Josh Rauh Rantings

Much more to follow especially after this afternoon’s four-hour seminar on Public Pensions but, for now, here’s a tidbit from this morning’s workshop on Public Employee Retirement Systems.

Under the topic of Media Misperceptions I chimed in asking what was the dumbest thing out there to which moderator Lance J. Weiss of Gabriel, Roeder, Smith and Company responded with the title of this blog.

Joshua Rauh is a professor at Northwestern who in October, 2010 came out with a paper where he basically asserted that, were the funding interest assumption dropped from 8% to 4% for public pension plans, their underfunded liabilities would be about $3 trillion.

The actuaries in this workshop I attended uniformly disagreeed with Professor Rauh and Actuary Weiss even co-authored a paper that took him to task and noted that Professor Rauh had been invited several times to speak at actuarial conferences but consistently responded that he was “too busy”.

The $3 trillion number is out there and in the mainstream media with scant rebuttal.

Personally, I agree with Professor Rauh’s conclusion though not his methodology…..but… it applies to New Jersey.  There are other public systems that are not running on NJ standards.  Shouldn’t public pension actuaries for those systems be doing a little more to debunk the Rauhs beyond venting in an unrecorded session at an EA meeting?

20 responses to this post.

  1. Posted by briandin on March 28, 2012 at 2:49 pm

    Wait, NJ has STANDARDS???


  2. Posted by Tough Love on March 28, 2012 at 4:25 pm


    Lance J Weiss is not listed as a co-author of the paper linked in your 4-th paragraph.

    While reading it, I thought it was one-sided and biased. When I got to the end the reason became clearer, as the listed author Leigh Snell, is Director of Federal Relations at the National Council on Teacher Retirement.


    • Posted by Tough Love on March 28, 2012 at 11:59 pm

      John, I took a 2-nd longer read of that linked article authored by Leigh Snell.

      Have you read that complete article? I simply cannot believe you don’t find it, almost in it’s entirety, to be one-sided, extraordinarily misleading, intentionally giving examples structured (with twisted logic or selective choice of facts or time periods) to prove a point (easily proven otherwise).

      While Professor Rauh’s $3 Trillion underfunding estimate may or may not be on the mark, the quoted article (authored by someone with a clearly biased agenda) is hardly a scholarly discussion aimed at proving his estimate wrong.


      • Here’s the real paper co-authored by Weiss:

        Click to access media-misconceptions.pdf

        which I also inserted in the link.


        • Posted by Tough Love on March 29, 2012 at 2:31 am

          Glad to see that you fixed that link …. the erroneous linked article was horribly biased.

          I just read the correctly linked article, with most of the discussion comparing the merits and flaws of the Prof Rauh’s support for using fixed treasury rates for discounting Plan liabilities VS the current (gov’t Plan) practice of discounting Plan liabilities using the earnings assumption for Plan assets.

          Here’s my take on this very complicated subject ….

          While the best estimate asset-earnings-rate (be it in the 7.25-8.25% range currently used by Gov’t Plans, or the 6% assumed by Warren Buffet) will likely materialize over the long hall, and therefore it’s use in discounting Plan liabilities and for calculating the funding ratio is not defacto deceptive, inherent in it’s use is the assignment of zero cost to the portfolio risk associated with achieving that
          long term average return.

          Rauh’s, use of treasury rates in discounting Plan liabilities (and the funding ratio) assumes there is a substantive risk cost to equity investing (which can be measured by the cost of options to guarantee the higher average long term return assumption on the asset portfolio) a rick cost which his method incorporates directly by using the lower fixed treasury rates (to match to the guaranteed nature of the liabilities). Rauh would say that use of the Asset return assumption ignores that risk cost BECUASE the Taxpayers (not Plan participants) act as the backstop (that does not exist under normal investing arrangements) and that ignoring it is wrong.

          So maybe the actuaries that support use of the asset assumption (for discounting Plan liabilities and calculating the funding ratio) should be required include an asterisk after that statement directed to the Taxpayers……

          * Use of the XXX.XX% rate is appropriate (but you’re on the hook if things go wrong).


      • I printed both articles out and plan on reading them tonight. I don’t remember reading them when they came out. I’m also researching an amazing change in public pension funding that I will contrast to private funding (may be ready by late Thursday). Apparently the GASB is out of the funding-method-advisory business. New Jersey may not need to ignore the ARC since there won’t be any ARC.


  3. Posted by Larry Littlefield on March 28, 2012 at 7:43 pm

    Did you see this post? Is it an accurate reflection of what was said?

    “Here’s our choice, America: Live or die on the toss of a coin. Or take the sure, safe option of guaranteed quadrapleagia for life. That’s how one actuary phrased it when they gathered here Monday for opening session on the fate of public pension plans.

    “Kalwarski, Cheiron Inc. CEO, said when it comes to defined benefit pensions, “The traditional model is broken.” He said increasing discount rates and focus on peer rankings leads to pension funds “chasing each other up the ladder of high risk” seeking increased returns.”

    “Perceived pension fund “surpluses were actuarial herion” for politicians who – despite warnings from actuaries – expanded benefits and cut contributions, setting up pension funds for a sure crash. One audience member asked from the floor, “What are your options as an actuary?” when that happens. Panelist answers ranged from “go for headline news; you can’t just write a 10-page report and go away,” to “It’s better to get fired than resign.”


  4. Posted by Al Moncrief on March 29, 2012 at 12:15 pm

    Hey guys, this is interesting. Yesterday Fitch released a report comparing each state’s debt and pension liabilities with that state’s wealth base or personal income. For some reason Colorado and six other states were excluded from the survey. Bummer, it would be interesting to see how Colorado compares. (To view a PDF of the report visit Fitch’s website,, and create a free account.)

    But in reading the report one sentence caught my eye:

    “Fitch generally considers pensions with funded ratios 80% and above to be well-funded.”

    In Colorado, our COLA-theft bill, SB 10-001 aims to continue the theft of the contracted COLA benefit from retirees until our Colorado PERA pension reaches a 100% funded ratio. Can you say overreach?


    • Posted by Tough Love on March 29, 2012 at 2:05 pm

      Al, the 80% figure is nonsense.

      Read “half-Truth #4” in the following:


      • Posted by Al Moncrief on March 30, 2012 at 11:34 am

        TL, are you saying that one of the three major ratings agencies in the United States uses rating standards that are “nonsense”? Stop for a moment and examine the your current policy positions.

        It looks like even Girard may havve to modify his stance on this one. Makes sense though doesn’t it? If I have a $100,000 house, and $80,000 is paid off, and I have 30 years to pay off the remaining $20,000, I am not in a “crisis.”


        • Posted by Tough Love on March 30, 2012 at 1:23 pm

          Al, I challenge you to find a direct statement from any of the rating agencies that they believe that (from their own independent research) … and not passing along what someone else supposedly said.

          For consideration …. Private Sector Plans, which are funded on a much more conservative basis than Public Sector Plans (via use of much shorter amortization periods for unfunded liabilities, and much lower interest rates for discounting Plan liabilities) consider 80% sufficiently POOR, that if the Plan incorporates a Lump Sum withdrawal option, that option is restricted to only 50% once the Plan’s funding ratio falls below 80%. Additionally, once the Plan’s funding ratio drops below 60%, no further pension accruals are allowed.

          And …. if PUBLIC Sector Plan were valued on the same standards as PRIVATE Sector Plans, almost ALL would be below 80%, and many would be below the 60% threshold.

          And you example is not representative of what a funding ratio means. A better example (but w/o the lender being able to foreclose on the mortgage) would be that midway through that mortgage where you were supposed to have paid off $100,000 of principal, but have only paid back $80,000.


          • Posted by Al Moncrief on March 30, 2012 at 9:50 pm

            Hi TL, the statement from Fitch is on about the thrid page of their report, which is brief, maybe 10 pages or so.

            You can’t paint the funding of private sector DB plans with such a broad brush, plan funding varies dramatically and abuse is rampant. Have you read the book Retirement Heist yet? It’s scary out there in private DB land.

          • Posted by Tough Love on March 30, 2012 at 10:47 pm

            Al, Please print the paragraph it was in here…. and a pre/post paragraph if relevant.

          • Posted by Al Moncrief on March 31, 2012 at 12:58 pm

            Jesus TL, you’re getting lazy. That is out of character, I have always considered you an indefatigable champion of DB pension reform, (slowly moving your position toward prospective, legal pension reforrms that will reduce the taxpayer’s burden legally, albeit gradually.) The moral path is not the easy path.

            The statement you ask about is 34 lines down on page 5 of the report. You can get the complete report by going to the website and creating a free account. The statement is not taken out of context. You will want to have a copy of this report anyway, it is a really interesting comparison of the scale of the problem among the states. (Could give you some fresh ammunition.) I’m not sure I should reproduce a full section of the report, don’t want to infringe on their copyrights. (I am loath to infringe on the rights of others!) Have a cup of coffee and go get the report. It will take about 10 minutes. Al

    • Posted by Robert Mitchell on March 29, 2012 at 3:34 pm

      Al has a one-trick pony. He brings it to every pension party.
      The Colorado political leaders decided to make affordable promises instead of outrageous promises, and he is outraged.
      Hope he tires of this rant soon.


      • Posted by Al Moncrief on March 30, 2012 at 11:29 am

        Hi Robert, my pony has many tricks! I’m not concerned about what pension promises (contracts) Colorado leaders make in the future. I’m only concerned about their breach of existing contracts.

        All of my conservative buddies support the US Constitution and its Contract Clause. If contract law is not to your liking you’d be more comfortable in Bolivia.


  5. Posted by Larry Littlefield on March 29, 2012 at 1:52 pm

    Everyone is throwning around assumptions to suit themselves. But I look at it this way. Dividends and interest payments, cash coming in, only equaled half the benefit payments of the NYC pension funds, cash going out.

    The employer and employee contributions equaled less than half. That means stocks and bonds were being sold off to pay benefits. But those now working expect to receive benefits too. What will be left for them?

    Stocks prices have gone up and will go back down. The bottom line is income. In the long run that’s all you get to pay benefits. And the income from assets you no longer own is zero.


  6. Posted by Tough Love on March 29, 2012 at 2:07 pm

    Quoting …”What will be left for them?”

    THAT’s being pushed-off to be paid for by the FOLLOWING generation….. and on and on and on (until it fails).


  7. Posted by MJ on March 31, 2012 at 11:10 am

    Sounds like a bunch of mumbo jumbo to me with “the experts” not really knowing whats going to happen in the very near future. In the meantime, the beat goes on. If future generations will be paying then most of us will be long gone anyway. One thing seems certain and that is that those running the show will keep it going for as long as possible and that could be years and years down the road which doesn’t help any of us.


  8. […] Joshua Rauh, Director of Research and Senior Fellow, Hoover Institution, Stanford University […]


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