Public pensions are collapsing in part because of flawed actuarial methods.
Ivory tower concepts like believing the sponsor will be put in what they’re told to put in don’t work in states like New Jersey. But, beyond that, presuming that you will earn 8% on phantom assets could require you to earn 16.67% on what you actually have. Taking the most basic example:
Let’s say you want to receive $1,000 per year for five years and you have 5 years to put in your money. Assuming you get 8% interest then $681 is your contribution number per this spreadsheet.
But what if after year 3 you expect to have $2,388 but actually have $1,500 (63% funded)? Will you still get your $5,000 in total payouts? No. According to this spreadsheet you would only get $3,625 assuming you continue to make 8% earnings from year 4 on.
In order to get that $1,000 annual payout you would need to start getting 16.67% trust earnings which is essentially what a plan as badly funded as New Jersey’s is assuming when they predict everyone will get paid out.