U.S. Public Pensions Earn 1.15%

That is the morning’s attention grabbing Bloomberg headline.  1.15% is the worst yield since 2009 and there is no way to gloss over this number to make it seem better than it is.  Government pensions project rosy returns of 7% to 8.5% returns necessary in order meet their pension obligations.  You have to wonder where in the world any of these government forecasters expect to invest safely to earn 7%?

Bloomberg writes:

 Estimates of public-pension funding deficits vary from $757 billion to $4.6 trillion, depending on assumptions. To help close the gap, 29 states made changes to their pensions in the calendar year 2011, such as increasing employee contributions, raising the retirement age and revising automatic cost-of-living adjustments, according to the National Conference of State Legislatures.

Looking back at historical returns might help relieve some retirement anxiety but as the disclaimer  in every investment prospectus states past returns are no guarantee of future returns.

The median annualized return for public pensions in the past 10 years was 6.32 percent, Wilshire said. Public funds returned 21.4 percent in fiscal 2011 and 12.6 percent in 2010, according to Santa Monica, California-based Wilshire. The median public pension lost 17.4 percent in 2009.

OK at first glance this sounds better; a 6.32% average over 10 years. Not bad considering current economic conditions but still well below the government’s actuarial projection of 8.5% requirement each year.

Let’s do the return calculation for the last 3 years-2009-2011:

Assume $100,000 balance 2008

• 2009  a -17.4% loss, the $100,000 became $$82,600
• 2010  a 12.6% gain, the $82,600 increases to $93,008
• 2011 a 21.4% gain,  the $93,008 increases to $112,912
• $12,912 in 3 years the average yield is approximately 4.3% per year, significantly less than the yearly required 8.5% pensions need to fund benefits.

Does this mean the sky is falling? Probably not.  At the same time a realist, who would like to enjoy a timely retirement needs to make some alternative plans just in case.  Those already retired should start planning for the possibility of reduced cost of living adjustments.

One thing is certain though – things we once counted on are changing.  Making plans for your own supplemental private pension plan have never been more important.

You may ask questions in the comments or contact me privately:

Tim Barton

Chartered Financial Consultant

 

 

Tags: finance, Money, Retirement, retirement planning, Tim Barton

This entry was posted on August 8, 2012 at 11:51 am and is filed under News, Retirement Planning. You can follow any responses to this entry through the RSS 2.0 feed.