Tuesday, May 29, 2012

Public Pensions and the 8% Myth

City and State governments and  the unions representing their employees pretty much agree: on average, pension fund investments ought to earn close to 8 percent a year. The reality? Returns are closer to 5 percent – even lower for pension funds that go for broke with hedge funds, private equity or real estate.

Why don't plan sponsors set realistic investment targets? Because hard-pressed taxpayers then would be required to contribute more money to the plans. Why don't employee unions insist on realism? Because they fear benefits would be cut to avoid a taxpayer rebellion.

We bring up this impasse for two reasons. First, it's an excuse to quote New York City's mayor:
The actuary [for the city's five pension funds] is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent. If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.
Second, now and then every investor needs a reminder that wanting a stated rate of return bears no relation whatsoever to getting that rate of return. "If wishes were horses," as my mother used to tell me, "beggars would ride."

1 comment:

Jim Gust said...

In the fog of intoxication, we used to say, "If wishes were fishes, horses would fly."

Seemed funny at the time.