Comments for Pension Fund Return Projections are Based on Arithmetic, not Just History at http://www.cepr.net , comment 1 to 2 out of 2 comments http://www.cepr.net Tue, 18 Jun 2013 02:04:08 +0100 FeedCreator 1.7.3 http://www.cepr.net/index.php/blogs/beat-the-press/pension-fund-return-projections-are-based-on-arithmetic-not-just-history#comment-17595 The NPR piece gives a quote: "...over the last 30 years, our actual rate of return has been 9.3 percent." 30 years takes us back to 1982, when P/E of the major indices was little more than half what it is now. What would the rate of return be over the next 30 years if P/E goes back to the 1982 value? At first approximation an 8% rate of return implies P/E of 12.5 - what is the ratio now? Keeping in mind that bond returns from now on are not likely to be as good as they have been since 1982, the rate from stocks would have to be even higher than 8% to give a total return of 8%. I do agree with Dean that these estimates are tending to be too low now - most economic estimates including pension-fund rates tend to be too high in good times and too low in bad times - that's why we have cycles. - skeptonomist Fri, 20 Jul 2012 04:45:15 +0100 http://www.cepr.net/index.php/blogs/beat-the-press/pension-fund-return-projections-are-based-on-arithmetic-not-just-history#comment-17594 Dean, Please show me a pension fund that has a 30 year time horizon. If Calpers does not have increased returns over the next decade it will have a devastating effect on state and local finances. Massively higher contributions will be required by local, county and state government. These contributions will be bankrupting for many of these entities. And public pensions are political animals. When times are good (and stock valuations are high) politicians give away surplus funding. As was the case in California in the 1990s with both Calpers and the UC pensions. Once funding ratios approach 100% their is an irresistible urge by politicians of both parties to shower public employees with increased benefits. This is when you get such insanities as 3/30 pensions for safety employees resulting in a typical fireman retiring in his early 50s with a 6 figure pension (inflation adjusted for life). So 30 year average returns are irrelevant. "Excess" returns during the boom years are not locked away to make up for lean years. There is little smoothing funding over the market cycle. During the lean years the shortfalls are made on the back of the taxpaying public as is happening right now. - john Fri, 20 Jul 2012 04:23:27 +0100