Public Pension Promises

In the past, retirement planning has been a rather simple affair.  You add up everything a person has, estimate how much and how fast they can add to it, multiply that by some imputed rate of return, subtract a similar factor for inflation, and select a date in the future when they will retire.  What you come up with is how much they will have when they stop working.  You then apply similar calculations to that balance to determine how much they will be able to spend each year or how fast they will run out of money at a predetermined draw-down rate.  Pension plans, even Social Security, determine their liabilities to future retirees in much the same way.  Unfortunately, many of them, including a vast number of state pensions, continue to project their work force will retire in 30 years even though a large cohort of baby boomers expect to leave in about half that time.  This is akin to buying a home with a 30-year fixed mortgage only to discover you have just 15 years in which to pay it off.  Worse, the general assumption these pension plans (including really big ones like CalSTRS) are making calls for a steady 8% return on contributions, but the real world is delivering substantially less.  Thus we find, according to the American Enterprise Institute, that these unfunded pension liabilities in the public sector amount to some $500 billion dollars using the current projections, and it could possibly be as much as $3 trillion if today’s rates of return were used.  For these pension promises to be delivered, states will need to raise an enormous amount of money soon.  Instead, they just keep using the same flawed data.  I suppose everyone has to believe in something, even when they know it isn’t true.