Pension solutions

April 21, 2011


There are two sides to the municipal pension equation.

One side is the outflow or the payments made to retirees from the pension fund.

This outstanding map from the Pew Center on the States illustrates how each state is adjusting the payments or outflows from their funds. (If you click through to Pew’s site you can see how states have addressed this from 2001-2010.)

The other side of the equation is the revenue or inflow side of the equation. This side is comprised of worker and employer contributions and the gains made from the investments held in the pension fund.

Lisa Lambert and Edith Honan of Reuters wrote an excellent article today about the most important issue on the inflow side. This is the question of what rate to estimate investment returns to the pension funds.

Almost everyone agrees many pension funds can cover promises to current retirees, but not those in the future. Estimates of the total gap range from $700 billion to $3 trillion because of disputes on calculating returns.

More than half of 124 pension funds surveyed by the National Association of State Retirement Administrators expect a return of 8 percent, while 38 expect less and 35 more.

Some states, such as Illinois, are lowering expectations. Rhode Island is looking into dropping its rate to 7.5 percent.

And in Congress, Republicans are calling for pensions to put expected rates of return at around 4 percent.

Going back 20 years, the average annual return is 8.1 percent, Kil Huh [who tracks pension funds for the Pew Center on the States] said. In the last decade, it is just 3.9 percent.

“For the people who want to cut employee pensions, they’ll take 2000 as a reference point,” said David Hitchcock, senior director at Standard & Poor’s Ratings Services. “They’re making the most dramatic case possible.”

I’d call it diddling the actuary. And who is the actuary? Now that is a good question!

Image source: Pew Center on the States | State Pension Reforms 2010 |

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