I think you're wrong on this one. Past performance is no guarantee of future performance, and it is hopeful to expect the global economy to keep growing endlessly. Energy and environmental issues are already hampering growth, and we will be lucky if we can settle into some kind of steady state economy. Of course you think this is nuts... We'll see. I am certainly "hopeful" that I'm wrong...

Same old, same old! Every time interest rates and stock earnings are down, no one can fully fund their pension plans, creating dire predictions and right wingers who want to shut them down.

As soon as the interest rates and stock earnings go up, pensions are overfunded and everyone wants to spend the money like it will never end.