California Sounds Retreat in War on Arithmetic

Calpers is reducing its risk adjusted rate of return to 7.5%. Tell me where
you can get relatively risk free return of 7.5%? Equities? Govies? F500 Corp
Bonds? Aivars Lode


California is staging a limited retreat in the war on arithmetic—but it’s vowing to fight on.

Just like in New York, where the state legislature recently vetoed a plan to put the state’s wobbly pensions on stable footing, California is facing a crisis borne out by numbers. The problem bedeviling California is the gap between the money it has promised to pay retirees and the money it has—or expects to have—to pay the claims, estimated at about $500 billion late last year. For years, California politicians and union leaders rallied around a lie: They promised big benefits to employees while telling taxpayers that it wouldn’t cost a lot of money. They took less money out of current tax receipts than required to honor the pensions, and they assumed unrealistically high rates of return on the assets they did sock away. The wood fairies and the forest elves were going to make up any shortfalls.

The trouble with math, of course, is that it is so implacable. You can tell it anything you want; the numbers don’t change. If you don’t put enough money away, and it doesn’t grow as fast as you tell yourself it will grow, you won’t have enough money when the time comes to write the checks.

That is where California is today.

Despite the best efforts of public unions and government planners to deny the hard truth, in some combination, payouts will need to drop and other contributions will need to rise to keep the funds from running out of dough.

Calpers, the most important California retirement fund and one of the largest pension funds in the country, is responding to the crisis with a partial recognition of reality. For the first time in nearly a decade, it is lowering its estimates for return on investments to 7.5 percent.

This will be an extremely painful adjustment for a state where budgets are already strained to the breaking point. The Wall Street Journal reports that state workers will likely see layoffs and increases in their pension contributions. New pension obligations are expected to cost the state an additional $303 million per year, and many local governments face price increases of two to three percent.

Yet this may not even be the worst news for California. One Calpers actuary believed that the penion plan only had a 50 percent chance of achieving a 7.5 percent return and suggested that a more realistic number should be 7.25 percent, which would place it among the lowest in the country. The only reason these estimates weren’t lowered further were concerns at Calpers about the government’s ability to pay. Clearly, something is wrong, and as much as California employees would like to ignore it, the arithmetic doesn’t lie.

Wars on arithmetic never end well.

http://blogs.the-american-interest.com/wrm/2012/03/15/california-sounds-retreat-in-war-on-arithmetic/