How will unfunded "pensions" affect the local economy?

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Submitted by phaster on September 1, 2014 - 7:48am

Here is a simple question, how do you think unfunded pensions affect the economy, specifically RE prices?

To illustrate specifically what I am concerned with, below is an outline of a local unfunded public pension issue....

*** WHAT YOU NEED TO KNOW ABOUT PUBLIC PENSIONS IN SAN DIEGO ***

A recent wall street journal article essentially said the SD county pension system was using derivaties to manage their portfolio.

"Simply put, it could have a market exposure of $20 billion despite only managing half that amount."

http://online.wsj.com/articles/san-diego...

To show why the current SD county pension "operations" is a bad idea, google "buying stocks on margin" and check out the first search result.

The math is pretty simple to understand (just add "000,000" to the following $ figures):

A Buying Power Example
Let's say that you deposit $10,000 in your margin account. Because you put up 50% of the purchase price, this means you have $20,000 worth of buying power.

http://www.investopedia.com/university/m...

Returning to our example of exaggerated profits, say that instead of rocketing up 25%, our shares fell 25%. Now your investment would be worth $15,000 (200 shares x $75). You sell the stock, pay back your broker the $10,000, and end up with $5,000. That's a 50% loss, plus commissions and interest, which otherwise would have been a loss of only 25%.

Think a 50% loss is bad? It can get much worse. Buying on margin is the only stock-based investment where you stand to lose more money than you invested. A dive of 50% or more will cause you to lose more than 100%, with interest and commissions on top of that.

http://www.investopedia.com/university/m...

A good basic math education, is all that is needed to understand the "downside" risk of a margin account (but all the reports in the media so far do not show this simple "downside" math).

Adding the "options" account variable complicates matters, but kinda explains the lackluster single digit portfolio returns of the SD county portfolio (i.e. the various options w/in the portfolio of "puts for downside protection and "calls" to try and win big on the upside" cancelled each other out - so far, in a market that has gone up), the big unknown is how the "options" are structured within the portfolio and how it react if there is sudden and dramatic turbulence.

Consider all it might take for the "local" house of cards to fall is some kind of foreign black swan event that drops the market towards 10% down, and because of leverage things could suddenly get ugly for the local economy (for example LTCM, which happened in a less complex world, now one has to factor in some thing akin to high speed robo traders, that will sell off a position because of a trigger event, thus converting a "paper" loss into a real loss for the pension portfolio??).

10 billion dollars placed into a margin account to play the options market IMHO is "insane" if anyone was investing their own money, but think I uncovered the motive.

The reason the county pension board might have taken such drastic action is the change in accounting rules which put public pensions on the balance sheet next year.

Few even in the investment community know that:

PUBLIC "Pension liabilities must be included on the balance sheets of the agencies responsible for funding their employees' pensions. Until now liabilities have been buried in arcane footnotes that few read and even fewer understood"

http://articles.latimes.com/2014/apr/09/...

NOTE if San Diego's pension board margin-option strategy fails, the tax payer is on the hook!

One other thing, there is a youtube video (starting at 3:24), where san diego is mentioned at the being at the top of the list (for being the deepest in the hole overall for unfunded pensions and having an unfunded health care plan)

https://www.youtube.com/watch?v=BRr49iAgI9g

If pensions and health care costs have to both be included on the balance sheet, the bond markets are in for a real shock which will ripple through the economy and affect everyone on main street.

If you want understand why there is a problem with pensions in San Diego, read the history of pensions at the state level (which started out well managed and over the years turned corrupt and mismanaged):

http://www.city-journal.org/2013/23_1_ca...

The local(s) (city and county) basically followed the CalPERS model, and what might be telling is the former CEO of CalPERS just plead guilty to a fraud, corruption charge

http://www.latimes.com/business/la-fi-ca...

Submitted by CA renter on October 3, 2014 - 2:39am.

You're welcome (for the *actual* data), pri.

Submitted by CA renter on October 3, 2014 - 2:36am.

harvey wrote:
Thanks for the data, phaster.

DB plans will go down in history as a failed economic experiment.

LOL! And you think that DC pensions will go down in history as a successful experiment? Good luck with that.

Submitted by livinincali on October 3, 2014 - 7:09am.

CA renter wrote:
harvey wrote:
Thanks for the data, phaster.

DB plans will go down in history as a failed economic experiment.

LOL! And you think that DC pensions will go down in history as a successful experiment? Good luck with that.

Long comfortable retirement for the masses will go down as a failed experiment. Hope you didn't burn too many bridges with your kids because it's live with them or get the living equivalent of 3 hots and a cot. That's what's eventually going to happen. The top 20% may be able to experience comfortable retirement, but the rest will be living pretty damn broke in retirement. Surviving but not thriving. There's just not enough disposal income from the productive members of society to provide comfortable retirement for the masses.

Submitted by livinincali on October 3, 2014 - 7:12am.

CA renter wrote:

Now, as for that "$2 Trillion Hole," many public agencies are already addressing the unfunded liabilities. CalSTRS just enacted a new plan to pay off their unfunded liabilities over 32 years (because they can...because it's not a DC system) by increasing contributions from all stakeholders. Most of the other pension funds are working on the numbers and legislation to pay off their unfunded liabilities, as well.

Problem is those plans are still counting on 7%+ average returns for today's current levels in the stock and bond market. A 50% crash in the stock market or a long bear market in bonds blows those projections up. The cold harsh reality, the pension funds are screwed and most people expecting to receive a defined benefit will probably see somewhere between a 30-50% cut in benefits when it's all said and done. They'll go down kicking, screaming, and suing but the money just isn't there.

Submitted by scaredyclassic on October 3, 2014 - 7:49am.

either the future is so bright we're gonna have to wear sunglasses or
the future is so bright we're all gonna have our eyeballs irradiated and melted from the nuclear blast of debt.

I'm getting tired of predicting disaster, which makes me want to think everything's gonna be ok, but, from a contrarian point of view, it's usually safest for me to think the opposite of what i'm thinking or want to think.

So I'm going with the melted eyeball scenario for the future.

Submitted by CA renter on October 3, 2014 - 11:37pm.

livinincali wrote:
CA renter wrote:
harvey wrote:
Thanks for the data, phaster.

DB plans will go down in history as a failed economic experiment.

LOL! And you think that DC pensions will go down in history as a successful experiment? Good luck with that.

Long comfortable retirement for the masses will go down as a failed experiment. Hope you didn't burn too many bridges with your kids because it's live with them or get the living equivalent of 3 hots and a cot. That's what's eventually going to happen. The top 20% may be able to experience comfortable retirement, but the rest will be living pretty damn broke in retirement. Surviving but not thriving. There's just not enough disposal income from the productive members of society to provide comfortable retirement for the masses.

Agree, to a large extent. That was my point about historical social safety nets being familial. But how do we reconcile this with the trends related to industrialization and modernization -- non-agrarian lifestyles where children are expected to sever ties with parents, siblings, and other family members at a fairly early age in order to pursue their own education and interests, etc.? It just doesn't bode well, especially for most American families.

Submitted by CA renter on October 3, 2014 - 11:39pm.

livinincali wrote:
CA renter wrote:

Now, as for that "$2 Trillion Hole," many public agencies are already addressing the unfunded liabilities. CalSTRS just enacted a new plan to pay off their unfunded liabilities over 32 years (because they can...because it's not a DC system) by increasing contributions from all stakeholders. Most of the other pension funds are working on the numbers and legislation to pay off their unfunded liabilities, as well.

Problem is those plans are still counting on 7%+ average returns for today's current levels in the stock and bond market. A 50% crash in the stock market or a long bear market in bonds blows those projections up. The cold harsh reality, the pension funds are screwed and most people expecting to receive a defined benefit will probably see somewhere between a 30-50% cut in benefits when it's all said and done. They'll go down kicking, screaming, and suing but the money just isn't there.

I'm generally at least as bearish as you are, but will admit that things have, as of yet, not been nearly as bearish as I would have predicted.

Submitted by scaredyclassic on October 4, 2014 - 10:10am.

We have a very worried cat. I am never nervous when she stays outside for the night. I know she's paranoid and scared beyond all reason.

We have a different cat who is confident and oblivious. We get really nervous when he stays out for the night.

Income inequality. No income. Poverty. Climate change. Humanity huddled in environmental refuge camps in Alaska eating the last canned goods and tree bark.

I just hope we continue to produce Floss so I can have teeth.

Submitted by FlyerInHi on October 4, 2014 - 2:11pm.

harvey wrote:
You'll probably live longer:

http://www.apa.org/news/press/releases/2...

Pessimism About the Future May Lead to Longer, Healthier Life, Research Finds

People who are pessimistic are always researching and doing something in case of disaster.

You need stress in your life to keep the youth enzymes going. They tell your body to fight to live longer. Of course, the optimal level of stress is debatable and varies from person to person.

You can create your own stress by taking on more than your can handle, but not too much that you fail at everything. That way you're always running around doing something. It prevents you from being bored and sitting around watching TV and eating potato chips.

Submitted by phaster on October 15, 2014 - 10:41pm.

CA renter wrote:

2.) Responding to that first link of yours, though, this has nothing at all to do with the Mills Act. The Mills Act is a California state program; the program in your link is federal.

If you have some issue with a particular property having a Mills Act designation, you should look up why they have that designation.

3.) Again, the issue with the software does not point to any fraud. There was no fraud found when they *tried* to find problems with the system. There is no smoke, nor any fire, from what I can see. If you have any evidence or reason to believe that there was fraud, please make your case. The fact is that fraud *can* be committed all over the place -- in the public and private sectors -- but we don't get to randomly accuse people of fraud when there is no evidence nor reason to believe that any fraud was committed.

4.) I'm not sure how your parents would have been accessories to insurance fraud if the owner of the other property was willing to fix the problem and pay for it. Are you saying that he was filing a claim? That's not made clear based on your posts. Quite frankly, if the owner was willing to pay to fix the problem, I'm not sure what the complaint is about.

The current (political and bureaucratic) SD management, seem to have a "history" of looking the other way kinda like the old sgt schultz character,

livinincali wrote:

I worked on a project for RISK management about 12 years ago, which is the San Diego's self funded disability insurance office. What firefighter and cops did at retirement was pretty bad. That was more a case of disability fraud, where if you retire under disability 50% of you pension income is tax free. But there were crazy things in the payroll system. People claiming to work more than 24 hours in a day. People claiming light duty (aka a disability claim) and regular duty in the same day.

The link:

http://www.washingtonpost.com/local/us-s...

In recent years, the Internal Revenue Service has denied 70 percent of facade easement deductions, court filings show. Since 2002, the Justice Department estimates that inflated easement deductions have totaled $1.2 billion.

is directly related to fact that with a "historic property" classification its possible to game federal taxes (with a city policy)

Ability to donate a facade easement to the city or other historical preservation agency as a charitable donation deduction from income taxes.

Still don't see the connection with software developed by the city that "allows for fraud?"

Bottom line, I was un-necessarly dragged into court and had to face delaying tactics because I seem to have uncovered a web of dishonesty no one wants to admit to (while initially I had concerns about being an accessory to insurance fraud)

https://dl.dropboxusercontent.com/u/2206...

Submitted by phaster on October 15, 2014 - 10:34pm.

harvey wrote:
CA renter wrote:
CalSTRS just enacted a new plan to pay off their unfunded liabilities over 32 years (because they can...because it's not a DC system) by increasing contributions from all stakeholders. Most of the other pension funds are working on the numbers and legislation to pay off their unfunded liabilities, as well.

Whew! That's a relief!

It's good to hear that CalSTRS has a 32 year plan that will fix the problem.

Their execution for the past thirty years has been a total failure, but I'm sure they'll get it right after a a few more decades.

And "most of the the other" fiscal time bombs are "working on the numbers and the legislation" ...

Sounds like everything is under control. No worries!

Thought I'd drop in after the watching the market head south the past few days...

Thank god...

SD PENSION "officials close to the system say it is designed to balance out the fund's holdings and protect it against big losses in the event of a stock-market meltdown."

http://online.wsj.com/articles/san-diego...

actually given the magnitude of the problem (and burn rate) if california/SD makes it 8 years (a quarter of the 32 year plan) w/o going bankrupt I'd be surprised...

Submitted by FlyerInHi on October 16, 2014 - 12:49pm.

Student loans are a bigger worry in the shorter term. Debts are preventing household formation and home buying.

Submitted by spdrun on October 16, 2014 - 2:31pm.

That's a "worry?" Nah. Keep 'em renting and leave buying up to the professionals.

Submitted by FlyerInHi on October 16, 2014 - 2:57pm.

Yeah, it is a worry because household formation and homebuying are good for the economy.

I see so many rental condos in Vegas. I'm surprised that people don't buy and lower their monthly housing costs. I can understand renting in the expensive coastal areas... but you can get an OK condo in Vegas for $70k.

Submitted by spdrun on October 16, 2014 - 3:05pm.

Why worry about what's good for the economy? Worry about what's good for you and enjoy the fact that you don't have Twitter Twits competing with you to buy.

BTW - the home ownership rate is similar to what it was in 1995, which wasn't exactly the end of the world economically. Actually, not owning a primary residence has its benefits. For example, if you have to move 1000 miles for work, you're mobile and more likely to take a job than be tied to your city.

The idea that every schmoe has to own a house is egalitarian nonsense. Some people simply aren't cut out to make an expensive investment. Lastly, you're talking about Vegas. No one whom I know who's moved there has stayed beyond a few years. It's a transient town and people know it. I can understand the aversion to putting down roots there.

Submitted by FlyerInHi on October 16, 2014 - 3:14pm.

A $70k condo is hardly putting down roots.
Buy it to live and sell later. Why is that a big deal if it lowers your monthly housing outlay?

People in Vegas do drive nice cars. Lots of flashy cars.

Submitted by spdrun on October 16, 2014 - 3:33pm.

What do you care? Why would you want them competing with you? Keep 'em renting!

And there's your answer: if you have a $600 car payment and $200 insurance per month, it eats into your ability to get approved for a mortgage a wee bit...

Submitted by phaster on December 14, 2014 - 2:56pm.

FlyerInHi wrote:
Student loans are a bigger worry in the shorter term. Debts are preventing household formation and home buying.

Have to disagree, that student loans are the bigger problem (short term). Just look at the magnitude of each component of the "difficult/unserviceable debt" and the context.

Broadly speaking in ascending order, here is a list of various "debt" problem(s).

"the volume of total subprime auto loans increased roughly 15 percent, to $145.6 billion"

http://dealbook.nytimes.com/2014/07/19/i...

There is "a $518 billion total pool of HELOCs" (i.e. people using their homes as an ATM)

http://blogs.reuters.com/felix-salmon/20...

$1.2 Trillion College Debt Crisis

"According to The Institute for College Access and Success (TICAS) Project on Student Debt, the average borrower will graduate $26,600 in the red."

http://www.forbes.com/sites/specialfeatu...

I hear what you're saying there is a "negative" feed back going on, with recent graduates having a difficult time getting a start in the job market, this kicks the can down the road of household formation and home buying BUT

There is "a [dark] cloud totaling $4.1 trillion dollars for state-administered public pension plans"

http://www.statebudgetsolutions.org/publ...

[edited 12/14/2014 - added a "link" and a graphic showing a range of PV calculation from a Harvard University’s John F. Kennedy School of Government working paper titled:

Underfunded Public Pensions
in the United States:
The Size of the Problem, the Obstacles to Reform and the Path Forward]

http://www.hks.harvard.edu/centers/mrcbg...

Keep in mind the reason I think "unfunded" public pensions will be the trigger event (of the next economic downturn) is because of the change in accounting rules starting in 2015 (which puts debts on the balance sheet and will affect "muni" bond ratings).

Looking at the big picture...

America - its government, businesses, and people - are nearly $60 trillion in debt

"The Congressional Budget Office predicts that the economy will stall by 2017 because Americans will continue spending, but wages and wealth won’t be going up...

Economists have not agreed on how to stave off the impending crisis. But Americans’ addiction to spending on credit will not help."

http://rt.com/usa/166352-us-total-debt-s...

http://research.stlouisfed.org/fred2/ser...

Submitted by CA renter on December 14, 2014 - 5:09pm.

Agree that debt is a HUGE problem going forward, but public pensions are just one part of the problem. They are dwarfed by other types of debt.

BTW, nobody in their right mind would use the market value of of assets discounted by the 15-year Treasury rate, especially during a time of unprecedented Federal Reserve manipulations. This was put out by a right-wing group that is 100% funded by those behind the Privatization Movement. In other words, pure propaganda.

There is a very real war going on against working/middle-class people in developed countries. Don't be a a useful idiot. If you're not being paid, you should definitely demand payment from the Privatization Movement for your services. They expect to reap great rewards from the work of people like yourself; make sure to get your piece of the pie.

http://en.wikipedia.org/wiki/Useful_idiot

Submitted by FlyerInHi on December 14, 2014 - 10:29pm.

Realistically, no, unfunded pensions, whatever the total size, will not put a damper on the economy.

I don't think the municipalities can increase taxes much more, so they can't take a larger share of the economy.

Plus, if there's a problem, it's far into the future with different municipalities working out their problems at their own pace.

Localities can cut services to service debt and pay employees. The services might suck, but there won't be a systemic collapse of the economy.

In the mean time, student debt is weighing on young people putting a drag on household formation and home building. That's an immediate concern.

Submitted by spdrun on December 15, 2014 - 7:30am.

That's not a "concern" for you -- less home building and fewer people buying hours = more renters and less competition for you. :)

Submitted by phaster on March 28, 2015 - 11:07am.

Wall Street Journal wrote:

San Diego County Pension Chief to Resign

By Dan Fitzpatrick
March 19, 2015 6:22 p.m. ET

The chief executive of San Diego County’s pension system announced he would resign at the end of the month, bringing fresh turmoil for the $10.4 billion fund.

San Diego County Employees Retirement Association said in a statement that CEO Brian White and the board had "amicably agreed" that Mr. White's tenure of nearly two decades would end March 30. David Wescoe, former head of the city of San Diego's pension fund, will take over as CEO while the board searches for a permanent replacement.

A Sdcera spokesman said Mr. White made the decision to resign and that he and the board had been discussing the move "over the course of several months." Mr. White said in a statement that "Sdcera has enjoyed great success, which I expect will continue" and that "serving as Sdcera's CEO has been an incredibly rewarding professional experience."

The exit of the system's longtime leader caps a period of strife for a fund that manages money on behalf of more than 39,657 active and former public employees.

Board members and staff members spent much of the past year wrangling over an outside firm's investment strategy that involved the use of derivatives to boost performance. The controversial approach was the subject of a front-page article in The Wall Street Journal.

The board voted in November to find a new internal investment chief rather than rely on an outside manager for that role.

Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com

www.wsj.com/articles/san-diego-county-pe...

FWIW everything I've looked at tells me that mis-use of math models are the cause for the financial crisis

https://www.youtube.com/watch?v=DhX0PGG-baI

paradoxically "the math" also tells me it is only a matter of time before the $hit hits the fan because no matter who the board finds to manage the fund, the "economic" system as it exists today is unsustainable...

Submitted by phaster on November 18, 2015 - 7:54pm.

FWIW in todays news paper

CalPERS may lower its return target;
taxpayers may have to contribute more

Experts have warned for years that the state's largest public pension plan has overestimated how much its investments will earn, leaving taxpayers to pay billions of dollars more than expected.

Now the board of the California Public Employees' Retirement System is reconsidering. As soon as Wednesday, the fund's board could approve a plan that would slowly reduce to 6.5% the current 7.5% it says it expects to earn on its investments.

For taxpayers, that seemingly small change is significant.

Under the proposal, the rate would be reduced slowly by tiny increments. Getting to 6.5% could take 20 years.

Many experts believe that even the 6.5% estimate is too optimistic.

The average corporate pension plan now uses a rate of 4% to determine how much money needs to be contributed, according to a recent study by Milliman, a consulting firm.

This year, after several years of double-digit returns, CalPERS earned just 2.4%.

http://www.latimes.com/business/la-fi-ca...

Submitted by CA renter on November 19, 2015 - 1:43am.

"Fact:

CalPERS investments have earned an average 7.6 percent annual return over the past 20 years and 9.4 percent over the past 30 years.
CalPERS investments earned 13.2 percent in Fiscal Year 2012-13.
CalPERS assumed rate of investment return is a long-term (20 years or more) average. Any given year is likely to be higher or lower than the assumed rate.

May 9, 2014"

https://www.calpers.ca.gov/page/newsroom...

This covers a period of time during which we've seen two massive bubbles and subsequent crashes, plus a recession that was steeper than any other recession since the Great Depression.

--------------

They are trying to be conservative since the Federal Reserve seems unlikely to allow interest rates to "normalize" for some time to come.

Additionally, some of this money will come from public employers, some from public employees (reductions in pay, benefits, etc...as we've already seen since 2008), and some from other special interest groups and private contractors.

Submitted by CA renter on November 20, 2015 - 5:13am.

Feel free to double-check their numbers. Get back to us with what you find.

Submitted by CA renter on November 20, 2015 - 9:10pm.

I shouldn't even be responding to your trolling, but I will do so one more time...

1. The LA Times is more biased than CalPERS, and CalPERS is, one would assume, the original source of the information that the LA Times is citing.

2. The information on the CalPERS site is factual. If you take issue with any of their numbers, please post a credible source showing how CalPERS is lying about these numbers.

3. Yes, you need to learn how to cite credible sources. Specifically, you need to learn about the difference between a primary source, and a secondary source (which is where the spin usually happens).

Good luck!
--------

edited to add: Just looked up Melody Petersen, the journalist who wrote the LA Times article. It's clear that she has a right-wing, pro-privatization perspective because her other articles about the Military Industrial Complex don't show the same sort of hawkish stance. To the contrary, they are glowing articles talking about all the jobs that will be created when the govt spends tens of billions of dollars on more war planes that we don't need, and shouldn't be building.

http://www.latimes.com/la-bio-melody-pet...

Additionally, in that article, she quotes research from the Stanford Institute for Economic Policy Research (SIEPR). Though they claim that they are "non-partisan," SIEPR was founded by George P. Shultz and Michael J. Boskin, both of whom have been deeply involved with the Hoover Institution.

http://www.hoover.org/profiles/george-p-...

http://www.hoover.org/profiles/michael-j...

-----

The Hoover Institution's purpose and scope statement:

"This Institution supports the Constitution of the United States, its Bill of Rights and its method of representative government. Both our social and economic systems are based on private enterprise from which springs initiative and ingenuity.... Ours is a system where the Federal Government should undertake no governmental, social or economic action, except where local government, or the people, cannot undertake it for themselves.... The overall mission of this Institution is, from its records, to recall the voice of experience against the making of war, and by the study of these records and their publication, to recall man's endeavors to make and preserve peace, and to sustain for America the safeguards of the American way of life. This Institution is not, and must not be, a mere library. But with these purposes as its goal, the Institution itself must constantly and dynamically point the road to peace, to personal freedom, and to the safeguards of the American system."'

- Herbert Hoover

http://www.hoover.org/about/missionhistory

Epic fail, Pri. You still haven't shown anything that indicates CalPERS was lying about it's numbers. Nothing.

Try again.

Submitted by CA renter on November 21, 2015 - 3:18am.

1. Going through that LA Times article, and it says nothing at all about CalPERS lying about their returns. It says that they will be lowering their return assumptions because the overall investment climate has changed, and pension funds may not be able to meet their existing return targets (because of the Fed's gross manipulation of interest rates over far too many years -CAR) if there is another crash. They have lowered return assumptions in the past, are evaluating the need to lower them further, and are proactively shifting their risk profile and trying to make more conservative assumptions. This is a wise and responsible policy.

2. I have yet to see Jerry Brown "calling bullshit" on CalPERS. Please include a quote (a real one, not one of your "edited" ones), and cite your source.

3. My link is a link to the original/primary source of the information. The LA Times and the WSJ are secondary sources. You have yet to show anything from the CalPERS site that is "bogus," as you say.

4. The statement about public employees not earning SS was directed at those who think that public employees earn both a SS benefit and a DB pension benefit at the same time. As a matter of fact, even if they've earned SS from another job in the private sector, that benefit that they have already earned from SS is **reduced** if they receive a retirement check from a public DB pension plan.

https://www.ssa.gov/pubs/EN-05-10045.pdf

https://www.ssa.gov/pubs/EN-05-10007.pdf

5. It's also funny how you think that a 20 or 30-year return history is more "cherry-picked" than a fraction of a single year's return. You really are dense, Pri.

So far, I'm the only who who has presented credible data from original/primary sources. You are the one who has relied on biased secondary sources.

Submitted by CA renter on November 21, 2015 - 7:12pm.

LOL! You just keep burying yourself, Pri. You don't even have the slightest knowledge about this issue, and when someone calls you out on your BS, you resort to more of your trolling.

Good luck!

Submitted by EconProf on November 22, 2015 - 11:18am.

In this long-running debate about whether public pension plans will bankrupt us or not, there is one decisive data-point. The government-run pension plans assume a rate of return of near 8% for the indefinite future, while the private sector pension plans assume a rate of about 4%.
The pension plans constructed and run by politicians is keeping present taxpayer and employee contributions low because they want to avoid the pain that being honest would entail. The private sector, company-run plans are forced by their auditors and actuaries to be honest and assume a 4% rate of going into the future. The politicians know they will not be around in a few years, and want to look good only for the next election. The private sector companies have to consider their long-run survival prospects, and they act accordingly.
If the public sector were forced to be as honest as the private sector, many California cities and counties would instantly be bankrupt. As it is, public sector pensions are already squeezing budgets for schools, parks, libraries, etc. across the state, and it is soon to get much worse, all because of the pension promises politicians made.

Submitted by Coronita on November 22, 2015 - 1:44pm.

EconProf wrote:
In this long-running debate about whether public pension plans will bankrupt us or not, there is one decisive data-point. The government-run pension plans assume a rate of return of near 8% for the indefinite future, while the private sector pension plans assume a rate of about 4%.
The pension plans constructed and run by politicians is keeping present taxpayer and employee contributions low because they want to avoid the pain that being honest would entail. The private sector, company-run plans are forced by their auditors and actuaries to be honest and assume a 4% rate of going into the future. The politicians know they will not be around in a few years, and want to look good only for the next election. The private sector companies have to consider their long-run survival prospects, and they act accordingly.
If the public sector were forced to be as honest as the private sector, many California cities and counties would instantly be bankrupt. As it is, public sector pensions are already squeezing budgets for schools, parks, libraries, etc. across the state, and it is soon to get much worse, all because of the pension promises politicians made.

Gotta love the 8% unicorn guaranteed return. Especially when it also counts heavily on wall street's performance.

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