The pension crisis has been escalating for quite some time, and accounting for pension shortfalls seems next to impossible for state governments.
The shortfall between pension assets and liabilities is a major problem. But another problem may be spelling the beginning of the end for public pensions altogether.
The Beginning of the “End”
Typically, public pensions assume a 7-percent discount rate so they need to generate a return higher than that. But according to Bloomberg, they aren’t getting those returns often enough.
The Bloomberg article states that the average returns for pension-fund-like portfolios have only generated returns of 7 percent or greater for 50-year periods twice since 1871.
The article continues, saying the problem is worse because of two primary reasons:
- “Cumulative returns are lower than the averages.”
- “An extended period of bad returns cannot be made up even with astronomical returns later.”
For example: Over a 50 year period, if a fund were to have zero returns in the first 15 years, and goes broke, it wouldn’t matter what it did (or could do) after that. If that seems obvious, that’s because it is.
And this example applies even if a fund started in June 1949 and earned an average of 7.99%, according to Bloomberg. Even if the pension is fully funded, “there is no chance existing assets are enough to pay already-contracted liabilities.”
If that sounds dire, once the base of assets start to decline it’s game over, because shrinking assets can’t keep paying increasing liabilities. And according to Pew Research, they have been in decline since 2016.
So worrying about the next 50 years is “pointless”, says Bloomberg:
Worrying about the next five decades is pointless, because there’s also no chance the current system will survive long enough to discover what the next 50-year average returns will be.
…click on the above link to read the rest of the article…