Friday, July 22, 2016

Bad news from California

We have blogged before about the problems of public defined-benefit pension plans:
the use of higher-than-appropriate discount rates (e.g., 7.5%) reduces the value of the pension obligations that is reported to the public, and thus likely reduces the contributions that sponsors feel they must make to pre-fund their pension obligations.

 If the pension fun earns 7.5%, then it will have enough to pay out to retirees when they retire.  However, if they earn less, then there will not be enough money to go around.

Calpers, one of the biggest defined-benefit pension funds in the world has reported that it is earning much less than than the discount rate they use to compute the present value of pension obligations:
California’s pension fund for most public employees—reported abysmal annual earnings of 0.61 percent, a tiny fraction of the seven-and-a-half percent annual returns needed to keep it solvent over the long run.

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