Tuesday, August 6, 2013

Are states and cities saving enough for the pensions?

A report from Boston College says "no," because they are still using very optimistic discount rates, illustrated above.  Remember that higher discount rates mean that you don't have to save as much to fund future pension promises. 

Here is the scary bottom line:

In other words, Boston College found that unfunded liabilities may be almost double the official estimates despite applying a lower return assumption to just a piece of the overall calculation (in addition to eliminating asset smoothing). ....
For local and state government pensions and other post-retirement benefits, I suggest a rough rule of thumb of doubling the shortfalls found in official reports. Reality may prove worse than that, but let’s be optimistic.

We have blogged about over-optimistic pension assumptions.  I hope I never have to tell our Mayor, "I told you so."  

3 comments:

  1. I hope you never have to tell the Mayor "I told you so" either. Just last week I received a letter from one of my retirement plans that was notifying my of its "Intent to Terminate" in a distress termination. I looked back at my old copies of the annual plan assets v. liabilities and the actuarial assumptions and found one from 2004 that assumes an interest rate of 8.5%. Thankfully all my "eggs" are not in one basket because this one is rotten.

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  2. My husband works for a credit union and has recently stopped transferring additional funds to his money market account because the interest rates are so very low. It is difficult to believe that professionals who have the future of many employees in their hands would be using such outdated information. If returns are low, the present value must increase to compensate. I feel for those who are trusting any government to provide for them in their old age. We are getting closer every day to social security benefits becoming extinct.

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  3. I can get really worked up where pensions are concerned. Well, DB Pensions, not necessarily 401K plans where the beneficiary invests their own money and is responsible for their own choices…

    Many employees mistakenly believe their Pension is guaranteed income at retirement. Sadly, pensions are not guaranteed, at least, not in full. I work in a benefits office and we have to send out letters regarding our Funding Status, clearly stating our percentage of funding. There have been times we were in Endangered Status, and our trustees had to implement a Funding Improvement Plan. Thankfully we are doing well now, but… honestly, with 30 years before I retire, I do not have a lot of security. Thirty years is a LONG time!!!

    Granted, there are organizations in place that are intended to protect at least a portion of pensions. One such plan is the PBGC, but even that only guarantees a small percentage of what one would expect when they retire.

    Many organizations have taken advantage of “smoothing”, especially when the market took a nose dive during 2008-2010. Pension Smoothing is an accounting tactic that allows for organizations to delay making pension contributions, and it falsely states their value. “The accounting technique doesn't actually reduce companies' obligations to retirees. Instead, it artificially lowers the present-day value of future liabilities by boosting the interest rate companies use to make that calculation.

    The risk is that pension smoothing will ultimately increase corporate pension deficits by encouraging executives to delay payments, says the Congressional Budget Office. For instance, more companies could default on their obligations to retirees” "All you're really doing is deferring payments," said Jonathan Waite, chief actuary at SEI Investments Co., an asset manager. "It has to be put in someday” (Monga, 2014).

    Monga, V. 2014. Welcome to the world of Pension Smoothing. Wall Street Journal. http://www.wsj.com/articles/welcome-to-the-world-of-pension-smoothing-1407800119

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