For public pension boards living in the past standing behind the 8% earnings assumption currently propping up overstated plan funding levels, you are advised to read this outlook.
Ten years ago, the US economy was three times larger than China’s. China is now projected to overtake us as the largest economy in the world by 2016.
That estimate could easily be off by a few years, but the momentum behind China’s economic growth will eventually leave the United States behind, even if China suffers a recession, which could very well happen.
The forecast does not mean doom and gloom for our nation or the rest of the world; it does mean we must re-examine assumptions we use in all aspects of our financial planning. More importantly, it means a reassessment of financial risk is in order. Why? Because no one really knows what’s over the horizon. When you cannot project the future with confidence, you must be conservative with your assumptions.
Can the public unions continue to hold to 8% as the long-term risk-free earnings rate? Leaders as naive as the SEIU’s Julie Butcher and Robert Schoonover think they can. They and others in their camp assume there is clear sailing ahead without qualification. Their outlook is similar to assuming the city will collect 100% of past due outstanding fees.
The rates used by LACERS and FPP are political benchmarks designed to head off a reckoning with defined pension plan funding levels. Since the taxpayers are on the hook for investment risk, why should the public unions care?