Tuesday, September 18, 2018

REPOST: can I take credit for this?

Former student Ford Scudder (NJ state treasurer) must have been paying attention in class, as he reduced the discount rates for NJ defined benefits pension system from 7.9% down to 7%.  The move is controversial as it increases the amount that NJ must set aside for its generous retirement benefits:
The decision will likely increase what the state will have to pay into the pension system next year by $234 million, according to the Treasury Department. Instead of a $3 billion pension contribution in his first budget, Murphy [the new Governor] would likely have to make a $3.2 billion contribution under that estimate.
But it is better in the long run:
“Given the current elevated level of asset values across the board, long-run expected returns have diminished, so it is appropriate to lower the assumed rate of return,” Rijksen said. “Our actuaries have suggested doing so, and it is the unmistakable trend in public pension plans across the country, with some other 20 state pension plans having adopted or being in the process of moving to an assumed rate of return at 7 percent or below.”
Readers of this blog will know that I motivate the topics of discounting and its inverse, compounding, with use our under-funded defined-benefits pensions.  Here is a recent post about another fund, from another under-funded state, doing the same thing:

Thursday, February 2, 2017


Another pension fund lowers discount rate to 7%

If a pension fund has to pay out $100 in 30 years, and earns 7.5% on its investments, it must save 100/(1.075)^30=13.14 today.  If it earns only 7.0%, the amount that it much save increases by 15%.

Calstrs, the second biggest pension fund in the world, just admitted that it is reducing its target rate of return (also its discount rate) from 7.5% to 7.0%.  The increase in payments is split between the teachers and the State of California, the employer of the teachers.
Approximately 80,000 current members of Calstrs could see an increase in their yearly pension contributions of $200 or more as a result of Thursday’s move, Calstrs said. The state of California has already budgeted an extra $153 million for its pension contribution to cover the rate change, bringing the total contribution to $2.8 billion.

1 comment:

  1. This is interesting. I would have to assume that its a popular decision among state employees but a rather unpopular decision during budgeting season. An increase in the discount rate would put an increased strain on the current budgets of governments. According to Forbes, the average discount rate for pensions have fallen over the last few years. This is the best thing to do to fully fund the obligations, but puts further strains on local and state governments all across the nation.
    https://www.forbes.com/sites/greatspeculations/2018/06/26/how-companies-use-discount-rates-to-produce-misleading-earnings/#5f4095e5426c

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