Manhattan Institute for Policy Research.
search  
 
Subscribe   Subscribe   MI on Facebook Find us on Twitter Find us on Instagram      
 
 
   
 
     
 

Newsday

 

Taxpayers Lose in Pension Gamble

May 31, 2012

By E. J. McMahon

During New York’s Tier 6 pension-reform fight earlier this year, public employee unions claimed Gov. Andrew M. Cuomo wanted to "let Wall Street gamble" with pension money.

Last week brought a reminder of who’s really rolling the dice. State Comptroller Thomas DiNapoli announced that the pool of investments backing the New York State and Local Retirement System (NYSLRS), of which he is sole trustee, earned 5.96 percent during the fiscal year ended March 31.

A nearly 6 percent return may not look too shabby in a slow-growth era of sub-3 percent yields on U.S. Treasury bonds. But NYSLRS assumes its investment returns will average 7.5 percent a year. For a pension fund now valued at $150 billion, that 1.54 point difference equates to a shortfall of more than $2 billion.

Given recent market conditions, it’s hard to fault DiNapoli for not making more money. After all, his largest block of assets consists of corporate stocks, whose performance has been volatile for more than 10 years. But while pensions are a risk-free proposition from a government employee’s standpoint, stocks and other financial instruments promising higher returns do pose risks for taxpayers.

In defense of his bullish outlook, the comptroller could point out that the pension fund gained 14 percent a year ago, and 26 percent the year before that. But that rebound came only after the fund lost $40 billion -- nearly a quarter of its value -- in 2008-09. We’ve been backfilling the hole with higher taxes, and we’ll continue to do so for years to come.

The main problem here isn’t investment strategies but accounting standards.

A key factor in determining the funded status of any pension plan is the discount rate used to calculate liabilities. The higher that rate, the less money needs to be set aside now to cover benefits promised in the future.

Corporate pension plans also have ambitious return targets, but they must discount liabilities using a lower-risk "market" interest rate, such as the yield on AAA-rated corporate bonds. That’s typically 4 to 5 percent these days. By contrast, government accounting standards allow public pension funds to discount liabilities using the same high rate of return they hope to earn on their investments. That produces a trade-off -- pay less now, but more in the future if the goals are not met.

While DiNapoli’s 7.5 percent target is still too optimistic, at least he took it down a notch from the 8 percent in effect through fiscal 2010. Meanwhile, New York City’s pension funds are about to cut their assumed return from 8 percent, which Mayor Michael Bloomberg once described as "laughable," to 7 percent, which he termed merely "indefensible."

"If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff," the mayor said in February.

Incredibly, as if oblivious to changes in financial and economic outlooks since 2008, the trustees of the $90 billion New York State Teachers’ Retirement System decided last fall to keep its assumed rate of return at 8 percent. That unrealistic projection could ensure that teacher pensions remain underfunded for many years to come -- with taxpayers picking up the slack.

Not that any of this is a gamble for retirees or current government workers. Underfunded or not, their benefits are guaranteed by the state Constitution, so public employee unions are essentially playing with house money when they fight all proposals to reform pension accounting rules.

Of course, DiNapoli and other pension-fund overseers can never eliminate financial risk. But until they are willing to reduce it, they’re forcing all of us to share in a bad bet.

Original Source: http://www.newsday.com/opinion/oped/mcmahon-taxpayers-lose-in-pension-gamble-1.3750910

 

 
PRINTER FRIENDLY
 
LATEST FROM OUR SCHOLARS

5 Reasons Janet Yellen Shouldn’t Focus On Income Inequality
Diana Furchtgott-Roth, 10-20-14

Why The Comptroller Race Matters
Nicole Gelinas, 10-20-14

Obama Should Have Picked “Ebola Czar” With Public-Health Experience
Paul Howard, 10-18-14

Success Of Parent Trigger Is Unclear­—Just As Foes Want
Ben Boychuk, 10-18-14

On Obamacare's Second Birthday, Whither The HSA?
Paul Howard, 10-16-14

You Can Repeal Obamacare And Keep Kentucky's Insurance Exchange
Avik Roy, 10-15-14

Are Private Exchanges The Future Of Health Insurance?
Yevgeniy Feyman, 10-15-14

This Nobel Prize-Worthy Economist Figured Out How To Destroy Terrorism
Diana Furchtgott-Roth, 10-15-14

 
 
 

The Manhattan Institute, a 501(c)(3), is a think tank whose mission is to develop and disseminate new ideas
that foster greater economic choice and individual responsibility.

Copyright © 2014 Manhattan Institute for Policy Research, Inc. All rights reserved.

52 Vanderbilt Avenue, New York, N.Y. 10017
phone (212) 599-7000 / fax (212) 599-3494