Monday, May 28, 2012

Looking for a guaranteed 8% return?

Me too, especially in today's market where long term bond yields are at historic lows.  Where might one find such an investment?  We need to ask the advisors of state and local government pension plans.  Researchers at Boston College have calculated that the average plan assumes it will get an 8% return and adjusts its annual contribution accordingly, reports today's NYT.  The hitch, of course, is that pension plans are highly unlikely to see such returns, so in future years taxpayers will have to kick in more to cover obligations to retirees.  So some political leaders such as NYC major Michael Bloomberg have pushed plan managers to lower the interest rate assumption to something more realistic. 

Although this looks like basic good government, public employee unions are not happy.  They realize that if governments have to kick in more dollars for future pension obligations, there will be fewer dollars to spend on raises and there might even need to be cutbacks in state services. 

In the private sector, the average plan assumes it will earn 4.8%.  Although I am not the sort who usually looks for ideas for new regulations, would it be unreasonable to ask state and local pension plans to use the same interest rate as plans in the private sector? 

1 comment:

  1. An argument could be made that 4.8% is still high. The liabilities of the pension fund are essentially riskless - they have to be paid, so they should be discounted at the riskless rate (currently about 2%). I won't be holding my breath on this though.