Dean,
I don't think your "arithmetic" jab works on this topic of reasonable pension fund returns. If only it were so simple. With trillions at stake, you might want to tone down your criticism of those who assume lower returns. Here's does Robert Shiller, an arithmetic whiz who knows this territory well.

"Q: Are you saying that there's no reason stocks should outperform bonds at all?

A: (Robert Shiller 4-10-12) Oh, no. If you go back to textbook finance and make some assumptions about investors' risk aversion and that assets should be priced to pay investors for added risk, you would get some outperformance for stocks. But not as much as it's been; it looks as if past high returns were a historical anomaly.

So when I said the 10-year P/E predicts a 4% return, that's conditional on past returns being a guide to future returns, and the truth is, we don't know. Maybe it will be only 2%." http://money.cnn.com/2012/04/1.../index.htm

Uh, Richard, when did Dean criticize those who assume lower returns? As I read it, he is criticizing those who assume higher returns!? What Dean is saying is that 8% is an outlandishly high assumed return on the part of an investor, when the PE ratios are far above the norm during healthy growth times of about 14-16. Buying at a PE ration of 20 to 30 indicates that someone is willing to pay 33-100% above what earnings are telegraphing as a fair price. Those same people are thus fantasizing 8% returns when they are actually going to get 4-6% returns (significant in the long run). Now, are these people pension fund managers? Maybe not. But in Texas, the governor (who we all saw is not the sharpest saw in the shed) gets to appoint these managers; cronyism in Texas is just part of the government, still.

Now, if a pension fund manager is making these unrealistic assumptions, they do lack in arithmetic skills (actuarial skills are complex, but boil down to doing arithmetic). So they would deserve a good roasting.

Still, it is true that one catches more flies with honey than with vinegar. But that doesn't mean you give them a lot of honey. And you still smash them when they insist on landing on your food.

Pension fund managers probably are going to be put on Arkship B
http://www.clivebanks.co.uk/TH...radio6.htm

CAPTAIN:
Oh precisely yes. So it was decided to build three ships, three Arks in space, anyway…where’s the soap? Ah! Thank you. Ah! So the idea was that into the first ship, the A Ship, would go all the brilliant leaders…

NUMBER ONE:
The scientists…

CAPTAIN:
Yes, the great artists, you know, all the achievers. And then, into the third ship, the C Ship, would go all the people who did the actual work; who made things and did things you see. And then in the B Ship -

NUMBER ONE:
That’s us.

CAPTAIN:
Yes. Would go everyone else, the middlemen you see. And so we were sent off first.

ARTHUR:
But what was wrong with your planet?

CAPTAIN:
Well it was doomed - as I said. Apparently it was going to crash into the sun. Or was it the moon that was going to crash into us?

NUMBER ONE:
No, no, I thought it was that the planet was more or less bound to be invaded by a gigantic swarm of twelve-foot piranha bees.

NUMBER TWO:
No, no, no. That’s not what I was told! My commanding officer swore blind that the entire planet was in emanate danger of being eaten by an enormous mutant star goat.

ARTHUR:
But they made sure that they sent all you lot off first anyway?


CAPTAIN:
That it was very important for morale to feel that they would be arriving on a planet where they could be sure of a good haircut and where the phones were clean.

FORD:
Oh yes! Well I- I can see that would be very important.

[Now trying very hard not to laugh] ... And er, the, the other ships followed on after you did they?

CAPTAIN:
Ah! Well, it’s funny you should mention that…

Because curiously enough, we haven’t actually heard a peep out of them since we left

But they must be behind us somewhere.

FORD:
Unless, of course, they were eaten by the goat.

In California, one of the large state employee pension plans (CALPERS) has been assuming they could get reliable 7.75% per annum returns.

In 1999, CALPERS had such great returns they increased pension benefits, without increasing contributions, with Republican and Democratic legislators' approval, claiming it wouldn't cost the taxpayer anything.

There was no clawback provision in the legislation and CALPERS argues that while pension benefits can be increased by the legislature they can't be decreased.

CALPERS did recently decrease the assumed discount rate, dropping it from 7.75% to 7.5%.

CALPERS reported a 1% return on its investments for the year ended June 30.

I believe the California city bankruptcy count is up to four with Vallejo, Compton, Riverside and Stockton leading the pack.

But CALPERS is threatening these cities with legal actions if they attempt to use bankruptcy to avoid pension contributions.

Other cities are cutting services to meet their pension obligations.

But, I understand Illinois and maybe New Jersey are in worse shape.

As a CA state taxpayer, it will be interesting to see how this sorts out.

This is all part of the strategy for the laveraged buyout of government: load the governments with debt and "unfunded liabilities" by making grossly optimistic assumptions about future costs, cut taxes (that is distribute "dividends" to "shareholders") and then when the bills come due cut jobs and salaries and benefits.

This has been done at the federal level by using the SS Fund surplus to fund the Bush tax cuts, and at the local level by assuming 8% returns.

In a study by the Atlanta Fed department it is pretty clear that local government pension fund returns follow closely the SP500 on the upside, but overshoot it significantly on the downside, which seems to mean that the funds are mostly invested in the stock market instead of treasuries and bonds, and that stock investment is leveraged.


http://macroblog.typepad.com/macroblog/2011/10/state-and-local-fiscal-fortunes-follow-the-money-collected.html

These highly leveraged instruments indexed on the S&P 500 (but curiously only on the upside, they undershood it on the downside) have been assumed to generate 8% yearly risk-free net returns over many decades, allowing local governments to pretend they don't have liabilities to those pension funds and thus declared tax holidays for rich local taxpayers:

There is no question for me: conservative action groups are very astute, and the middle classes greedy and stupid.

"San Bernardino" is in the process of bankruptcy, not "Riverside".

Excuse my knee-jerk in post above w/ quote from Robert Shiller. Dean has very often criticized the arithmetic skills of pension managers because they NOW want to project LOW returns. I reflexively assumed that he was doing that here--sorry. So much for scanning and seeing what you want to see.

However, save that Shiller quote--I'm pretty sure you'll be needing it re: a future pension-arithmetic post by Dean.