Fewling Stasis

The New York Timesrecent article “A Sour Surprise for Public Pensions: Two Sets of Books” was remarkably incisive in exposing a scam multiemployer (union) plans have been using for decades in valuing pension liabilities at different rates for different purposes but there was pushback at the time and more from Alicia Munnell yesterday admitting that this is a complex issue and concluding that “[a]rticles like ‘Sour Surprise,’ however, do not help the process one iota.”

Ms. Munnell is dangerously mistaken on both counts.

  1. Selecting interest rates for public plans is as simple as it gets. Actuaries are told what rates to go with it and it is up to them to justify the use of those rates using jargon as arcane as necessary.
  2. Exposing the actuarial profession’s capture by their clients is an essential first step in explaining how pension plans got to 30% funded ratios (both for public and multemployer plans).  What is not helpful is analysis like this:

“Determining funding contributions is a trickier issue.  Academic models suggest the calculation should use a riskless rate.  But contributing based on the riskless rate while investing part of the portfolio in equities produces ever growing funded levels.  That outcome may sound great, but one of two things will happen.  Politicians will raise benefits, increasing the commitments of public plans.  Or they will reduce the contributions for successive generations, creating serious equity issues.”

A little thought here:

  • Going to a riskless rate would require about 99.99% of plans to start paying off huge unfunded liabilities over decades. Is it benefit increases in 2055 that Ms. Munnell fears?
  • Has any politician ever uttered the phrase: “I know the actuaries tell us to put in $2 billion but, dammit, think of grandkids, let’s put in $5 billion.”?

What Ms. Munnell has attempted to do is cut off a perfectly legitimate line of questioning with specious reasoning designed to maintain the status quo.

8 responses to this post.

  1. Posted by S Moderation Douglas on October 6, 2016 at 2:04 pm

    Really. Discount rates, smoothing, life expectancy, bear markets, zero interest rates, etc., etc., etc.

    And scary. From a purely greedy and selfish standpoint, as a retiree, I would ostensibly be better off if CalPERS adopted a five percent discount rate (or lower) and increased required contributions accordingly. Hope for the best but plan for the worst. It would theoretically be the conservative way to go, and pay down the unfunded liability much sooner…

    Unless it drove half the local governments into bankruptcy. Talk about a death spiral.

    No, I’m not proposing that.

    “There are no easy answers, but there are simple answers.” – Ronald Reagan

    “For every complex problem there is an answer that is clear, simple, and wrong.” – H. L. Mencken

    See? It is complicated!


  2. Posted by Eric on October 6, 2016 at 6:02 pm

    Since the NJ Supreme Court ruled that the state is not required to honor any of its commitments, among them is making required pension contributions into the pension funds, as set forth by law, place the NJ Supreme Court members, with the exception of Justice Barry Albin, into a 401K plan, managed by hedge funds loyal to cc, charging hundreds of millions of dollars in fees to its members.
    These are 6 pensions that will not be paid, which is a modest beginning in saving money, and teaching that the consequences of your actions will directly affect you without “running to obtain political assurances” to reach deals on saving your own pension at the expense of harming others. The rot and stench is tremendous.
    We have all heard of the ancient Chinese proverb that a trip of one thousand miles begins with the first step. These are the first 6 steps that I would gladly take.


    • Posted by dentss dunnigan on October 6, 2016 at 6:56 pm

      Our SC has been fleecing taxpayers in this state for years ,and anyone trying to upend that court gets payback in spades …..that’s what Bridgeghazi is all about payback to CC for not reappointing,Justice John E. Wallace Jr and Justice Helen Hoens back to the SC


    • Posted by Anonymous on October 6, 2016 at 9:02 pm

      Eric here’s another, relatively unknown, Chinese proverb for those six SC justices – “man (generic) who keep making mistake no longer fool but a**hole”!


    • Posted by boscoe on October 7, 2016 at 1:14 pm

      Sorry, must have missed it. When has the NJ Supreme Court ruled that the state is not required to honor any of its pension commitments? I know they’ve ruled on COLAs and annual funding commitments, but have they ever ruled on the contractual right of a vested employee to receive a his or her earned pension?


      • Posted by dentss dunnigan on October 7, 2016 at 1:34 pm

        Well I guess the checks are still going out so that’s good enough for them …the’ll make a ruling when they stop …just like they did on COLA


  3. I’ll say it again, the discount rate based on past experience really shouldn’t be much higher than the risk free rate right now.

    Once you adjust for lower expected inflation (10-year TIPS vs. normal Treasuries) and currently inflated asset values (a 2.0% yield for stocks and even lower for bonds).


  4. Posted by anonymous on October 9, 2016 at 9:30 pm

    Number one is an oversimplification that is also not entirely universal, but it’s close enough to true that it is definitely terrifying. I’ve worked with public pension funds over the last two decades ranging from the tiniest to the largest and yes, it’s figuring out what to do to support the numbers. You start with the answer and then figure out how to get there.


Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: