Monday, August 22, 2011

Victim of a Lie

How is California going to pay me what it's promised?
The state auditor's office on Thursday added teacher pensions to the list of high-risk issues facing California government.

The report by State Auditor Elaine Howle added the nation's largest teacher pension fund because it can't meet the costs of retirement benefits beyond the next 30 years. The pension funding problem was added to a list of risks that also includes California's chronic budget deficit, unfunded retiree health costs and prison crowding.
Answer: it won't. It can't.


maxutils said...

Not necessarily true. It depends on their investments. 10 years ago, this was not an issue.

Darren said...

"As recently as 2001, the fund had 98 percent of the assets it needed, but benefit changes and economic slumps that hurt asset values have reduced that number." They promised what they didn't have.

And they're still promising this to me; every year I get a statement from STRS telling me that everything is hunky-dorey, and even if it isn't, my retirement will be funded out of the state's general fund.

Anonymous said...

CalSTRs is assuming a return of 7.75% per year going forward (in nominal terms).

Their target mix of assets is 60% stocks, 20% bonds and 20% other (real estate and "alternative"). Focusing on the stock and bond portions, the current yield on 10 year treasuries is about 2%. The long-term US return on stocks has been around 10% (but the US has done very well compared to other countries ... and the US stock dividend yield used to be much higher).

So ... 60% stock @ 10% return and 20% bonds @ 2% return gives a blended return of (0.6×10 + 0.2×2)/0.8 = 8% blended.

If stocks return 10% for the next N years, all should be okay (in the sense that the shortfall won't get any worse). If stocks return closer to 8%, then the hole gets larger.

One huge wild-card is taxes going forward. Raising corporate taxes would probably draw less complaining from taxpayers, but won't exactly *help* stock market returns. Ditto for raising the tax rate on dividends.

My guess is that the CalSTRs assumptions are on the optimistic side of reasonable, but have a non-trivial chance of being too high.

We have a problem. It might get better on its own, but it could just as easily get worse on its own ...

-Mark Roulo