James Saft is a Reuters columnist. The opinions expressed are his own.
As the people of the great state of California are finding out, very small changes in our assumptions about the world can have very large consequences.
The $230 billion California Public Employees’ Retirement System (CalPERS) will likely cut its expectation this week about how much the pension fund will earn in future years, reducing its “discount rate assumption” to 7.5 percent from 7.75 percent.
That is going to land the State and other employers with workers in the fund with a bill to make up the shortfall that could total upwards of $200 million.
And let’s not just pick on California; this is, or should be, happening all over the U.S. as government and private pension plans come to terms with the reality of a low-growth, low-return world. The median discount rate for leading U.S. public pension plans is 8 percent, according to the National Association of State Retirement Administrators, while consultants Milliman say the largest defined benefit corporate pension plans are banking on 8.1 percent.
Those figures are not only far higher than recent returns, they are very likely far higher than what it is reasonable to expect going forward.