Educating the Public on Detroit

Technology has killed serous televised discourse.  I can’t imagine William F. Buckley feeding setups to six talking heads spewing their sound-bites on topics of the day. I see him debating informed challengers proffering well-reasoned positions, which could still have more entertainment value than anything we see on TV today:
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So it is that the discussion being had on the Detroit bankruptcy instigated in part by faulty assumptions as to the value of pensions and the perceived wisdom being formed that actuaries have been lying for decades to appease their clients is welcome but the pundits carrying the message could use some better backup information though they are not completely to blame.

For example CALPERS is a severely underfunded plan.  They admit to a 65% funding level as of 6/30/10 that is supposed to have gone up to 74% as of 6/30/11 in a 14 page report titled Annual Review of Funding Levels issued March, 2012.  Nowhere in that report could I find where they list asset or liability values or the assumptions upon which they are based but let’s say that the assets are $222 billion and liabilities are $300 billion calculated using a 7.5% interest rate.  GASB and others have criticized the use of a 7.5% interest rate for valuing liabilities and this has penetrated the public psyche.  But……

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I don’t mean to bash Mr. Karlgaard who had me at “politicians are mathematically ignorant’ but that one-third cut conclusion (presumably arrived at by dividing 2.5% by 7.5%) makes perfect sense to people who know nothing (or little enough to be dangerous) about pension funding (a group that might include that entire panel and 99.9999% of their viewers) but is a mind-blowing concept to that other .0001% since so many other factors are involved.  Going from 7.5% to 5% funding could raise the liability value to about $444 billion which would lower the funding level to 50%.  If anything benefits should be cut in half.

Again, this is not to bash Mr. Karlgaard since educating the public has never been a priority where the funding of public pension plans is concerned for those who are supposedly doing it.

6 responses to this post.

  1. Posted by Tough Love on August 11, 2013 at 2:26 pm

    Mathematically the answer might be that a 50% cut in PAST Service accruals is needed to “make whole” theses promises ….. and for FUTURE accruals a 1/3 cut might suffice.

    Reply

    • That’s not what Mr. Karlgaard understood. He translated a change from a 7.5% to a 5% funding rate as if it were a DC contribution which made me wonder whether every other pundit is also faking it.

      Then I researched CALPERS funding numbers and found this ludicrous report that threw in everything EXCEPT solid numbers that laymen were likely to grasp which is another failure of the actuarial profession. Every report they put out there can ONLY be understood by another actuary though, for public plan actuaries, that might be for self-preservation.

      Reply

  2. From most previous blogs here on actuary workings, I feel a bright 8th grader could set up honest practical systems without all the terms such as smoothing,……..

    Reply

  3. Also heard a couple months back a network (CNN?) is planning a ‘Buckley’ format this Fall…..?

    Reply

  4. Posted by Eric on August 11, 2013 at 10:53 pm

    I deeply miss William F. Buckley, Jr. What entertainment. What an intellectual.
    Eric

    Reply

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