Tuesday, October 16, 2012

Public Pensions and the Assumed Rate of Return

How big are the unfunded public pension liabilites? Bigger than reported and bigger than you think because almost every public pension fund uses unrealistically high "assumed rates of return"--

Reason Foundation - Out of Control Policy Blog > Warren Buffett on Public Pensions: "Most public pension funds assume, for example, that they will earn 7.75% or 8% a year, on average, while Buffett has said that 6% would be more realistic."

Study: Public Pensions Underfunded by $1.2B | Fox Business: "Critics have called for public pensions to reduce their assumed rates of return to as little as 5 percent or less, which would cause unfunded liabilities to soar and likely leave taxpayers having to cover the difference. But without the change, critics say, future generations will be left to deal with a financial bomb. Other studies have tried to measure the overall size of the problem. The Pew Center on the States found that the shortfall is about $766 billion. Moody's Investors Service said in July that the collective gap would be $2.2 trillion if funds used a 5.5 percent discount rate."


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